Re Graeme John Jones and Beverley Lorraine Barnett Ex Parte: Alan Edson Ledger As Trustee of the Property of Graeme John Jones and Beverley Lorraine Barnett v Bunnings Limited [1988] FCA 1 (15 January 1988)

FEDERAL COURT OF AUSTRALIA

Re: GRAEME JOHN JONES and BEVERLEY LORRAINE BARNETT
Ex parte: ALAN EDSON LEDGER as trustee of the property of GRAEME JOHN JONES
and BEVERLEY LORRAINE BARNETT
And: BUNNINGS LIMITED
No. WA 637 of 1986
Bankruptcy

COURT

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

CATCHWORDS

Bankruptcy - Application by trustee pursuant to s.122 - payments by bankrupts to creditor within six months before the presentation of their petitions - at the time payments were made the bankrupts were unable to pay their debts as they became due - payments constituted a preference priority or advantage over other creditors - payments not received by the creditor in good faith - interest.

Bankruptcy Act 1966

HEARING

ADELAIDE
15:1:1988

Counsel for the applicant: Mr L. Christensen

Solicitor for the applicant: Phillips Fox

Counsel for the respondent: Mr J. Gilmour with Mr P.J. Arns

Solicitor for the respondent: Gilmour & Dearn

ORDER

The payments made by the bankrupts to the respondent in the sum of $2,238-59, $1,000-00, $2,000-00, $3,000-00, $1,600-00 and $400-00 made on 22 May 1986, 26 June 1986, 30 June 1986, 8 July 1986, 28 July 1986 and 8 August 1986 respectively constitute a preference priority or advantage to the respondent and are void against the applicant.

There be judgment for the applicant against the respondent in the sum of $10,238-59 together with an amount of $1,890-00 for interest making $12,128-59 in total.

The respondent pay the applicant's costs of action to be taxed.

Note: Settlement and entry of order is dealt with in Bankruptcy Rule 124.

DECISION

This is an application by the trustee of the bankrupt estates of Graeme John Jones and Beverley Lorraine Barnett ("the bankrupts") for a declaration that six payments made by them to the respondent Bunnings Limited between 22 May 1986 and 8 August 1986 and totalling $10,238-59 each constitute a preference priority or advantage to the respondent and are void against the applicant. Orders are also sought for payment to the applicant by the respondent of $10,238-59 together with interest thereon and costs.

2. On 22 October 1986 their own petitions for bankruptcy of the bankrupts were accepted by the Registrar in Bankruptcy and the applicant Alan Edson Ledger was appointed trustee of the estates of the bankrupts who were in partnership as house builders. The bankruptcy of each of the bankrupts is deemed to have commenced on 22 October 1986 and thus the six impugned payments were made within six months of the bankruptcy of the bankrupts.

3. The bankrupts were house builders in a comparatively small way of business. They traded in the building business as Conrect Constructions. The active partner was Graeme John Jones ("Jones"). It is not shown that Beverley Lorraine Barnett played any active part in the business at all. The partners were and are de facto spouses. At the time of their bankruptcy the bankrupts had five jobs in progress and five more awaiting commencement which were never commenced. The respondent was amongst other things a supplier of timber and builders' hardware in a large way of business.

4. In December 1985 the bankrupts applied to the respondent for a thirty day credit account with a limit of $12,000. In due course in January 1986 they were granted credit facilities for a thirty day account with a credit limit of $5,000. In January 1986 purchases on credit amounting to $37-07 were made. In February purchases amounting to $2,238-59 were made and on 28 February payment of the January account of $37-07 was made. In March purchases amounting to $17,554-31 were made notwithstanding the limit. There were five credits, said in the monthly statement to be based on credit notes, and presumably for the return of goods or for some price adjustment but no payments were made. In April purchases amounting to $3,924-72 were made and no payments. The last invoice is dated 18 April 1986 and the statement for April shows a debit balance of $23,276-06.

5. After 18 April no further purchases were made and the only transactions recorded on Conrect Constructions' statements with the respondent were the impugned payments and the record of two dishonoured cheques. The first of these was received on 30 May and was for $17,112-75. The dishonour of this cheque is recorded as a journal entry dated 31 July. The second dishonoured cheque was received by the respondent on 6 September 1986 and was for $13,037-47 sufficient to clear the account but it was dishonoured two days later. No transaction later than the dishonour of this cheque is recorded in the statements.

6. It is to be noted that when there was outstanding $2,238-59 with respect to February purchases the respondent permitted the bankrupts to make purchases amounting to $17,554-31 during March. The assistant credit manager of the respondent one Ryder wrote a letter to the bankrupts on 15 April pointing out that the credit terms had a limit of $5,000 and were "strictly 30 days" and asking that the bankrupts give the position of their account, namely $19,351-34 then in arrears, prompt attention. As I have said nothing was paid in April but payments in reduction of the account commenced on 22 May 1986 and concluded on 8 August 1986.

7. The application is made under s.122 of the Bankruptcy Act 1966. The relevant parts of this section 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 of 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.

(1A)...

(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;

(b) the rights of a person making title in
good faith and for valuable consideration
through or under a creditor of the debtor;
or

(c) a conveyance, transfer, charge, payment or
obligation of the debtor executed, made
or incurred under or in pursuance of a
maintenance agreement or maintenance
order.

(3) The burden of proving the matters referred to
in sub-section (2) lies upon the person
claiming to have the benefit of that
sub-section."

8. If the trustee is to succeed he must prove that at the time the payments were made the bankrupts were unable to pay their debts as they became due, and that the payments had the effect of giving the respondent a preference priority or advantage over other creditors. He must also prove that the payments were made within six months before the presentation of a petition by virtue of the presentation of which the bankrupts became bankrupt. This last matter is not, and indeed could not be, disputed. Even if these matters are proved it is open to the respondent to establish that with respect to the impugned payments it was a payee in good faith and for valuable consideration and in the ordinary course of business. If the respondent establishes these matters then the declaration and the order for repayment sought by the trustee should not be made.

9. It was submitted on behalf of the respondent although somewhat faintly that at the time the payments were made the bankrupts were not unable to pay their debts as they became due. All the evidence is to the contrary. Jones said that even if the payments due to the partnership with respect to the completion of work in hand were made he would still not be able to pay all the partnership's debts but that he hoped to be able to generate sufficient profits from future work to pay his current debts. The financial affairs of the partnership were in this state during the whole period when the payments were made that is to say the partnership was unable to pay its debts as they became due and would not have been able to pay them if all the money owing to the partnership or potentially coming due to the partnership with respect to work in hand were paid. The affidavit of the trustee supports this conclusion. I find without difficulty that at the relevant time during which the payments were made the bankrupts were unable to pay their debts as they became due.

10. The next question is that of whether a preference priority or advantage was given to the respondent by the payments being made. Exhibit R.2 to the affidavit of the trustee sworn on 11 May 1987 reveals that twenty-eight of the partnership's creditors as at 31 May 1986 received no payment during the time when the respondent received the impugned payments. In addition from October 1985 to April 1986 there was owing to the Deputy Commissioner of Taxation a total of $10,941 with respect to unremitted prescribed payments. These payments were still unremitted at the date of the bankruptcy. It would appear on the face of it that the respondent gained a preference priority or advantage by being paid ahead of an appreciable number of other creditors. Counsel for the respondent laid some stress on what may be called the "running account" cases such as Queensland Bacon Proprietary Limited v. Rees [1966] HCA 21; (1966) 115 CLR 266 and Richardson v. Commercial Banking Company of Sydney Ltd [1952] HCA 8; (1952) 85 CLR 110 but with respect to him it seems to me that these cases are of no assistance to the respondent. As I said in the course of argument the situation after 18 April between the respondent and the bankrupts could not be described as a running account. No further purchases were made after that date and all that happened was a series of payments all but one of which was a round sum having no apparent connection with any particular transaction or series of transactions between the bankrupts and the respondent. The May payment of $2,238-59 made on 22 May 1986 was the amount owing at the end of February 1986 due to be paid by 31 March 1986. At the time the payments were made ordinary business between the bankrupts and the respondent had ceased and the respondent was engaged in trying to recover the money owed to it. It seems to me that the conclusion that the respondent by the payments received a preference priority or advantage is beyond argument and I so find.

11. I consider next the defences provided by s.122(2) of the Bankruptcy Act. If it is to retain the payments which prima facie as I have found amount to preferences the respondent must prove, no doubt on the balance of probabilities, that the payments were received in good faith for valuable consideration and in the ordinary course of business.

12. The question of valuable consideration is conceded by counsel for the trustee so that it is not necessary to deal with it. The live issues are therefore those of good faith and the ordinary course of business.

13. Section 122(4)(c) is as follows :

"(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."

14. Has the respondent established that the payment did not occur under such circumstances as to lead to the inference that it knew or had reason to suspect that the bankrupts were unable to pay their debts as they became due from their own money and that the effect of payment would be to give it a preference priority or advantage? I have found that as a fact at relevant times the bankrupts were unable to pay their debts as they became due and that the effect of the payments was to give the respondent a preference priority or advantage. The point now at issue is has the respondent proved that it neither knew or had reason to suspect this state of affairs? The evidence on this topic is that of Jones and of Pickles the credit manager of the respondent both of whom filed affidavits and were cross-examined.

15. In the respondent's statement of its trading with the bankrupts up to the end of March 1986 which became available to Pickles after the first week in April the debit balance was $19,351-34. On 15 April Ryder who was the respondent's assistant credit manager and thus Pickles' subordinate wrote to the bankrupts pointing out that their credit limit was $5,000 and the terms thirty days and asking that the position of their account be given prompt attention. Jones called in to see Pickles towards the end of April or early in May after further supply from the respondent had been refused.

16. What passed between Jones and Pickles at this and subsequent meetings has been a matter of some debate. Bearing in mind my impression of the witnesses and what they said I am satisfied that Pickles told Jones that the account was entirely unsatisfactory as being well over the limit of $5,000. He told Jones that if he did not make substantial reductions legal proceedings would be taken against him. Whether or not Pickles threatened bankruptcy I cannot be sure. I think that he may have done but whether he did or did not I am satisfied that if a writ had been issued and served by the respondent, custom in the building trade would have led to the issue of more writs by other creditors. If this had happened Jones was sure that bankruptcy was inevitable. Jones asked Pickles not to take proceedings and told him that progress payments would be coming in out of which he would make payments to the respondent in reduction of the account. Despite Pickles' denials I am satisfied that at the first meeting Jones told Pickles that although the partnership could not pay its debts in full at that time he was very hopeful that out of progress payments coming due and the profits from future work the partnership would eventually be able to pay its debts as they became due. Jones' phrase was that he expected to be able to "trade out of" his problems and although no doubt he mentioned to Pickles the matter of progress payments coming due I am satisfied that he also said that he needed time and indulgence to enable the partnership to trade out of its financial difficulties. At a subsequent meeting towards the end of May Pickles suggested to Jones that a meeting of creditors be called but Jones was reluctant to do that as he still hoped to be able to trade out of his difficulties.

17. It follows that I find that from the end of April or early May Jones was telling Pickles that the partnership could not pay its debts as they became due but that Micawber-like he hoped that he would be able to trade out of his problems. From a time shortly before the impugned payments began I am satisfied that the respondent through Pickles knew that the bankrupts could not pay their debts as they became due from their own money. I find therefore that the respondent was not a payee in good faith within the meaning of s.122(2)(a) of the Bankruptcy Act. The matters of "in good faith", "for valuable consideration" and "in the ordinary course of business" all have to be satisfied in order that a creditor may get the benefit of the section. Since the matter of good faith is not established the respondent fails and the applicant succeeds and is entitled to the declaration which he seeks and to an order for repayment.

18. The applicant is also entitled to an order for the payment of interest. Interest was claimed in the application and it was submitted on behalf of the applicant that if judgment were entered for the applicant with respect to the payments or any of them interest should run from the date of sequestration that is to say 22 October 1986 and should be at the rate applicable to judgments of this Court pursuant to the Federal Court Rules that is to say 15%. Counsel for the respondent made no concession on the topic of interest but he made no contrary submissions either. Interest on $10,238-59 at 15% from 22 October 1986 to 15 January 1988 amounts to $1,893-44. I allow interest at $1,890.

19. The Court declares that each of the six payments referred to in the application made by the bankrupts to the respondent between 22 May 1986 and 8 August 1986 constituted a preference priority or advantage to the respondent and is void against the applicant.

20. There will be judgment against the respondent for $10,238-59 together with $1,890 for interest making $12,128-59 in all together with the applicant's costs of action to be taxed.