Re Stephen Abrahams v Ex Parte: Hugh Charles Thomas and Agc (Factors) Limited [1988] FCA 8 (22 January 1988)

FEDERAL COURT OF AUSTRALIA

Re: STEPHEN ABRAHAMS
And: Ex parte: HUGH CHARLES THOMAS and AGC (FACTORS) LIMITED
No. W290 of 1982
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
GENERAL DIVISION
Einfeld J.(1)

CATCHWORDS

Bankruptcy - Application to set aside mortgages pursuant to s 121 and s 122 of the Bankruptcy Act - solvency of debtor - duty of mortgagor to conduct investigations when put on notice regarding solvency of debtor - good faith of mortgagee in taking out mortgage with debtor - inference of intention of defraud creditors pursuant to s 121 - meaning of bona fide under s 122(2).

Bankruptcy Act 1966 - ss 121, 122(1), 122(2)

HEARING

SYDNEY
22:1:1988

Counsel and Solicitors for Applicant: Mr. A.J. Bannon instructed by: Blessington Judd & Co. Solicitors

Counsel and Solicitors for Respondent: Mr. H.K. Insall instructed by: Clayton Utz Solicitors

ORDER

Order that the mortgage dated 19 June 1981 over the land comprised in Certificate of Title Volume 10769 Folio 242 is void as against the trustee.

Order that the mortgage dated 2 December 1981, over the land comprised in Certificate of Title Volume 12520 Folio 47 is void as against the trustee in the bankruptcy.

Order the respondent to pay the applicant's costs.

NOTE: Settlement and entry of these orders are dealt with in rule 124 of the Bankruptcy Rules.

DECISION

This is an application by the trustee ("the trustee") of the estate of Stephen Abrahams ("the bankrupt") seeking the following orders:

(a) That a mortgage dated 19 June 1981 ("the Fairfield mortgage")

given by the bankrupt to AGC Factors (Limited) ("the
respondent") over the land comprised in Certificate of Title
Volume 10769 Folio 242 is void as against the trustee.

(b) That a mortgage dated 2 December 1981 ("the Rose Bay mortgage")

given by the bankrupt to the respondent over the land comprised
in Certificate of Title Volume 12520 Folio 47 is void as against
the trustee.

2. The bankrupt was the managing director of two companies called Quality Confections Pty. Ltd. ("Confections") and Quality Confections Imports (Australia) Pty. Ltd. which conducted the business of confectionery wholesaler.

3. On 28 February 1980, Confections entered a factoring agreement with the respondent pursuant to which the respondent advanced funds to the company in return for an assignment of book debts. The bankrupt guaranteed Confections' obligations under the agreement.

4. On 3 June 1981, a company called Balfour Williamson (Australia) Pty Ltd. ("Balfour"), who had provided Confections with finance facilities in 1979 and who had been given as security a charge over the assets of Confections, appointed a receiver and manager pursuant to the charge. The bankrupt and Mr. G.I. Fuzi were co-guarantors of the Balfour arrangement.

5. At about the same time, the respondent had become concerned about the factored debts and the possibility that fraudulent invoices had been given to the respondent. The respondent threatened to sue the bankrupt under the guarantee. On 19 June 1981, the respondent sought and obtained from the bankrupt the Fairfield mortgage as further security for its obligations under the factoring agreement. On 2 December 1981, the bankrupt executed in the respondent's favour and at its request, the Rose Bay mortgage as still further security. These are the subject mortgages of this application.

6. It appears that on 24 September 1981, the respondent signed or obtained a judgment against the bankrupt but the evidence does not establish, nor was I told, what the amount or grounds of the judgment were. Liability for this debt appears to have been postponed by agreement between the bankrupt and the respondent at some time, apparently in some way connected with the Rose Bay mortgage.

7. On 2 February 1982, a petition seeking a sequestration order was presented by a company called APD Snack Foods Pty. Ltd. ("APD"). This company was a creditor claiming to be owed the sum of $98,406.98, being the amount due on a final judgment recovered in the Supreme Court of NSW on 4 September 1981. A sequestration order was made on this petition on 10 May 1982.

8. On 9 June 1983, the bankrupt lodged a statement of affairs in which it was disclosed that there were two unsecured creditors, Balfour and APD. He also stated that there were three companies in the AGC group including the respondent, whose debts were said to be secured by the Fairfield and Rose Bay mortgages.

9. Essentially the trustee's submissions were:

(a)that both mortgages were clearly given with the intention of
defrauding other creditors within the meaning of section 121;

(b)that the Rose Bay mortgage was given within six months before
the presentation of the creditor's petition, when the bankrupt
was clearly unable to pay his debts as they became due from his
own money, with the effect of giving the respondent a preference
over other creditors within the meaning of section 122.

10. The trustee also suggested that the two mortgages were connected in that at the time of the Fairfield mortgage, the Rose Bay mortgage was in prospect and that the security had been pledged to the respondent or was the subject of an understanding between the bankrupt and the respondent.

11. These sections provide, so far as relevant:

"121(1) Subject to this section, a disposition of property,
whether made before or after the commencement of this Act,
with intent to defraud creditors, not being a disposition
for valuable consideration in favour of a person who acted
in good faith, is, if the person making the disposition
subsequently becomes a bankrupt, void as against the trustee
in the bankruptcy.

(2) . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) In this section, "disposition of property" includes
a mortgage of property or a charge on or in respect of
property.

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 the 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."

12. Subsection (1A) of section 122 extends the effect of subsection (1) to cases where the debtor is jointly liable to the creditor or is a joint owner of the relevant property.

13. The respondent opposes the orders sought by the trustee on the grounds that:

(a)the Fairfield mortgage was not given with the requisite
fraudulent intent;

(b)at the time of the Rose Bay mortgage, the bankrupt was able, or
was not demonstrated to be unable, to pay his debts.

The Fairfield Mortgage

14. The evidence of the circumstances in which the Fairfield mortgage came about emerged principally from the evidence of Mr. Hamley, the respondent's general manager of corporate finance at the time. He said that he had become aware in early June 1981 of a "shortfall" or "possible loss" under the factoring agreement and sought to secure the respondent's position. It appears that the respondent had been presented with a number of fraudulent invoices which threw doubt on the adequacy of its existing security. Its only recourse to protect itself was to seek and enter the Fairfield mortgage.

15. In the public examination of the bankrupt under section 69 of the Act, the bankrupt revealed that he had become aware of the grave financial problems facing him in early June 1981, including that bankruptcy may well fall upon him. From an internal memorandum of the respondent company dated 15 June 1981, showing an anticipated shortfall/possible loss of $278,163.77 and a letter from the respondent's solicitors dated 24 June 1981, confirming the taking of the Fairfield mortgage, it is reasonable to conclude that the Fairfield mortgage was obtained in extreme haste.

16. The letter from the solicitors also revealed that the respondents had been advised that if it was proved that on the day of taking out the Fairfield mortgage, the bankrupt was unable to pay his debts, the mortgage was liable to be discharged upon the application of the trustee in bankruptcy as a preference. The trustee submitted that this advice would only have been given where there was some concern over the financial situation of the mortgagee. An inference therefore arose, the trustee submitted, that the respondent wanted to obtain some form of security over the assets of the bankrupt in preference to other creditors, especially Balfour. The respondents knew of the existence of Balfour as they became aware of the appointment of the receiver in June 1981. The trustee submitted that the net result of these activities was that other creditors would be delayed and disadvantaged.

17. The evidence established that a number of other persons within the respondent's business dealt with the bankrupt at this time. They included Mr. Winkelmuller who was Manager of the NSW Factoring Division who, the evidence revealed, now operates his own business in Townsville; Mr. Hankinson, who was Australian Manager of the Factoring Division and who is now in AGC's Bangkok office; Mr. Sullivan, who is now Manager of AGC's Canberra branch; and Mr. Bishop, who is also a current AGC employee somewhere.

18. None of these persons and no persons other than Mr. Hamley gave evidence at all, inter alia, to explain the respondent's and the bankrupt's motives for these transactions. In my opinion, it is appropriate to draw the inference from all the circumstances that their evidence would not have been able to assist the respondent in these proceedings. The trustee submits that from all these matters the necessary intent to defraud creditors and absence of good faith can and should be inferred.

19. The respondent submitted that a mere intention to prefer one creditor over another creditor did not amount to "an intent to defraud creditors" within the meaning of section 121. What must be shown, it was said, is an intention to defeat, delay or hinder creditors in general with a resulting benefit to the debtor. It was submitted that the benefit to the debtor need not be permanent, but it is sufficient if it is temporary: see Re Kelly (1932) 4 ABC at 258 per Lukin J; Re Sarflax Ltd. (1979) 1 All ER 529. However, in Re Fasey (1929) 2 Ch 1 at 12, Lord Sterndale said:

"I do not think the proposition that a conveyance or
transfer for the purpose of giving a fraudulent preference
to one creditor is not a defrauding of the creditors
generally and would not come within the statute of
Elizabeth, can be inverted so as to enable the debtor to
say: 'I did intend to defraud my creditors, I did intend to
hinder them, I did intend to delay them, but incidentally to
that intention I did give one of them some benefit, and
therefore what I did cannot come within the statute of
Elizabeth in law.' That proposition so inverted cannot be
maintained as a general principle. What we have to see is
whether this transaction was for the purpose of disturbing,
hindering, delaying or defrauding the creditors of the
bankrupt."

20. This seems to dispose of the respondent's argument.

The Rose Bay Mortgage

21. The trustee submits that throughout the six month relation back period from the presentation of the creditor's petition, the bankrupt was insolvent. He submitted that this insolvency dated back at least to June 1981. The bankrupt's statement of affairs indicates that the value of the properties encumbered by the Fairfield and Rose Bay mortgages was some $230,000. Other evidence establishes the potential loss of the respondents in June 1981 under the factoring agreement was some $278,000. As guarantor of that agreement, it is clear that the bankrupt would not have been able to meet his obligations in the event that the guarantee were called up. At the time of the Rose Bay mortgage, the respondent was a creditor of the bankrupt under its unsatisfied judgment of 24 September 1981. The trustee submitted that this further demonstrated the bankrupt's involvency during the relevant period, although as the sum was unspecified, I doubt if any conclusions can be drawn about it at all. The trustee asserted that the Rose Bay mortgage was clearly not part of any agreement between the bankrupt and the respondent in June 1981, as seemed to be alleged by the respondent. There is little doubt that the effect of the Rose Bay mortgage was to constitute the respondent a preferred creditor over other creditors.

22. On section 122, the respondent submitted that the onus of establishing the requisite elements rests with the trustee and that he had failed to discharge this onus. The respondent stated that there was an obligation on the applicant to present a reasonably complete picture of the bankrupt's financial position as at the date of the transactions in question, and that insolvency had not been established.

23. On the issue of insolvency, it is clear that the debt to APD was due in October 1981 and was still due in May 1982. It therefore was obviously due in December 1981 at the time of the Rose Bay mortgage. No explanation other than insolvency was given as to why this debt was unsatisfied, although there is no doubt that it was owing at all relevant times.

24. However, the respondent further submitted that there was no evidence presented as to the status of the Balfour debt in December 1981. The bankrupt had shown that in his statement of affairs that he did owe Balfour and others money, but the respondent submitted that the evidence failed to establish at what point in time the bankrupt first started to owe Balfour this money. It is true that Balfour had begun to make demands on the bankrupt which culminated in the appointment of the receiver in June 1981, but there was no indication as to the amount owing.

25. The respondent submitted that due to the complexity of the circumstances involving the Balfour debt, no decision as to whether anything was actually owing in December 1981 was possible. To support his submission, the respondent suggested the possibility that Mr. Fuzi, the co-guarantor of the debt, may well have agreed to pay the debt but that this was unknown. The respondent submitted that the trustee had had ample opportunity to ascertain details regarding the bankrupt's financial position at the time of conducting the section 69 public examination, and to the extent that it had not been done, I should not now be drawing inferences as to the amount of money involved in the Balfour debt and when it was or became payable. In the circumstances, this is an extraordinary proposition if, as appeared to be the case, it extends to embrace a denial that the evidence establishes a substantial amount to be owing which the bankrupt was unable to pay.

26. The respondent submitted that the public examination was overbearing, and that I should discount the answers given by reason of the likely emotional state of the bankrupt under interrogation. He also spoke of unspecified dangers of my using, presumably to the disadvantage of the respondent, the transcript of a section 69 examination. I reject that argument completely. The bankrupt was asked about his financial situation several times during the course of the examination, and he had every opportunity to present his own explanations and answers rather than to use the words of the cross-examiner. He was represented throughout by able and competent counsel who made no complaint about any aspect of the proceedings. There was no re-examination relevant to those issues. These submissions are unsustainable.

27. Further, the size of the Balfour debt appears to have been about $900,000. It was unquestionably owed. If the bankrupt could have paid it, or even a substantial part of it, a receiver would not have been appointed and the bankrupt would not have been facing bankruptcy. There is no substance in the respondent's arguments on this aspect.

28. The respondent suggested that there was no case to answer regarding section 121. It relied upon a number of cases, the most recent of which are Re Sarflax Limited (above) and Re Lloyds Furniture Palace Limited (1925) 1 Ch 853. It also cited Glegg v Blomley (1912) 3 KB 474 at 484,485 and 492, in which it was held that where the effect of a transaction is to prefer one creditor at the expense of another, if the the transaction is with a bona fide creditor, regardless of the bankrupt's intentions, it does not infringe section 121 of the Act. The respondent's argument was that this was a case of a bona fide debt without intention to defraud.

29. The respondent firmly denied any knowledge of other creditors, but all the circumstances and the inferences seem to me to point to such knowledge.

30. Mr. Hamley gave evidence that the respondent was aware in June 1981 that a receiver had been appointed by Balfour, and was concerned at the consequences of its facing substantial financial losses due to the possible or likely fraud in the factored invoices. Together with the high likelihood that a widely experienced financier like the respondent would immediately have instigated a full inquiry into what assets of the bankrupt were available to offset or recover those losses and what liabilities reduced the value of those assets, those statements lead inevitably to the conclusion that the respondent was, and had sufficient knowledge and information to be, fully cognizant of the existence of at least the Balfour debt at the time of the Fairfield mortgage. Likewise it must or ought to have known of the APD debt, as well as the Balfour debt, by the time of the Rose Bay mortgage.

31. In the circumstances, it is unlikely that the bankrupt would not have disclosed their existence. If he did not, it is simply not possible to accept that the respondent would not have checked everything and anything he said, especially as the circumstances were that deep fraud by the bankrupt or the respondent was suspected if not known. I am confident that it did, and that it thereby became aware, if it was not aware beforehand, of the existence of the other creditors. There can be little doubt that, having notice of the other creditors, the respondent therefore moved to protect itself by seeking and gaining the two mortgages, thereby seeking to defeat the other creditors' claims to these assets.

32. At the very least, it seems to me that if facts come to the attention of a finance company which would suggest a customer's fraud on the one hand and innocence on the other, the finance company may not deliberately shut its eyes from an enquiry as to the facts. That this is so as a matter of law emerges predominantly from the law dealing with unconscionable bargains and equitable relief. In Bank of NSW v Rogers [1941] HCA 9; (1941) 65 CLR 42, a case which alleged unconscionable conduct of the bank in procuring the respondent as surety for an overdraft for her uncle, McTiernan J at 60 cited with approval the statements in Owen & Gutch v Homan [1853] EngR 883; (1953) 10 ER 752 at 767 by Lord Chancellor Cranworth:

"Without saying that in every case a creditor is bound to
inquire under what circumstances his debtor has obtained the
concurrence of a surety, it may safely be stated that if the
dealings are such as fairly to lead a reasonable man to
believe that fraud must have been used in order to obtain
such concurrence, he is bound to make inquiry, and cannot
shelter himself under the plea that he was not called on to
ask, and did not ask any questions on the subject. In some
cases wilful ignorance is not to be distinguished in its
equitable consequences from knowledge. If a person abstains
from inquiry because he sees that the result of inquiry will
probably be to show that a transaction in which he is
engaging is tainted with fraud, his want of knowledge of the
fraud will afford no excuse."

33. Undoubtedly, this principle can be applied to the present case. In Bank of NSW v Rogers (above), it was established that the bank had been put on inquiry about the circumstances of entering the relevant security. There were strong grounds for suspecting a peculiar relationship between the respondent and her uncle which enabled the uncle, Gardiner, to dominate her will. McTiernan J at p 72 states that the bank was deemed to have known of the relationship of influence. His Honour said:

"If the bank had made reasonable inquiries, it would have
ascertained the facts about the situation in which the
respondent stood to Gardiner and that she was necessarily
exposed to influence founded upon her relations of
confidence and dependence with him. 'When it is said that a
person is put on inquiry, the result in point of law is that
he is deemed to know the facts which he would have
ascertained if he had made inquiries' (London Joint Stock
Bank v Simmons per Lord Herschell (1892) AC 201 at 220)."

McTiernan J referred to Maitland v Irving [1846] EngR 1095; (1846) 60 ER 688 at 690 where Sir L. Shadwell, VC said:

"But it seems to me to be very extraordinary that, when men
of mature age, who were carrying on a lucrative business,
were told by a gentleman who was himself unable to perform
his contract with them that he would procure a young lady,
who was residing with him, who was possessed of a large
fortune, and to whom he had been guardian, to give them a
guarantee for the fulfillment of his contract - it seems, I
say, very extraordinary, that with full knowledge of all
those circumstances they should have at once acceded to the
proposal, without making an inquiry or taking any pains to
ascertain whether the young lady was a free agent, and
perfectly willing with a full knowledge of the consequences
to do what the guardian said he would invite her to do."

34. Commercial Bank of Australia Ltd. v Amadio [1983] HCA 14; (1982-83) 151 CLR 447 dealt with the circumstances surrounding the execution of a mortgage by two elderly migrant persons. In this case, Lord Cranworth's statements referred to above were cited with approval by Gibbs CJ at 458-459; Mason J at 467 and Dawson J at 486. However, Gibbs CJ elaborated on what Lord Cranworth described as 'wilful ignorance'. He stated at 459:

"It will be observed that when Lord Cranworth LC spoke of
'wilful ignorance', he appears to have been referring not
merely to a case in which circumstances put the creditor on
inquiry, but to a case where the creditor does not inquire
because he is afraid of what he may discover."

35. Deane J at 479 stated that the bank was put on inquiry and it had reached the stage at which the bank was bound to make a simple inquiry as to whether the transaction had been properly explained to the defendants.

36. Thus, in this case, it is clear that the respondents had been made aware of the bankrupt's circumstances prior to the mortgage transactions and that it was therefore bound to carry out inquiries regarding the details of the bankrupt's financial position, including details of his other creditors.

Question of Solvency

37. The test of insolvency was enunciated by Barwick CJ in Sandell v Porter (supra) at 670, where he said:

"Insolvency is expressed in s.95 as an inability to pay
debts as they fall due out of the debtor's own money. But
the debtor's own moneys are not limited to his cash
resources immediately available. They extend to moneys
which he can procure by realization by sale or by mortgage
or pledge of his assets within a relatively short time -
relative to the nature and amount of the debts and to the
circumstances, including the nature of the business, of the
debtor. The conclusion of insolvency ought to be clear from
a consideration of the debtor's financial position in its
entirety and generally speaking ought not to be drawn simply
from evidence of a temporary lack of liquidity. It is the
debtor's inability, utilizing such cash resources as he has
or can command through the use of his assets, to meet his
debts as they fall due which indicates insolvency. Whether
that state of his affairs has arrived is a question for the
Court and not one as to which expert evidence may be given
in terms though no doubt experts may speak as to the
likelihood of any of the debtor's assets or capacities
yielding ready cash in sufficient time to meet the debts as
they fall due."

38. This was recently cited with approval in this Court in Re Trojan Ex parte Corporation of the Town of Hindmarsh (Fisher J, 5 November 1986, unreported).

39. By applying this test, I think that at the time of these mortgages, the bankrupt was insolvent. Balfour's appointment of a receiver and his own evidence on public examination make this perfectly clear. At the time of the Rose Bay mortgage, the APD debt was outstanding. There can be no doubt that he was unable to pay his debts out of his own money at all relevant times.

Requirements of Section 121

40. The trustee relied on this section in respect of both mortgages. In order for me to be satisfied that the requirements of this section have been adequately established, there must be demonstrated an intention to defraud on the part of the respondent at the times in question. It is a question of fact as to whether I can infer that there is such an intention (Re Barnes Ex parte Stapleton (1961) ABC 1). Furthermore, there must be established that there were creditors who were unpaid at the time that the actual disposition in question took place (Re Mackay (1951) 16 ABC 18).

41. The question is whether these elements were made out by the trustee in relation to each of the mortgages.

(1) The Fairfield Mortgage

There is no direct evidence of intent to defraud creditors so
that the matter to be examined is whether a fraudulent intent
can be inferred. The most persuasive though not the only pieces
of evidence of such an inference are:

(a) The respondent had suspected that there was a problem
with the factored invoices and it was aware of 'possible
losses'.

(b) It was aware that Balfour had called up its guarantee in
early June 1981 and appointed a receiver. It therefore
must have been aware of financial difficulties facing
the bankrupt in early June 1981.

(c) The Fairfield mortgage was secured in some haste.

(d) The unsatisfactory state of Mr. Hamley's knowledge of
the facts and the failure of the respondent to call
others in a better position to speak.

These matters and other evidence referred to earlier, coupled
with the respondent's knowledge or claimed failure to conduct
inquiries into the applicant's financial position after it had
been put so starkly on guard, establish in my mind a clear
intention to defraud other creditors by this mortgage.

(2)The Rose Bay Mortgage
For similar reasons and because of the apparent connection
between the two mortgages, I come to the same conclusion in this
instance.

Requirements of Section 122

42. The trustee relied upon this section in relation to the Rose Bay mortgage only. In order to succeed under this section, the following elements need to be made out:

1.There has been a transaction as described by section 122.

2.At the time of the transaction the bankrupt was insolvent.

3.The transaction favours the respondent as a creditor.

4.The effect of the transaction is to give a preference or advantage to one

creditor over others.

5.The transaction occurred within six months back from the presentation of the petition upon which the bankruptcy has been declared.

43. For the reasons previously given, I am satisfied that the applicants have successfully established each of the above requirements.

44. I must therefore consider whether the respondent can establish an entitlement to the protection given by section 122(2) of the Act. This section provides:

"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; . . . "

45. Because there can be no dispute that the respondent acted in the ordinary course of business and the transaction involved valuable consideration, this submission requires me to consider whether or not the respondent was in fact a bona fide encumbrancer at the time of entering the Rose Bay mortgage. This turns on whether at the time the mortgage was entered into, the respondent was or should have been fully aware of the true circumstances.

46. In Downes Distributing Co. Pty. Ltd. v Associated Blue Star Stores Pty. Ltd. [1948] HCA 14; (1948) 76 CLR 463 at 475-6, Latham CJ stated that good faith is excluded if,

" . . . whatever the creditor may think in relation to the
circumstances of the transactions, those circumstances are
such as to lead to an inference by the court that there was
reason to suspect according to the standards of an ordinary
reasonable man that the debtor was unable to pay his debts
as they became due and that the effect of the transaction
would be to give the creditor a preference over other
creditors."

47. This was cited with approval recently by Waddell J in Walker v Commonwealth Trading Bank (Supreme Court of NSW, 8 July 1986, unreported at p 13).

48. In Re Castellucci Ex parte Pipkin [1983] FCA 35; (1983) 68 FLR 162 at 168, Fisher J stated that good faith on the part of the respondent is a matter for subjective determination and cannot be found if the respondent knew or suspected that the bankrupt was insolvent. Fisher J considered it a crucial circumstance both with regard to the question of solvency and preference, whether the creditor knew at the relevant time in question that the bankrupt had other creditors.

49. His Honour went on at 169:

"This becomes a crucial if not conclusive circumstance in
considering whether I can draw the inference that a
reasonable man would have suspected insolvency and
preference. If the reasonable man was not aware of other
creditors he is hardly likely to suspect insolvency and
could not suspect preference."

50. In the present case, I have already pointed out that the respondent was at the very least aware of the existence of other creditors and that it did or should have conducted inquiries into the bankrupt's affairs, when put on notice of his problems. Applying the tests in the cases cited, I conclude that the respondent lacked the necessary good faith at the time of entering the Rose Bay mortgage. It is thereby deprived of the benefits conferred by section 122(2)(a).

51. I therefore make the declaration sought by the trustee and order the respondent to pay the applicant's costs.