Re Michael John Robinson and Sharon Robinson Ex Parte Peter Ivan Felix Geroff, Ronald Herbert Francis Turner and Permanent Custodians Limited [1994] FCA 999 (31 March 1994)

FEDERAL COURT OF AUSTRALIA

RE MICHAEL JOHN ROBINSON AND SHARON ROBINSON
EX PARTE PETER IVAN FELIX GEROFF, RONALD HERBERT FRANCIS TURNER and PERMANENT
CUSTODIANS LIMITED No. QB2760 of 1991
FED No. 159/94
Number of pages -25 Bankruptcy

COURT

BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
GENERAL DIVISION
COOPER J

CATCHWORDS

Bankruptcy - Mortgage security given by bankrupts in relation back period - whether transaction saved by operation of s. 123 of Bankruptcy Act - whether preference created in favour of mortgagee - whether mortgage of Torrens system land can be a settlement of property within the Act. Words and Phrases - "settlement of property" - "in the ordinary course of business" - "good faith".

Bankruptcy Act 1966 S.58(1)(a), s.115, 116, 122(2), 120, 123

Sibbles v. Highfern Pty. Ltd. [1987] HCA 66; (1987) 164 CLR 214 at 222 - 223

Burns v. Stapleton [1959] HCA 34; (1959) 102 CLR 97 at 106

Re Weiss; Ex parte White v. John Vicars and Co. Ltd. (1970) ALR 654 at 662 - 663

Official Trustee in Bankruptcy v. Mitchell [1992] FCA 521; (1992) 38 FCR 364 (FC) at 369

P.T. Garuda Indonesia Ltd. v. Grellman (1992) 35 FCR 515 (FC) at 528

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

Re Pahoff; Ex parte Ogilvie (1961) 20 ABC 17 at 20

Re Hyams; Official Receiver v. Hyams (1970) 19 FLR 232

Official Trustee in Bankruptcy v. Arcadiou (1985) 8 FCR 4 (FC) at 10 - 11

N.A. Kratzmann Pty. Ltd. v. Tucker (No. 1) (1966) 123 CLR 259

Norgard as Trustee of the Estate of La Rosa v. Rocom Pty. Ltd. (Unreported, Full Court, Northrop, Davies and Lee JJ, 16.8.90 per Northrop and Davies JJ at 6 - 9

Barton v. Official Receiver [1986] HCA 44; (1986) 161 CLR 75

Burns v. McFarlane [1940] HCA 25; (1940) 64 CLR 108

Downs Distributing Co. Pty. Ltd. v. Associated Blue Star Stores Pty. Ltd. (In Liquidation) [1948] HCA 14; (1948) 76 CLR 463

Taylor v. White [1964] HCA 11; (1964) 110 CLR 129 at 136, 146, 154, 159.

Tomkins v. Saffrey (1877) 3 App Cas 213 at 227

Re Abrahams Ex parte Thomas and AGC (Factors) Limited Unreported judgment 7/88, Sydney 22.1.88 Einfeld J at 11 - 14

Re Pacific Projects Pty. Ltd. (In Liq.) (1990) 2 QdR 541 FC at 548

HEARING

BRISBANE, 8 and 9 February 1993
31:3:1994

Counsel for the Applicant: Mr. P. Freeburn

Solicitor for the Applicant: Corrs Chambers Westgarth

Counsel for the Respondents: Mr. A. Lyons

Solicitor for the Respondents: J.F. Connors and Associates

ORDER

THE COURT:
1. Declares that the sum of $46,654.80 deposited with the Commonwealth Bank of Australia, Queen Street, Brisbane Branch on interest-bearing deposit number 4000-1008-3105 together with all interest payable thereon is the property of Peter Ivan Felix Geroff as trustee of the estates of Michael John Robinson and Sharon Robinson, bankrupts and that the said trustee is entitled to receive the said sum and interest and deal with it in accordance with the provisions of the Bankruptcy Act 1966 (Cth).

2. Orders that the cross-claim of the first respondent be dismissed.

3. Orders that the first respondent pay the applicant's costs of the application and the cross-claim including reserved costs to be taxed if not agreed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

J COOPER On 5 September, 1991 Michael John Robinson and Sharon Robinson (the bankrupts) executed in favour of Ronald Herbert Francis Turner (the first respondent) a bill of mortgage over land situate at 2825 Gold Coast Highway, Surfers Paradise, Queensland. The mortgage was a second mortgage over the property. A first mortgage was then held over the property by Permanent Custodians Limited, the second respondent. On 27 March, 1992, the second respondent as mortgagee sold the said property and by order of this Court the balance proceeds of sale were paid into an interest-bearing deposit with the Commonwealth Bank of Australia pending further order of the Court.

2. On 5 June, 1991 the bankrupts were each served with a bankruptcy notice issued under the Bankruptcy Act 1966 ("the Act") by Custom Service Leasing Limited. On 19 June, 1991 the bankrupts each committed an act of bankruptcy in that they failed to comply with the terms of the notice and failed to satisfy the Court that they had a counterclaim, set-off or cross-demand within the requirement of section 40(1)(g) of the Act. On 5 December, 1991, on the petition of Custom Service Leasing Limited, a sequestration order was made against the estates of the bankrupts. Peter Ivan Felix Geroff was appointed trustee of the estates of the bankrupts on that day.

3. For the purpose of section 116 of the Act, the bankruptcy of the bankrupts is deemed to commence on 19 June, 1991 (section 115(1)).

4. The trustee, as applicant, seeks :-
(a) A declaration that bill of mortgage dated 5 September, 1991

No. K78455X is void;
(b) An order that the bill of mortgage be removed from the
certificate of title to the land;
(c) A declaration that the sum of $46,654.80 presently held in
interest bearing deposit number 4000-1008-3105 with the
Queen Street Branch of the Commonwealth Bank together with
accrued interest thereon is the property of the applicant
trustee and may be dealt with by him as trustee of the
estates of the bankrupts;
(d) An order for costs against the first respondent;
(e) Further or other relief.

5. In support of the relief claimed, the applicant contends that :-

(a) By the operation of section 115 of the Act, the property is
deemed to have been vested in the applicant as trustee on 19
June, 1991. In consequence thereof it was beyond the power
of the bankrupts to mortgage the property on 5 September,
1991 and that, as against the trustee, the mortgage is void;
(b) The mortgage was a settlement of property within the meaning
of section 120 of the Act in respect of which sections
120(1)(a) and 120(1)(b) of the Act had no application, and,
having been granted after the commencement of the bankruptcy
on 19 June, 1991 was void against the trustee;
(c) The mortgage was a transfer or charge on the property or an
obligation incurred by the bankrupts within the meaning of
section 122(1) of the Act which had the effect of giving the
first respondent a preference, priority, or advantage over
other creditors of the bankrupts which was granted within
the period specified in section 122(1)(b) and, in
consequence, was void against the trustee.

6. The first respondent resists the relief claimed on the basis that the bill of mortgage was granted as part of a transaction whereby the first respondent advanced to the bankrupts the sum of $300,000.00, which advance constituted valuable consideration. The transaction took place before the date of the bankruptcy of the bankrupts and at a time when the first respondent did not have notice of the presentation of a petition against either of the bankrupts. The transaction, it was contended, was one in good faith and in the ordinary course of business. The first respondent has cross-claimed for a declaration that he is entitled to the monies held in the Commonwealth Bank, together with interest thereon, and for an order for costs.

The Facts
7. The first respondent is a New Zealand resident. In 1990 he retired. Immediately prior to his retirement he was employed as the assistant manager, merchant banking operations, with the NZI Bank in New Zealand. He was in 1991 a person who was experienced in commercial and banking matters.

8. In June, 1991 while on an extended holiday in Australia the first respondent attended at the offices of ABC Rent-a-Car at 2835 Gold Coast Highway, Surfers Paradise to rent a car. In the course of discussing rental rates, the first respondent, who was of the opinion that the rates were too expensive, was referred to Mr. Michael Robinson. It transpired that the first respondent had met Mr. Robinson approximately two years previously when he had rented a car from ABC Rent-a-Car on the recommendation of "Mr. Travel" travel agents in New Zealand.

9. Mr. Robinson put to the first respondent a proposal whereby a motor vehicle could be purchased, used by the purchaser and then put in the ABC Rent-a-Car fleet to return to the vehicle owner 30% per annum on the cost of the car. Robinson gave to the first respondent a brochure (Exhibit "RT2") which outlined the scheme. He also provided a draft management agreement to govern the lease of the vehicle between the investor and ABC Rent-a-Car. The first respondent took the agreement to Mr. Kerr of Messrs. Bowdens Kerr, Solicitors, and received advice in relation to it. In the discussions which followed Robinson asked the first respondent if he would be interested in marketing the scheme in New Zealand. The first respondent responded affirmatively.

10. On 27 June, 1991 the first respondent agreed to buy a vehicle and participate in the investment scheme. On 15 July, 1991 a purchase order was raised from ABC Rent-A-Car International Pty. Ltd. for $16,500.00 for a Ford Falcon sedan. The vehicle was used by the first respondent and on 16 September, 1991 made available for car hire to a company, Austcar (Australia) Pty. Ltd.

11. By late June or early July, 1991 the first respondent knew that ABC Rent-A-Car was previously operated by a company Robco Holdings Pty. Ltd. ("Robco") and that that company had suffered financial problems due to the airline pilot's strike in 1990. He also knew that Robinson had, or intended to, set up a new company with new investors. The company was ABC Rent-a-Car International Pty. Ltd. ("ABC International") and the new investors, according to Robinson, were to inject some $450,000.00 into the business to be operated by ABC International. In July, the first respondent attended a meeting with the "investors". The marketing in New Zealand of the scheme by the first respondent whereby investors would purchase motor vehicles for inclusion in the ABC Rent-a-Car fleet was discussed at this meeting. Thereafter the first respondent worked on the preparation of the marketing of the scheme in New Zealand to investors there. At about this time Robinson showed the first respondent an advertisement placed in the Australian Financial Review seeking investors in a "30% interest on secured investment" detailing a return of $6,292.00 per annum, with a potential yield of $7,866.00 per annum on a $16,000.00 investment. Readers were directed to Mr. Miller of K.P.M.G. Peat Marwick of the Gold Coast. From this time until mid-August, Robinson and the first respondent were, I find, in regular contact concerning the first respondent's role in marketing the scheme in New Zealand and in relation to the possible purchase of additional cars for investment in the scheme by the first respondent.

12. On or about 12 August, 1991 the first respondent told Mr. Robinson that he had instructed his New Zealand bank to transfer A$30,000.00 to his account at Westpac Banking Corporation on the Gold Coast to enable the first respondent to purchase four or five cars for rental by ABC Rent-A-Car as an investment. On the same day the first respondent wrote to his solicitor Mr. Kerr and to Mr. Robinson as the Managing Director of ABC Rent-a-Car International Pty. Ltd. In the letter to Mr. Robinson, the first respondent set out the terms and conditions upon which the first respondent was to act as ABC Rent-a-Car's New Zealand agent to market investment in vehicles to be managed and operated by ABC Rent-a-Car. The letter to Mr. Kerr confirmed a conversation which the first respondent and Mr. Robinson had had with Mr. Kerr on that date in which Mr. Kerr had agreed to act for the New Zealand investors who purchased motor vehicles to be operated by ABC Rent-a-Car.

13. The first respondent says, and I find, that on or about 12 August, 1991, Mr. Robinson told him that Robinson was having problems with the "investors" in ABC Rent-a-Car International Pty. Ltd. not providing funds and that without additional funds the business probably could not continue to operate. Thereafter the first respondent says that he had various discussions with Mr. Robinson as to what the first respondent could do to assist.

14. In the few days that followed there were discussions between Mr. Robinson and the first respondent concerning the possibility of attracting equity investors. During those discussions the bankrupts' situation was discussed. I find that Mr. Robinson told the first respondent that the bankrupts had received an offer of $1.1 million for the property at 2835 Gold Coast Highway subject to the sale of an adjacent property to the purchaser. He advised the first respondent that the property was in the joint names of the bankrupts and that $200,000.00 was secured against the property. He also told the first respondent that the bankrupts had an equity of $150,000.00 in their home at Runaway Bay. Robinson in these conversations valued his net worth at between $600,000.00 and $700,000.00 based on a value of the Gold Coast Highway property at between $700,000.00 and $750,000.00.

15. The first respondent checked with Mr. C. Tomuri of Daikyo Real Estate, Surfers Paradise, as to the purchase offer, he sighted the letter of offer and was advised that Daikyo Real Estate had investors prepared to buy the property at between $550,000.00 and $600,000.00.

16. Mr. Robinson, I find, did not disclose to the first respondent anything further as to his creditors save to advise the first respondent that personal guarantees the bankrupts had given to Esanda Limited ("Esanda") and Sanwa Australia Finance Limited ("Sanwa") to guarantee the borrowings of Robco were unenforceable because the lenders had changed the original terms and conditions without seeking the guarantors' consent. He also advised the first respondent that Esanda and Sanwa were keen to do further business with Robinson and his company. Robinson, I find, did not make a full, frank and true disclosure as to his financial position and in particular did not disclose other creditors and personal guarantees which he had given, nor that bankruptcy proceedings had been issued and served against himself and his wife.

17. I find that between 12 August, 1991 and 15 August, 1991 the first respondent agreed to loan to the bankrupts A$300,000.00, repayment of which was to be secured against the Gold Coast Highway property owned by them. The $300,000.00, I find, was to be used substantially to provide funds to enable a new company to acquire the business and goodwill (although not the debt) of ABC Rent-a-Car without payment to either Robco or ABC International and thereafter to operate the business as its own. The loan was also part of an agreement whereby the first respondent would have the option to acquire equity in the new company. If the first respondent exercised the option the shares in the company were to be paid for by the bankrupts, such payment to be in diminution or release of the debt due to the first respondent. The first respondent was also to become a director of the new company with a nominal shareholding. The new company was to pay the first respondent's expenses to attend at board meetings in Australia. Originally, the operative period of the loan and the option agreement was for a period of six months.

18. The terms of the agreement between the first respondent and the bankrupts as originally agreed, I find, are recorded in a hand-written memorandum prepared by the first respondent and tendered into evidence as Exhibit 8. Although the document is undated, I am satisfied that it represents the agreement to loan $300,000.00 referred to in a letter written to the bankrupts by the first respondent on 15 August, 1991. Additionally, steps were taken to implement the new corporate structure by obtaining a new company, for the first respondent to acquire a nominal shareholding in that company and to be appointed a director of it. The records of the Australian Securities Commission show that Austcar (Australia) Pty. Ltd. was registered under the Corporations Law on 22 August, 1991 and that the first respondent became a director and shareholder of that company on 23 August, 1991. The new company was acquired by Mr. Kerr as a shelf company on the instructions of the first respondent.

19. The financial position of ABC International was such that by 15 August, 1991 it could not meet wages and other necessary business expenses. On 15 August, 1991 the money the first respondent had instructed be transferred from New Zealand into his bank account on the Gold Coast, for the purchase of motor vehicles, arrived. The first respondent offered to make that money available as an advance of the $300,000.00 already agreed to be lent and pending finalisation of the mortgage over the Gold Coast Highway property to secure the loan. The offer was contained in a letter to the bankrupts dated 15 August, 1991 which said :-

"Dear John and Sharon,
Further to our recent discussions (and pending
legal requirements relating to the agreed
mortgage of $300,000 on your Gold Coast Highway
property) I am prepared to advance you $10,000
tomorrow to enable you to meet wages and some
other costs for A.B.C. International.
This advance and other advances that may be
required up to say $30,000 will be secured by
the first mortgage which should be able to be
signed within 10 days.
Kindly sign this letter as confirmation of our
agreement.
Should no mortgage be signed I will look to
repayment in three months.
Yours sincerely
(Signed R.H.F. Turner)
We accept the above".

20. It was accepted by the bankrupts by endorsement on the foot of it. I find that the offer was made and accepted on the date the letter bears.

21. I do not accept the submission of Counsel for the applicant that there were two agreements; one to advance up to $30,000.00 unsecured made on or about 15 August, 1991 and a second agreement to advance $276,000.00 made on or about 5 September, 1991 with the previous advance of $24,000.00 being secured under the mortgage of 5 September, 1991. The provision in the letter of 15 August, 1991 that in the event of a bill of mortgage not being executed, any sum up to $30,000.00 advanced in contemplation of the execution of a formal bill of mortgage was to be repaid in three months, is no more than a default provision. There is nothing in the evidence of the first respondent to support a finding that the provision of a further sum up to a total of $300,000.00 was dependent upon further negotiation and agreement by the first respondent and the bankrupts. As a matter of ordinary construction the agreement referred to in the letter of 15 August, 1991 was conditional only upon the preparation and execution of a bill of mortgage securing the agreed loan of $300,000.00 against the land.

22. The first advance of $10,000.00 was made on 16 August, 1991 and a further advance of $10,000.00 was made on 22 August, 1991, the date on which Austcar (Australia) Pty. Ltd. was registered and a final advance of $4,000.00 was made on 28 August, 1991.

23. Between 15 August and 26 August, 1991 the first respondent made several inquiries relevant to conducting a car rental business. These inquiries included seeking information on motor vehicle availability, trading terms, financing, preferred models and hire rates. Some of these matters he raised in a discussion with Mr. Flack of Esanda which occurred between 20 and 22 August, 1991. Although the first respondent gave evidence that this was to ascertain the viability of the ABC Rent-a-Car business to satisfy himself that the bankrupts could repay the loan, I do not accept this as correct. The first respondent in his affidavit deposed that he did not offer a loan to the bankrupts until late August or early September, 1991; again I do not accept this evidence. By 15 August, 1991 the first respondent had satisfied himself that there was sufficient equity in the Gold Coast Highway property to secure the loan and, I find, was prepared to lend on that basis without further security. Thereafter he was concerned to ensure that the ABC Rent-a-Car business was removed from companies which had previously operated it, re-established debt-free and re-equipped with vehicles. The rental fleet, or a substantial part of it, had by 15 August, 1991 been repossessed to the knowledge of the first respondent. The only circumstance likely to have led to the balance of the $300,000.00 not being advanced to the bankrupts was a failure to achieve these objectives. If the business had totally failed and ceased to trade, the first respondent had no further interest in making the loan and the bankrupts could not use the money for the purpose for which it was being advanced. As between the first respondent and the bankrupts at the latest by 22 August, 1991 steps had been taken to implement the agreement; the company Austcar (Australia) Pty. Ltd. had been acquired.

24. At 11.00 a.m. on 26 August, 1991 a meeting was held attended by the first respondent, the male bankrupt, J. Kitt, R. Nelson and B. Robertson. The agenda for the meeting was headed "SUGGESTED AGENDA FOR PROPOSED DIRECTORS TO CONSIDER" (Exhibit 11). I am unable to find on what date the document came into existence and by whom it was prepared. The document provided :-

"1. Conditions to be satisfied prior to
commencing Business:
(a) Availability of cars - what is minimum
number and timing of availability?
(b) Locations to operate from?
(c) Availability of: Telephone numbers
Premises
(d) General outline of future plans for
trading and availability of funds for
proposals
(e) Leases on plant, computers, cars, etc.
Assuming agreement on above then Directors will
agree to their appointment, then discuss:
1. Company name and Logo, Capital
2. Matters to distance new Company from
previous ABC operations
3. JR's position - Management contract
4. Confirm Staff salaries, positions and
duties
5. Outline Directors normal duties and any
extra duties for which they will be paid
either by time or commissions
6. Directors fees
7. Policy matters:
a) Future direction - expand and consolidate
b) Financial reporting
c) Capital budgets
d) Cash flow projections
e) Profit and Loss projections
f) Pre-emption rights - sale of shares
8. Administrative matters:
a) Bank
b) Solicitor
c) Auditor
d) Accountant
e) Cheque signing
f) Financial Controller"

The minutes of the meeting (Exhibit 10) record:-

"In answer to the questions in the attached
Agenda it was agreed :-
1.a Esanda - Minimum of 25 cars each week for
4 weeks (100)
AGC - 25 say in five days
1.b Locations - Gold Coast, Brisbane, Cairns,
Sydney and Melbourne
1.c Agreed telephone numbers and premises be
retained and were able to be retained and
not the property or assigned to ABC
International Pty Ltd
1.d Get up and running by re-fleet of 5
offices, consolidate the Company's name in
the rental car industry, reach trading
profit urgently by containing expenses,
then sell off more Franchises etc. Within
2 years aim to sell off operations
regarding day to day trading and retain
only company as parent Franchisor, plus
manage car fleeting from Franchisees.
1.e Confirmed by John Robinson that all
operations were to be included in the new
Company's activities eg; car rental,
investment proposals for car ownership,
computer operations for rental car booking
currently being developed for use and
on-sale,
leases on plant, computers, cars
etc, currently held by John Robinson or
his Companies.
On agreement of above, all present agreed:
1. Austcar (Australia) Pty Ltd as name, logo
to be later considered
2. Telephone accounts in name of ABC Rent A
Car International Pty Ltd to be paid by
John Robinson to protect numbers and
create further debt to John Robinson by
ABC International Pty. Ltd.
Austcar (Australia) Pty Ltd to provide
funds to John Robinson for same - say
$4,000.00.
3 and 4 Discussed only in brief - to be further
discussed
5. Directors (non Executive) selling
Investment Plan cars to be paid $1,000.00
per car sold.
6. No Director's fees for six (6) months
7 and 8 Not discussed
Ron Turner, John Robinson and John Kitt to
assess viability of operation on 100 cars over 5
locations and present to next meeting IF 100
cars are available as required on 1.a above".

25. At 2.30 p.m. on 26 August, 1991 the first respondent, Mr. Robinson and one or more of the other attendees at the morning meeting met with Mr. Crawley of AGC. At that meeting the first respondent discussed the new company acquiring some of the vehicles which had been repossessed by AGC and in so doing, worked off a list of repossessed vehicles provided by Mr. Crawley. The first respondent provided a curriculum vitae and a statement of his personal financial affairs to Mr. Crawley. I accept the evidence of Mr. Crawley that he was told by the first respondent that the new company was to be called Austcar Australia Pty. Ltd., that the first respondent would be the substantial shareholder in the company, and, that John Kitt would also be a shareholder. The meeting concluded with Mr. Crawley agreeing to put together an application for the first respondent and the new company for refinancing of some of the vehicles previously leased by Robco.

26. By 28 August, 1991 the first respondent, in consequence of the decision taken at the morning meeting on 26 August, 1991 and recorded at the end of the minutes, had completed six month profit projections and cash flows for the business (Exhibit RT16). In the notes to the projections is recorded :-

"DIRECTORS
TRAVEL - RON TURNER 4 DAYS A MONTH AIR FARES,
ACCOMMODATIONS AND EXPENSES - $1,500
INTEREST - 30% ON $250,000 INJECTED AS
LOAN BY JOHN ROBINSON".

27. The travel arrangement represents the agreement previously agreed between the first respondent and Mr. Robinson between 12 August and 15 August 1991 and contained in Exhibit 8. The $250,000.00 to be injected by Robinson is part of the $300,000.00 agreed to be lent by the first respondent. The other $50,000.00 is the item "JR - $50,000 for debts in Robco" recorded in Exhibit 8 and does not appear in Exhibit RT 16.

28. On 3 September, 1991 the first respondent met with Mr. Anderton of Sanwa. The meeting was fortuitous, Mr. Anderton having called to see Mr. Robinson about the financial position of ABC Rent-a-Car and its ability to continue in business. The first respondent was only briefly at the meeting and it is not possible to make any finding as to what was said during his presence between Mr. Anderton and Mr. Robinson. However, it is clear that the bankrupts' position as guarantors to Sanwa was not discussed in the first respondent's presence.

29. On a date prior to 5 September, 1991 which I am unable to identify, the first respondent agreed to the loan period being one year instead of the six months previously agreed.

30. On 5 September, 1991 the bankrupts executed the bill of mortgage. The bill of mortgage was for a sum of $300,000.00 for a term of one year, interest payable at 30% per annum. By clause 29 the mortgage provided :-

"28.6 Notwithstanding and in addition to the
provisions of Clause 25.1 hereof `moneys
secured' includes
28.6.1 the sum of TWENTY FOUR
THOUSAND DOLLARS ($24,000.00)
previously advanced by the
Mortgagee to the Mortgagor in
August 1991; and
28.6.2 the sum of TWO HUNDRED AND
SEVENTY SIX THOUSAND DOLLARS
($276,000.00) advanced by the
Mortgagee to the Mortgagor on
the date hereof".

31. Corcon Nominees Pty. Ltd. ("Corcon") granted to the first respondent on 5 September, 1991 an option to purchase 10,000 fully paid shares in Austcar (Australia) Pty. Ltd. at $20.00 per share, such option exercisable on or before 4.00 p.m. 4 March, 1992. At the same time the bankrupts, Corcon and the first respondent executed an agreement which provided that in the event of the first respondent exercising the option, Corcon would immediately give notice of the exercise to the bankrupts who would immediately pay to the first respondent in reduction of the mortgage debt an amount equal to the purchase price of the shares in Austcar (Australia) Pty. Ltd.

32. On 6 September, 1991 the first respondent authorised Messrs. Bowdens Kerr to draw from funds held in their trust account the sum of $100,000.00 payable to Mr. J. Robinson for the purchase of motor vehicles to be operated by Austcar (Australia) Pty. Ltd. On 9 September, 1991 Mrs. S. Robinson signed an acknowledgment for the receipt of $100,000.00 for the purchase of motor vehicles to be operated by Austcar (Australia) Pty. Ltd.

33. On 7 October, 1991 the first respondent prepared a reconciliation of the distribution of the $300,000.00 advance as follows:-

"Of $300,000 a nett $271,600 was received by J.R. and S.R.
(after repaying me earlier loans, legal expenses etc.)
The $271.600 was used as follows -
$71,600 into Austcar ($49,900 being payment for shares)
$50,000 to J.R. to cover personal debts
$150,000 into Doug Kerrs Trust A/c for cars into Austcar.
(Spent in Sept. $100,000 - 24 cars
" Esand 20 cars $ 28,240
Balance in Trust A/c $21,760
at 9.10.91
$271,600"

34. Later, the first respondent reconciled the disbursements as follows (Exhibit 15) :-

"5.9.91 - Advance $300,000.00
5.9.91 - Loan to ABC Int. for wages etc. $24,000.00
5.9.91 - Legal fees 4,391.00
5.9.91 - Funds to J. Robinson to pay debts etc. 50,000.00
5.9.91 - Loan to Corcon) See Loan 71,600.00
9.9.91 - " " " ) Agreement
26.9.91 - Loan to Corcon - see Loan
Agreement 28,240.00
24.10.91 - Funds to J. Robinson for
Legals etc. 21,768.40
$300,000.00
Comments
5.9.91 - $71,600 was used by Corcon as follows -
$5000 to J. Kett for shares in Austcar
1500 " J. Nelson " " " "
1500 " B. Robertson " " "
41,900 Subscribe for shares " "
21,700 to Corcon who onlent to Austcar
$71,600
9.9.91 - $100,00 to Corcon to buy cars for lease to Fleet
Investments
26.9.91 - $28,240 to pay Bond to Esanda".

35. The item of $50,000.00 "to J.R. to cover personal debts" in the reconciliation of 7 October, 1991 and to "J. Robinson to pay debts etc". in the later reconciliation excited much attention on the hearing and in the submissions. In his affidavit the first respondent deposed:-

"114. On 5 September, 1991 I advanced
$276,000 to Mr and Mrs Robinson. This was
broken up as follows:
(a) $4,391.60 by way of payment of the costs
and outlays of Messrs Bowdens;
(b) $50,000 to M.J. Robinson. Robinson and I
had agreed that this would be available
for the Robinsons own use; and,
(c) the balance. Robinson and I had agreed
that the Robinsons would put this into the
business. In particular, Robinson and I
had agreed that this sum was to be put
into the business to be used to cover the
deposit to be paid to the finance
companies for the lease of motor vehicles.
In the period before investors in motor
vehicles were brought into the business so
as to supply vehicles, it was necessary to
get cars from the finance companies and
deposit monies were required for this
purpose".

The written memorandum Exhibit 8 records in part :-

"A300,000 to be spent -
Esanda - $150,000 for 200 cars
W/Capital - $100,000
JR - $50,000 for debts in
Robco".

36. In cross-examination the first respondent said of the above part of Exhibit 8 :-

"You see it talks about $300,000 and how it is
to be spent - - -?---Yes.
- - - on the - at the bottom of the second page?
See those figures, `$300,000 to be spent -' then
under that there is `Esanda - $150,000 for 200
cars'?---Yes.
And underneath that is W/Capital $100,000, that
is working capital?---Working capital.
Then underneath that, JR, that is John
Robinson?---Yes.
Dash, $50,000, for debts in Robco?---Yes.
That is something you have filled out at the
time?---That is right. Robinson required to
have cash for the simple reason that he - under
the international company he stated he hadn't
been paid wages for a while. He was finishing
off his house, and there were some debts that he
wished to clean up in Robco.
So, at the time you wrote this note, you knew
that Robco owed money?---Oh, that Robco owned
money? I believed Robco did owe money, but not
necessarily Robinson.
Well, you were giving - part of the money was to
go to Robinson in order to pay an indebtedness
owed by Robco, was not it?---Some of the money
there is stated to be to settle up some Robco
debts, yes, and the rest, I think, was to finish
his kitchen, which was adding to his assets, and
then there was other matters there that he -
that he wanted to tidy up because he hadn't been
paid, as I understood it, under the
international company.
You see, can I put it to you that in your
affidavit, you say that the $50,000 of the
$300,000 was to go to Mr Robinson for
renovations to his house, fullstop. That is all
you say about it?---Is that what was - - -
Is that right; is that what you are saying in
the affidavit?---I don't know. I'd need to
check the affidavit.
All right. I will ask you to do that in a
moment?---Yes.
But does that accord with your recollection?---
That's possibly correct, yes.
Well, what was it? Was it for the renovations
to his house; I mean, this is $50,000 you are
talking about. Was it for the renovations to
his house, was it for the indebtedness of Robco,
or was it for something else, or was it for a
combination of things?---It could well have been
a combination of things but as I understood it,
the major portion of that 50,000 was for
indebtedness - well, was for renovations on the
house.
The major proportion?---The major portion of it,
as I understood it.
That note only talks - that is a note you made
at the time, and it talks about $50,000 for
debts in Robco; that is right, is not it?---It
does say so there, yes.
All right. Can you check your affidavit now?---
Yes, can you refer to a page or a - - -
Turn it up. Have a look at paragraph 102 on
page 30. You see that says that $50,000 was to
be used for the renovations, including fitting
in a brand new kitchen, changing some walls
around?---That's correct.
See, it is odd, is not it, that in your
affidavit you only referred to that purpose for
the $50,000 and yet in your contemporaneous
note, you refer to a totally different purpose?-
--The major portion, as I understood it, was to
be for the house, and that was the point that I
would have been making, but it would be - there
would certainly be an error there between there
and here".

He also said as to the reconciliation (Exhibit 15) :-

"Now, before we leave that document, just look
at the next item up, the third item on that
page, `Funds to J. Robinson to pay debts,
etcetera, $50,000'?---Yes.
That is another one of these documents written
by you recording the purpose of that $50,000?---
I believe this was written some time after the
happenings as a record, I think, as to where
funds were disbursed.
That is right?---It would be a record of the
disbursement of funds which was 50,000, which
was repeated in a previous document that you
raised which we talked about when you mentioned
debts, and as I mentioned, this was the possible
future debts, the present debts that he had with
regard to kitchen up-date, etcetera, not
necessarily past debts.
All right. But it is accurate. I mean, you
have written that note, `Funds to J. Robinson to
pay debts, etcetera.'?---That's entirely
accurate. It was a disposition of funds. I
believe I did it for the legal people, for
Kerr".

37. I am satisfied that the sum of $50,000.00 was advanced to Robinson to pay private debts or debts of Robco for which he was liable. Whether or not the bankrupts were then indebted for renovations to their home, the clear inference is that they did not have the funds to pay for the work and were relying on the first respondent to provide them with the money to pay for the work. At the time, the bankrupts were receiving no wages from the business and had not done so for some time. They were prepared to pay interest at almost twice the rate of commercially available loans at the time.

38. I find that at the time the first respondent agreed to loan $300,000.00 on security of the Gold Coast Highway land, he knew that :-

(a) Companies owned and controlled by the bankrupts which
conducted the business of ABC Rent-a-Car were in serious
financial difficulties and had been for a considerable
period of time.
(b) Motor vehicles provided by Esanda, Sanwa and AGC for use in
the business of ABC Rent-a-Car had been repossessed and that
the business was at risk of closing;
(c) The bankrupts had given personal guarantees to AGC and Sanwa
notwithstanding that Mr. Robinson had told the first
respondent that the guarantees were unenforceable;
(d) Neither the companies, nor the bankrupts, had the resources
to pay wages and other necessary outgoings in the business
and inferentially did not have the capacity to raise the
money at commercial interest rates by borrowing against the
assets they held;
(e) The bankrupts were dependent upon the successful operation
of the rent-a-car business to provide both the rental for
the premises on the Gold Coast Highway and an income for
each of the bankrupts who worked in the business. The
bankrupts had substantial borrowings secured against their
home and the commercial premises and were reliant upon
income from the business to service this indebtedness.
(g) The bankrupts were not then receiving wages from the
business and had not been receiving wages for some time with
the consequence that Mr. Robinson told the first respondent
that Mr. Robinson had some debts outstanding which he
required cash to pay.
(h) For all practical purposes the first respondent was the only
lender available at almost twice the commercial interest
rates then current.
(i) It was the intention of Mr. Robinson to attempt to sell the
property on the Gold Coast Highway to re-pay the advance of
$300,000.00.

39. The first respondent, I find, refrained form making any direct inquiry of the financiers as to the standing of the guarantees and the indebtedness claimed by the financiers under them. The first respondent failed to obtain from the bankrupts a full and correct statement of their true financial position. The financial position of the bankrupts, at the time of the agreement to advance the sum of $300,000.00 and at the time it was advanced under the mortgage, was of no real concern to the first respondent provided the bulk of the advance came into or was made available for the business of Austcar (Australia) Pty. Ltd., and that company acquired the business and goodwill of ABC Rent-a-Car free of the previous debts of the business. The first respondent had the option to acquire equity in the new operator of the business, had secured a management role in the business, and had made a commercial judgment that the business operated by the new company would be profitable. The value of the property as represented by Daikyo Real Estate would support the two mortgages in the event of a forced realisation and the whole or part of the debt secured against the property could be reduced or extinguished by taking equity in Austcar (Australia) Pty. Ltd.

40. The risk to which the first respondent was exposed was dependent upon his commercial judgment as to the viability of the rent-a-car business, his ability to exercise financial control over the business and his ability to ensure that the loan funds were used in the business, not the bankrupts' ability to repay. The security of the mortgage was only necessary if the business failed. Any liabilities of the previous operators of the business, or of the bankrupts because of their association with those companies, was of no concern to the first respondent because a new debt-free corporate structure was to be obtained. It was on this basis and in this belief that the first respondent entered into the transaction with the bankrupts.

41. I accept the evidence of the first respondent that he asked for and got agreement to an interest rate of 30% per annum because that was the return offered to him by Mr. Robinson for investing in the car scheme. However, I find that the first respondent knew that it was substantially above the then commercial interest rates for secured lending and that Mr. Robinson was in no position to refuse to pay the rate or argue for a lower rate.

The Preference Claim
42. When the first respondent agreed to loan to the bankrupts the sum of $300,000.00 the bankrupts agreed to secure repayment of such sum by a second mortgage over their land at Gold Coast Highway. The advance of up to $30,000.00 pending preparation of the bill of mortgage was to be part of the sum of $300,000.00 already agreed to be loaned by the first respondent and to be secured as part of that advance under the bill of mortgage. The contractual arrangements between the first respondent and the bankrupts were to come into effect at the time they were made and operated to charge the said property with the re-payment of the advances agreed to be made by the first respondent. Such a charge operated by way of equitable mortgage in relation to each of the advances made on 16, 22 and 28 August, 1991 to the extent of the particular amount of each advance. (Sibbles v. Highfern Pty. Ltd. [1987] HCA 66; (1987) 164 CLR 214 at 222 - 223; Burns v. Stapleton [1959] HCA 34; (1959) 102 CLR 97 at 106; Re Weiss; Ex parte White v. John Vicars and Co. Ltd. (1970) ALR 654 at 662 - 663).

43. At the time of the creation of the charge by way of equitable mortgage, there was no antecedent relationship of debtors and creditor between the bankrupts and the first respondent. The first respondent did not become a creditor of the bankrupts until he advanced to them the monies on 16, 22 and 28 August, 1991 and at that time the existing charge operated to secure repayment of the amount advanced against the Gold Coast Highway property. The giving of the bill of mortgage in registrable form on 5 September, 1991 did not create a preference in favour of the first respondent. The first respondent in taking the bill of mortgage and making the further advances on and after 5 September, 1991 did not obtain any benefit or advantage in relation to past indebtedness which he did not already enjoy. Neither the creation of the equitable mortgage nor the granting of a legal second mortgage had the effect of giving a preference within the meaning and operation of section 122(1) of the Act (Robertson v. Grigg [1932] HCA 29; (1932) 47 CLR 257 at 271 per Dixon J with whom Rich and McTiernan JJ agreed; Burns v. Stapleton at 105; Re Weiss at 662).

The Settlement Claim
44. The applicant further claims that the granting of the bill of mortgage on 5 September, 1991 by the bankrupts was a "settlement of property" within the meaning of section 120 of the Act which was not made in favour of a purchaser or encumbrancer in good faith and for valuable consideration and thus is void against the applicant as trustee. The applicant has the onus of establishing each of the three elements in section 120(1)(a) including the negative aspects of a lack of good faith and an absence of valuable consideration (Official Trustee in Bankruptcy v. Mitchell [1992] FCA 521; (1992) 38 FCR 364 (FC) at 369; PT. Garuda Indonesia Ltd. v. Grellman (1992) 35 FCR 515 (FC) at 528).

45. The first respondent contends that a mortgage of Torrens system land cannot be a settlement of property within the section as a matter of law. He further denies that the bill of mortgage in fact was a settlement within the section and contends that an absence of good faith and valuable consideration cannot be shown.

46. A bill of mortgage of land held under a Torrens system of title, upon registration, creates and transfers to the mortgagee an interest in the land in the nature of a charge or hypothecation over the land. The transfer of such an interest in land can constitute a settlement of property under section 120 of the Act (Re Pahoff; Ex parte Ogilvie (1961) 20 ABC 17 at 20; Re Hyams; Official Receiver v. Hyams (1970) 19 FLR 232; Official Trustee in Bankruptcy v. Arcadiou (1985) 8 FCR 4 (FC) at 10 - 11). There is nothing in the Real Property Acts (Qld.) implementing a scheme of Torrens title by registration which would compel a result other than that arrived at in the authorities cited which dealt with relevant New South Wales and Victorian real property legislation. However it does not follow that every bill of mortgage granted by a bankrupt within the period stated in section 120 of the Act will constitute a settlement of property (N.A. Kratzmann Pty. Ltd. v. Tucker (No. 1) (1966) 123 CLR 259 at 284, 293, 294; Hyams at 252). Irrespective of the form of the transaction for there to be a "settlement of property" the disposition of the property must be intended to secure an enduring benefit to the recipient of the property. There must be no contemplation of the immediate dissipation or consumption of the property (Official Trustee in Bankruptcy v. Mitchell at 369; Norgard as Trustee of the Estate of La Rosa v. Rocom Pty. Ltd. (Unreported, Full Court, Northrop, Davies and Lee JJ, 16 August, 1990 per Northrop and Davies JJ at 6 - 9)).

47. The transaction entered into between the first respondent and the bankrupts had no element of benefaction to it (N.A. Kratzmann Pty. Ltd. v. Tucker (No. 1) at 293) and no intention to grant or convey an enduring interest in the land. The interest created was to be held only for so long as the bankrupts were indebted to the first respondent for the monies to be advanced under the mortgage which, under the terms of the mortgage, was for twelve months. The transaction was an arms-length commercial transaction whereby the interest in the land as an equitable interest was created contemporaneously with the obligation of the first respondent to advance the sum of $300,000.00, which sum was advanced. The creation of a legal interest upon registration of the bill of mortgage did no more than transfer an interest in the land to the first respondent which the bankrupts were already contractually bound to transfer.

48. Additionally, the advancing of $300,000.00 by the first respondent to the bankrupts as a loan on the terms and conditions contained in the bill of mortgage was a consideration which had a real and substantial value and was not one which was merely nominal or trivial or colourable. In consequence it constituted valuable consideration within the meaning of section 120(1)(a) of the Act (Barton v. Official Receiver [1986] HCA 44; (1986) 161 CLR 75 at 86).

49. In my opinion the granting of the bill of mortgage by the bankrupts was not a settlement of property within the meaning of section 120 of the Act and was the granting of a registrable security interest in the land for which valuable consideration was given.

The Relation Back Claim
50. The applicant also seeks to avoid the bill of mortgage given on 5 September, 1991 on the basis that the security was given by the bankrupts after the commencement of the bankruptcy. By the operation of section 115(1) of the Act, the commencement of their bankruptcy is deemed to occur at the time of commission by the bankrupts of the earliest act of bankruptcy committed within a period of six months prior to presentation of the creditor's petition. The relevant date for the present application was 19 June, 1991, being the date on which the bankrupts failed to comply with the bankruptcy notices served on them on 5 June, 1991. The transactions between the bankrupts and the first respondent fall wholly within the relation back period.

51. The effect of sections 58(1)(a), 115(1) and 116(1)(a) of the Act is that all property of a bankrupt is deemed to vest in the trustee at the commencement of the bankruptcy which is fixed by relation back at a time prior to the making of the sequestration order. Thus during the period of relation back it is deemed not to have been within the power of the bankrupts to dispose of or deal with property which by the Act is deemed to have then been vested in the trustee. Securities granted before commencement of the bankruptcy bind the trustee and may be enforced by the security holder (section 58(5) of the Act), the trustee taking the property subject to all liabilities, equities or interests which affect the property in the bankrupt's hands (Sonenco (No. 77) Pty. Ltd. v. Silva [1989] FCA 462; (1989) 24 FCR 105). The position is different with securities granted after the deemed commencement date. Such securities are wholly ineffective against the trustee unless the holder of the security can bring the transaction within the protective provisions of the Act or satisfy the Court that the case is one where the trustee ought to be directed not to exercise its rights as to do so would be unfair (Ex parte James, In re Condon (1874) LR 9 Ch App 609; In Re Clark (A bankrupt); Ex parte The Trustee v. Texaco Ltd. (1975) 1 WLR 559). The first respondent has made no submission based on Ex parte James, In re Condon. He has, however, submitted that the transaction is saved by section 123 of the Act.

52. The section so far as is presently relevant, provides :-

"123(1) Subject to sections 118 to 122
(inclusive), nothing in this Act invalidates, in
any case where a debtor becomes a bankrupt -
(a) a payment by the debtor to any of his
creditors;
(b) a conveyance, transfer or assignment by
the debtor for valuable consideration;
(c) a contract, dealing or other transaction
by or with the debtor for valuable
consideration; or
(d) any transaction to the extent of a present
advance made by an existing creditor,
if -
(e) the transaction took place before the day
on which the debtor became a bankrupt;
(f) the person, other than the debtor, with
whom it took place, did not, a the time of
the transaction, have notice of the
presentation of a petition against the
debtor; and
(g) the transaction was in good faith and in
the ordinary course of business.
(2) The burden of proving the matters referred
to in paragraphs (1)(e), (f) and (g) in relation
to a transaction lies upon the person who relies
on the validity of the transaction".

53. I am satisfied that the making of the loan of $300,000.00 to the bankrupts was valuable consideration for the obtaining of the mortgage interest in the land on the Gold Coast Highway. The bill of mortgage was given by the bankrupts prior to the day upon which they became bankrupt. I am satisfied that the first respondent did not on 5 September, 1991 at the time the mortgage was granted by the bankrupts have notice of the presentation of a petition against the bankrupts and I so find. The requirements of paragraphs 1(c), (e) and (f) of section 123(1) are made out.

54. I turn now to the questions of "in the ordinary course of business" and "good faith".

55. In Robertson v. Grigg [1932] HCA 29; (1932) 47 CLR 257, Gavan Duffy CJ and Starke J said (at 267) :-

".....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'".

56. As to the transaction in issue in Robertson v. Grigg, their Honours said (at 268) :-

"The road-making contracts into which the debtor
entered promised good profits, but the debtor
required financial assistance in carrying them
out mainly for the payment of wages and
obtaining materials. Such assistance could be
obtained, and, probably, only obtained, if the
person rendering assistance were protected by an
assignment of the moneys coming due under the
contracts. The transaction was fair and
reasonable, and such as any man might engage in
without adverting even to the possibility of
bankruptcy".

57. In Burns v. McFarlane [1940] HCA 25; (1940) 64 CLR 108, Rich, Dixon and McTiernan JJ said of the expression "in the ordinary course of business" as used in the Bankruptcy Act 1924 (Cth) (at 125) :-

".....the expression as used in the Bankruptcy
Acts is a wide one: See Sievwright v. Hay and Co.
Ltd. (1913) 50 ScLR 313; Robertson v. Grigg
(1932) 47 CLR at p 267, per Gavan Duffy CJ
and Starke J. Unlike the expression found in
the bills-of-sale legislation, viz., `transfers
of goods in the ordinary course of business of
any trade or calling,' it does not require an
investigation of the course pursued in any
particular trade or vocation and it does not
refer to what is normal or usual in the business
of the debtor or that of the creditor: See
Robertson v. Grigg (1932) 47 CLR, at p 273,
per Evatt J, and cf. Halsbury's Laws of
England, 2nd ed., vol. 3, p 20. Possibly the
application of the expression in bankruptcy is
not so wide as in relation to floating charges:
Cfr. Halsbury's Laws of England, 2nd ed., vol.
5, p. 482, and Palmer, Company Precedents, 13th
ed. (1927), Part III., Debentures, p. 72. But
that meaning has more analogy.
The transaction considered as a whole presented
the appearance of a perfectly fair and honest
attempt to place the finances of Woon's business
on a sound basis by raising money on free
assets, giving an ample security, for the
purpose of paying off unsecured creditors and
providing a small surplus for current expenses.
On the whole, therefore, we think that the
finding that it was in the ordinary course of
business ought not to be disturbed".

Starke J said (at 128) :-

"In S. Richards and Co. Ltd. v. Lloyd [1933] HCA 26; (1933) 49
CLR 49 this court held that the section
looked to the effect of the transaction and not
to the intent or state of mind of the debtor,
and, further, in Robertson v. Grigg [1932] HCA 29; (1932) 47
CLR 257, that the test under sec. 95 of the
ordinary course of business was not related to
any special business carried on by the debtor or
creditor but was whether the transaction was
fair and what a man might do without having any
bankruptcy in view".

58. The first respondent submits that these statements establish the test as one which requires no more than the transaction was fair and reasonable and such as any person might engage in without adverting even to the possibility of bankruptcy. Such an argument was put by the appellant in Downs Distributing Co. Pty. Ltd. v. Associated Blue Star Stores Pty. Ltd. (In Liquidation) [1948] HCA 14; (1948) 76 CLR 463 (at 468 - 469), the word "fair" being used as the antithesis of "oppressive". The argument was not accepted. Latham CJ said (at 474 - 475) :-

"In my opinion it is unnecessary in this case to
determine the precise meaning of the words `in
the ordinary course of business' where they
appear in s.95(2)(b) of the Bankruptcy Act.
Whether that expression is understood in a very
general sense or in a sense limited by reference
to the particular business of the parties
concerned, it cannot in my opinion fairly be
said that the settlement of a debt between
traders by a transaction involving the
redelivery of goods sold together with other
goods, subject to an arrangement that the debtor
may purchase the goods again for cash, is a
transaction in the ordinary course of business.
Whether it is regarded as satisfaction of the
debt by delivery of the goods (as recorded in
the defendant company's books) or as a loan of
money followed by payment of the debt and a
pledge of the goods, the transaction is of an
unusual kind and cannot be said to be in any
ordinary course of business".

Rich J. said (at 476 - 477) :-

"As was pointed out in Burns v. McFarlane [1940] HCA 25; (1940)
64 CLR 108, at p 125 the issues in sub-s.
2(b) of s. 95 of the Bankruptcy Act 1924 - 1933
are `(1) good faith; (2) valuable
consideration; and (3) ordinary course of
business'. This last expression it was said
`does not require an investigation of the course
pursued in any particular trade or vocation and
it does not refer to what is normal or usual in
the business of the debtor or that of the
creditor'. It is an additional requirement and
is cumulative upon good faith and valuable
consideration. It is, therefore, not so much a
question of fairness and absence of symptoms of
bankruptcy as of the everyday usual or normal
character of the transaction. The provision
does not require that the transaction shall be
in the course of any particular trade, vocation
or business. It speaks of the course of
business in general. But it does suppose that
according to the ordinary and common flow of
transactions in affairs of business there is a
course, an ordinary course. It means that the
transaction must fall into place as part of the
undistinguished common flow of business done,
that it should form part of the ordinary course
of business as carried on, calling for no remark
and arising out of no special or particular
situation".

Williams J said (at 480) :-

"It seems to me, therefore, that the expression
refers to a transaction into which it would be
usual for a creditor and debtor to enter as a
matter of business in the circumstances of the
particular case uninfluenced by any belief on
the part of the creditor that the debtor might
be insolvent".

59. Since the decision in Downs Distributing Co. Pty. Ltd. v. Associated Blue Star Stores Pty. Ltd. (In Liquidation), the High Court has stressed that it is the ordinariness of the transaction as part of the general flow of business by which the transaction is judged. Transactions which are unusual, remarkable, special or particular transactions according to ordinary business standards are not in the ordinary course of business (see Taylor v. White [1964] HCA 11; (1964) 110 CLR 129 at 136 per Dixon CJ; at 146 per Kitto J; at 154 per Taylor J; at 159 per Menzies J).

60. Whether or not the terms of a loan and any mortgage taken to secure repayment are fair and reasonable is but one facet of testing the ordinariness of the transaction; it is not the sole criterion. It is the whole of the circumstances surrounding the transaction which must be looked at to see whether the particular transaction in those circumstances forms part of the ordinary course of business.

61. The first respondent submits that the sum of $300,000.00 was advanced as a loan on ordinary commercial terms to enable the bankrupts to inject capital into the business of ABC Rent a Car, such advance being secured by a second mortgage. Viewed as a loan transaction it was submitted that there was nothing unusual, remarkable, special or particular which would render the transaction other than ordinary according to ordinary business standards. It was submitted that the transaction viewed as a whole was no different from that in Burns v. McFarlane, namely a fair and honest attempt to place the bankrupts' business on a sound basis by lending working capital for use in the business. I do not agree. The transaction was not an ordinary loan transaction supported by a mortgage security over real property.

62. The advance made to the bankrupts was for the purpose of acquiring the business and goodwill of ABC Rent-a-Car from the company or companies then operating that business, without payment for the goodwill and without assuming the liabilities of the business, and then operating the business using a new corporate entity and the funds provided by the first respondent. The advance was also to be used to provide funds to pay such of the business liabilities of the previous operator as were absolutely necessary to maintain the business and the goodwill, eg. telephone numbers and entries, and to provide funds for the bankrupts to pay personal creditors. Nor was the first respondent to be a mere lender; he was to obtain an option to acquire an interest in the new company which was to acquire and operate the business and could retire the debt by taking equity in the company. The purpose of the advance was to salvage the business of ABC Rent-a-Car and to appropriate it for the benefit of the bankrupts and the first respondent.

63. At the time the agreement to loan the bankrupts $300,000.00 was made the ABC Rent-a-Car business was at the point of disintegration. The agreement to advance up to $30,000.00 to pay wages and necessary outgoings occurred in circumstances where objectively the business was not generating sufficient funds to pay those outgoings, the bankrupts did not have the funds to make the payments from their own resources and did not have the capacity to borrow from conventional sources to obtain the funds at commercial rates. Of the sum advanced $50,000.00 was to go to the bankrupts to pay personal debts as the bankrupts were receiving no wages from the business and had not been receiving any for some time. The first respondent was a lender of last resort and the interest rates charged were not commercial rates. It does not assist to say that the interest rate charged is explicable on the basis of what returns could be earned on an investment in the car scheme. Without the business there was no car scheme to operate and earn such high interest. The rates charged were at the time extremely high and non-commercial. The interest rate charged is itself a circumstance which calls for comment or explanation because the rate was unusual or remarkable. Looking at the whole of the circumstances of the transaction including the granting of the bill of mortgage, I find that the transaction was not one in the ordinary course of business.

64. Although it is unnecessary to express any view on the question of good faith, I should record that I am far from satisfied that the transaction was one entered into by the first respondent with the requisite degree of good faith required towards the other creditors of the bankrupts. The first respondent chose to rely almost totally upon what Mr. Robinson told him as to the bankrupts' financial position. The inquiry of the real estate agent was only as to the adequacy of the security offered. The inquiry of the first respondents' solicitor was only as to the general character and reputation of the bankrupts. The first respondent knew of the guarantees given to two finance companies. He refrained from raising the question of the indebtedness of the bankrupts under those guarantees with the financiers. To rely upon Mr. Robinson's assertion that the guarantees were unenforceable was unreasonable. The first respondent took no positive steps to independently ascertain the true financial position of the bankrupts when he knew that they had neither the monies nor access to monies to pay the wages and other necessary outgoings of the ABC Rent-a-Car business. The business he knew was on the verge of imminent closure. He knew that the business was the source of the bankrupts' income and the source of the rental income for the premises on the Gold Coast Highway site. He also knew that the business was necessary to pay the bankrupts' secured and unsecured creditors and that the bankrupts had been without wages for some time due to the failure of investors to inject funds into ABC International. Finally, the first respondent knew that the bankrupts intended from the outset to attempt to sell the property to repay the advance.

65. In my view the first respondent was not entitled to refrain from making the necessary inquiries in the circumstances which existed (Tomkins v. Saffrey (1877) 3 App Cas 213 at 227; Re Abrahams Ex parte Thomas and AGC (Factors) Limited Unreported judgment 7/88, Sydney 22.1.88 Einfeld J at 11 - 14; Re Pacific Projects Pty. Ltd. (In Liq.) (1990) 2 Qdr 541 FC at 548, 549). If the first respondent had made proper inquiry he would have discovered that the bankrupts owed substantial sums to numerous creditors including substantial sums under guarantees to finance companies. He would have seen that to take a second mortgage over the real property on the Gold Coast Highway was to take from the existing creditors the benefit of any equity in that property in circumstances where the advance would not produce an immediate substitute asset. At best it would create a debt due to the bankrupts from a company or companies in which they had an interest.

66. The first respondent submitted that there was no evidence that the bankrupts were insolvent at the time of the relevant transaction. The best evidence that the bankrupts' financial position was not a mere temporary lack of liquidity, is their inability to pay up to $30,000.00 out of their own monies or borrow against their assets to do so to keep in operation the business which was the sole source of their personal income and rental income or even pay the judgment debt of between $4,000.00 - $5,000.00 to avoid bankruptcy. A proper investigation of the financial affairs of the bankrupts would, in my view, have disclosed to the first respondent such insolvency.

67. The first respondent has failed to make out the requirements of section 123(1)(g) of the Act. In consequence, the transaction between the first respondent and the bankrupts giving rise to the equitable mortgage and subsequently to the registered bill of mortgage number K78455X is void as against the applicant. The applicant is entitled to the monies held on interest-bearing deposit being the funds remaining after the discharge of the first mortgage and the costs of sale by the first mortgagee. The applicant is also entitled to the interest earned on those funds.

68. The first respondent has failed in his claim to the monies invested and costs, including reserved costs, should follow the event.

69. THE COURT:

1. Declares that the sum of $46,654.80 deposited with the
Commonwealth Bank of Australia, Queen Street, Brisbane
Branch on interest-bearing deposit number 4000-1008-3105
together with all interest payable thereon is the property
of Peter Ivan Felix Geroff as trustee of the estates of
Michael John Robinson and Sharon Robinson, bankrupts and
that the said trustee is entitled to receive the said sum
and interest and deal with it in accordance with the
provisions of the Bankruptcy Act 1966 (Cth).
2. Orders that the cross-claim of the first respondent be
dismissed.
3. Orders that the first respondent pay the applicant's costs
of the application and the cross-claim including reserved
costs to be taxed if not agreed.