S Richards & Co Ltd v Lloyd [1933] HCA 26; (1933) 49 CLR 49 (15 May 1933)

S. Richards and Company Limited Applicant, Appellant; and Lloyd and Another Respondents, Respondents.

This appeal is brought from an order of the Federal Court of Bankruptcy made by his Honor Judge Lukin declaring void, as a preference, an equitable assignment given by the bankrupt to the appellant by way of security for a debt, and dismissing an application by the appellant for an order for payment to it by the Official Receiver of moneys which, although comprised in the assignment, had nevertheless come into his hands.

The bankrupt was a boring contractor. He also worked an irrigation farm at Leeton in New South Wales. The appellant is a company which conducts a storekeepers' business at Leeton, among other places. In 1927 and the earlier part of 1928, the bankrupt obtained from the appellant, upon credit, supplies of building materials for the erection of a house on his farm. At 30th June 1928, he owed the appellant about £679 on this account. He was further indebted to it in a sum of about £308 upon a general account for supplies of goods. His brother was also in the appellant's debt. In June and July 1928 some sort of review of the position seems to have taken place. The bankrupt paid about £236 in cash in respect of the building account; he gave four promissory notes for the balance of the account amounting to £433; he paid £40 off his general account, and he gave a guarantee of his brother's account. During the next eighteen months he continued to obtain goods from the appellant, but to a diminishing extent. None of the promissory notes was paid, but three substantial payments were made on general account, namely, £158 8s. 9d., £200, and £100 respectively. The last was made on 30th January 1930. After this date practically no goods were supplied to the bankrupt. It appears that he was away boring. His wife gave the appellant her husband's cheque for £200 on 15th September 1930. It was dishonored, but she explained to the appellant that some Government payments, sufficient to meet the cheque and some other accounts, had not been made as expected. The cheque was eventually paid on 5th November. On 12th January 1931, the bankrupt was indebted on his own account in the sum of £770 2s. 3d., and, under his guarantee of his brother's account, in the further sum of £118 8s. On that date he gave the assignment which has been declared void by the judgment under appeal. He assigned to the appellant all his right, title and interest in all moneys due or which should become due to him in connection with a boring contract then being carried out by him at Brindiwilpa, Broken Hill, for the Water Conservation and Irrigation Commission. In his evidence, the manager of the appellant's business at Leeton gave the following account of the transaction:—"He called on me as he usually did when he visited his farm and I asked him how he was getting on with the boring work and he said quite all right and then I asked him when he would be likely to complete his bores and he said Of course that is practically impossible to answer. We may strike water in a week or it may be three months possibly and we don't know until we actually strike water when the bores will be completed. I asked him could he not give me a definite date and he said No and then in general conversation he said that if I liked he would be quite prepared to offer me securities over the moneys coming from the bores and in the end he offered me security over the money coming from Brindiwilpa bore." The witness knew that the bankrupt was carrying on work at two bores as well as conducting his farm, but he said that he did not know that he had other creditors. In point of fact, he owed about £2,380, excluding the appellant's debt, and he was, and had long been, quite unable to pay his debts as they became due. A sequestration order was made against him on 16th April 1931. At this date the bores had not been completed and when, subsequently, under an arrangement with the Official Receiver, they were carried to completion, the Brindiwilpa bore produced an available sum of £617. In the meantime, on 3rd February, a further sum of £400 had been paid to the appellant, from what source does not appear, and the bankrupt's debt to it stood at £520 nearly.

The learned Judge found that the assignment had the effect of giving the appellant a preference over the other creditors, and that the appellant did not act in good faith, in that, within the meaning of sub-sec. 4 of sec. 95 of the Bankruptcy Act 1924-1930, "the charge was given under such circumstances as to lead to the inference, not only that the company had reason to suspect, but that the company knew, that the debtor was unable to pay his debts as they became due, and that the effect of the charge would be to give the company a preference over" the "other creditors"[1].

On behalf of the appellant, this conclusion was said to be insufficient to support the order, because it contained no finding that the debtor spontaneously, voluntarily, or intentionally gave the preference. It was contended that upon the true construction of sec. 95 (1), at any rate before it was amended by Act No. 31 of 1932, which inserted after "preference" the words "a priority or an advantage," the advantage constituting the preference must be meant by the debtor, and an unintended superiority or greater benefit would not suffice. This argument is founded in part upon the decision in Bank of Australasia v. Harris[2], as explained in Nunes v. Carter[3], and in part upon the associations and the implications of the word "preference," which, according to Isaacs J. in Muntz v. Smail[4], "connotes a free choice" and has voluntariness inherent in it. The question has been examined more than once since the Federal statute came into force (see Re Stevens[5]; Re Sanderson[6]; Re Mazok[7]; Re Scott[8]; Australian Law Journal, vol. 3, pp. 174 and 211). We think the language of the section, the history of the bankruptcy legislation in Australia and the course of the colonial decisions provide considerations which displace the effect of the decision in Bank of Australasia v. Harris[9], which, after all, was given on a very different statute, containing a context which, in the Commonwealth Act, does not appear with the critical words that are, in effect, common to both enactments. This contention, therefore, should be rejected.

It was next said that the appellant had taken the assignment in good faith and for valuable consideration and in the ordinary course of business, and so obtained the protection of sub-sec. 2 (b) of sec. 95. Upon this issue the burden of proof was upon the appellant and we think it is impossible to say that the evidence requires the conclusion that good faith was established. The debtor was unable to pay his large and long-standing debt to the appellant, and, of course, this the appellant's manager knew only too well. The sole difficulty arises from sub-sec. 4, which may be thought to be expressed as if, before good faith is negatived, facts should affirmatively appear justifying the positive inference that the creditor suspected that the debtor could not pay his debts as they became due and that the effect of the transaction would be to give the creditor a preference. But sub-sec. 4 should not be understood as detracting at all from sub-sec. 3, or as intending to substitute some artificial criterion for the issue set by sub-sec. 2 (b). In terms it is a prohibition. It denies the possibility of good faith if its conditions are satisfied. It says nothing about onus. In the present case it was apparent to the appellant that, if there were other creditors, the assignment must operate to give it a preference over them. No inquiry was made as to the existence of other creditors. The debtor's wife, after the cheque was dishonored, probably in October, had referred to other accounts of the debtor. His account with the appellant proclaims the company's knowledge of his lack of funds. Could anyone familiar with affairs have hesitated in adopting the supposition that he was indebted elsewhere? At any rate, it was open to Judge Lukin to refuse to believe that the witness whom he had heard cross-examined on the subject did not know "that the debtor was unable to pay his debts as they became due" and that the effect of the charge would be to give the company a preference over other creditors.

This is an appeal from an order of the Federal Court of Bankruptcy declaring void an assignment made on 12th January 1931 by one Walsh to Richards & Co. Ltd. of all his right, title and interest in moneys due and owing, or to become due, to him under a contract with the Water Conservation and Irrigation Commission. On his own petition, filed on 16th April 1931, Walsh's estate was sequestrated in bankruptcy on the same day. The order declaring the assignment void was founded upon sec. 95 of the Bankruptcy Act 1924-1930, as it stood before the amendment of 1932 (No. 31 of 1932, sec. 24) which inserted the words "a priority or an advantage" after the word "preference" wherever occurring.

Several matters have been argued before us, but the principal question is whether the mere fact of a conveyance, transfer or assignment of property being made which has the effect of giving a creditor a preference avoids the transaction if the debtor becomes bankrupt on a bankruptcy petition presented within six months thereafter, or whether the conveyance, transfer or assignment is avoided only if it constitutes a fraudulent preference, that is, if the conveyance, &c., were made with a view to prefer the creditor to whom it was made—the question then depending upon the state of mind of the debtor (Sharp v. Jackson[10]). Since the 1932 amendment, the former view is inevitable (see Sharp v. Jackson[11]; Muntz v. Smail[12]). But, before the additional words were inserted by the later Act, the word "preference," in its then context, involved, it is contended, some element of choice or selection, "so that the motive actuating the debtor must be the wish that the creditor should be preferred" (Ex parte Topham[13]; Butcher v. Stead[14]; Bank of Australasia v. Harris[15]; Nunes v. Carter[16]; Sheldrick v. Aitken[17]; Humphery v. McMullen[18]). Whatever assistance, however, we may derive from these decisions upon other Acts, the decision of this Court in the present case depends upon the true construction of the Federal Bankruptcy Act 1924-1930. Now that Act says nothing about the view or intention of the debtor nor about any choice or selection by him. It simply declares that a conveyance, transfer or assignment, made within a certain time before bankruptcy, having the effect of giving the creditor a preference, shall be void. It looks to the effect of the transaction and not to the intent, or state of mind, of the debtor. In my opinion, therefore, the argument addressed to us is untenable and must be rejected.

Richards & Co. Ltd. next claimed protection under sec. 95 (2) (b), as a purchaser or encumbrancer in good faith and for valuable consideration and in the ordinary course of business. The burden of proving compliance with the requirements of this sub-section is cast upon Richards & Co. Ltd. by sub-sec. 3, and the learned Judge in bankruptcy has found against it. There is no doubt, I think, that Richards & Co. Ltd. took the assignment for valuable consideration (Glegg v. Bromley[19]), but it took it knowing that Walsh was insolvent and unable to pay his debts as they became due, and, obviously, to protect itself and give it priority and security over other possible creditors. By sec. 95 (4), it is provided that a creditor shall not be deemed to be a purchaser or encumbrancer in good faith if the conveyance, transfer, &c., were made under such circumstances as to lead to the inference that the creditor knew or had reason to suspect that the debtor was unable to pay his debts as they became due, and that the effect of the conveyance, &c., would be to give him a preference over other creditors. It is quite impossible, having regard to these sub-sections and to the facts, to displace the finding of the learned Judge in bankruptcy that Richards & Co. Ltd. was not a purchaser or encumbrancer in good faith and in the ordinary course of business (Tomkins v. Saffery[20]; Robertson v. Grigg[21]).

It contends that the assignment executed by the debtor in its favour on January 12th, 1931, is not void as against the respondent trustee in bankruptcy under sec. 95 (1) of the Bankruptcy Act because of the absence of proof that the debtor had any intent to give a fraudulent preference. This argument was based upon the well known decision of the Privy Council in the Bank of Australasia v. Harris[22]. In that case the Privy Council had to construe the words "having the effect of preferring any then existing creditor" which were contained in the New South Wales Act, 5 Vict. No. 17. Knight Bruce L.J. said[23]:—

Their Lordships consider it impossible to construe the words "having the effect of preferring any then existing creditor" contained in sec. 8 of the Colonial Insolvency Act, read as that section must be in connection with the rest of the Act, and particularly with the 5th, 6th, 7th, 9th and 12th sections, in the manner for which the respondents contend. The better opinion, they think is, that according to the true construction of the Act those words indicate fraudulent preference, and were not intended to refer to any case of preference not fraudulent; but whether this be so or not, in the full sense of fraudulent preference, as generally understood, their Lordships are satisfied that the words in question were not intended, and ought not to be construed, to extend to a case in which not only there was no intention to prefer, but in which the preference (if such there were) arose merely from the circumstance that Harris & Co., when they accepted the bill, were creditors of Lloyd & Co., whereas by accepting the bill they had represented themselves to be debtors, and had authorized third persons dealing with the bill to consider them as such.

A perusal of the sections of the New South Wales Act referred to, especially sec. 12, makes it reasonably clear why the state of mind of the debtor was considered to be a relevant fact in relation to sec. 8. But sec. 95 (1) of the Commonwealth Act is not surrounded by any other provisions which reflect any light upon the meaning of its own words. It is carefully drafted in order to invalidate transactions by an insolvent debtor if in fact they produce a certain result, that is, a preference over the other creditors. In my opinion words could hardly be devised which would more plainly show a legislative intent to hit at the results and effects of a debtor's action, whatever his motive or intention may have been. The test adopted is completely objective and in no way subjective. This view has been consistently adopted for a number of years by all Courts administering the Federal Bankruptcy Act. The argument of the appellant on this first point should fail.

Next, it was contended by the appellant that it came within the protection of sec. 95 (2) of the Bankruptcy Act as being an encumbrancer in good faith and for valuable consideration and in the ordinary course of business. The respondent trustee, on the other hand, says that the appellant cannot be deemed to be an encumbrancer in good faith, and invokes in his favour the rule laid down in sec. 95 (4).

In my opinion it is not necessary to consider the finding of Judge Lukin that the appellant did not act in good faith. Such a finding is a serious one, and of necessity much depends upon the credibility of the appellant's manager, who gave evidence in the Court below and was cross-examined at considerable length. Too much, I think, has been made of the manager's statement that he never troubled to inquire into the debtor's financial position. There is much force in the answer of this witness that "in the ordinary course of business after dealing with a man for thirteen years and knowing him personally and he being well thought of in the district, you do not cross-examine him and ask him every time to prepare a balance-sheet of how he stands or anything like that."

In my opinion the appellant fails to bring itself within sec. 95 (2), because the assignment it received from the debtor on January 12th, 1931, was not taken "in the ordinary course of business."

In Robertson v. Grigg[24] I had to consider this phrase, and I was of opinion that it "is not ... to be related to any special business carried on by either debtor or creditor but is concerned with the character of the impeached transaction itself."

In that case the lender was financing a debtor in order to enable him to carry certain contracts to completion. A charge was taken by the lender upon the proceeds which were to come from the contracts. In the present case the appellant carried on business as a storekeeper and had no direct concern with the boring contracts between the bankrupt and the Water Conservation and Immigration Commission. The assignment was executed, not in consideration of any advances from the appellant, but merely, the law would have us presume, in consideration of the appellant's forbearance in respect of debts incurred by the bankrupt long before. There had been a break in the business relationship between the appellant and the bankrupt for a considerable time prior to the date of assignment. The appellant's manager's evidence states quite frankly that the suggestion of a security over the moneys to come from the boring contracts proceeded, not from the appellant, but from the bankrupt. The absence of any pressure or demand by the appellant is significant (cf. Nunes v. Carter[25]).

It is true that there was some evidence adduced that the appellant used to take security over crops grown by its customers in the irrigation area, but, looking on all circumstances of the transaction of January 12th, 1931, the conclusion is that it was not in, but out of, the ordinary course of business.

[1] (1933) 5 A.B.C., at p. 169.

[2] [1861] EngR 741; (1861) 15 Moo. P.C.C. 97; 15 E.R. 429.

[3] (1866) L.R. 1 P.C. 342.

[4] (1909) 8 C.L.R., at p. 295.

[5] (1929) 1 A.B.C. 90, at pp. 94, 96.

[6] (1930) 2 A.B.C. 182, at pp. 187, 188.

[7] (1930) 2 A.B.C. 237, at pp. 241-243; (1931) S.R. (Q.) 19.

[8] (1931) 4 A.B.C., at pp. 13-26.

[9] [1861] EngR 741; (1861) 15 Moo. P.C.C. 97; 15 E.R. 429.

[10] (1899) A.C. 419.

[11] (1899) A.C., at p. 423.

[12] (1909) 8 C.L.R., at pp. 293, 294.

[13] (1873) 8 Ch. App. 614, at p. 619.

[14] (1875) L.R. 7 H.L., at p. 846.

[15] [1861] EngR 741; (1861) 15 Moo. P.C.C. 97; 15 E.R. 429.

[16] (1866) L.R. 1 P.C. 342.

[17] (1869) 6 W.W. & a'B. (L.) 59.

[18] (1868) 7 S.C.R. (N.S.W.) 84.

[19] (1912) 3 K.B. 474.

[20] (1877) 3 App. Cas., at p. 236.

[21] [1932] HCA 29; (1932) 47. C.L.R. 257, at pp. 266, 267.

[22] [1861] EngR 741; (1861) 15 Moo. P.C.C. 97; 15 E.R. 429.

[23] (1861) 15 Moo. P.C.C., at pp. 114, 115; 15 E.R., at pp. 436, 437.

[24] (1932) 47 C.L.R., at p. 273.

[25] (1866) L.R. 1 P.C., at p. 348.

High Court of Australia

S Richards & Co Ltd v Lloyd [1933] HCA 26; (1933) 49 CLR 49 (15 May 1933)

HIGH COURT OF AUSTRALIA