Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR 266 (6 April 1966)

HIGH COURT OF AUSTRALIA

QUEENSLAND BACON PTY. LTD. v. REES [1966] HCA 21; (1966) 115 CLR 266

Bankruptcy - Company

High Court of Australia
Barwick C.J.(1), Kitto(2) and Menzies(3) JJ.

CATCHWORDS

Bankruptcy - Avoidance of preferences - Good faith - Reason to suspect debtor unable to pay debts as they became due - Payments in running account - Onus of proof - Bankruptcy Act 1924-1960 (Cth), s. 95 (2), (3), (4).*

Company - Liquidation - Avoidance of preferences - Company unable to pay debts as they became due from own money - Protection of payees in good faith - Retail company's running account with its wholesale traders - Arrangement that the company pay after delivery of goods - Payees having reason to suspect company unable to pay its debts as they became due - Effect of arrangements to reduce indebtedness on running accounts - Whether payee in good faith - Whether good faith to be tested in relation to each payment into the running account or on the general effect of the whole series of payments into the running accounts - Onus of proof - The Companies Acts, 1931 to 1960 (Q.), s. 275** - Bankruptcy Act 1924-1960 (Cth), s. 95.

HEARING

Brisbane, 1965, June 15, 16, 17;
Sydney, 1966, April 6. 6:4:1966
APPEAL from the Supreme Court of Queensland

DECISION

1966, April 6.
The following written judgments were delivered: -
BARWICK C.J. Hennessy's Self Service Stores Pty. Ltd. (the company) was (the Act) in 1959. As from 1st July of that year the company took over and commenced to conduct the self-service stores, eleven in all, then conducted in the suburbs of Brisbane by John Joseph Hennessy who, upon its incorporation, became the governing director of the company. Under his management the business of the company was rapidly expanded so that by the end of December 1960 the company had twenty-three self-service stores around Brisbane. Two of the additional stores were opened in October 1960 and the last of them was opened on 15th December 1960. This exuberant expansion of its business requiring a great deal of trading stock was not justified by the amount of capital at the disposal of the company and was carried out predominantly by means of bank overdraft accommodation and goods obtained on thirty, sixty days or, perhaps, in some instances on somewhat longer, terms of credit, from a wide range of wholesalers. In the latter part of 1960 bank credit was restricted generally in the community and the company was required by its bankers substantially to reduce its overdraft. Also, consumer demand for the foodstuffs the company was stocking did not reach the levels which the company had anticipated. Notwithstanding these influences, however, as found by the Supreme Court of Queensland "there appears to have been no outward indication that the business was verging on collapse until early February 1961 when the company quite suddenly went into liquidation". A petition was presented on 10th February 1961 to the Supreme Court of Queensland on which an order winding up the company was made on 16th March 1961. In the liquidation of the company a very substantial deficiency emerged. Trade creditors were admitted to a total of 222,097 pounds and other unsecured creditors to an amount of 47,641 pounds. Apart from the effect which setting aside a number of payments to creditors as preferences would have, the anticipated dividend to unsecured creditors is estimated to be of the order of 2s. in the pound. (at p278)

2. However, the liquidators brought before the Supreme Court four applications to set aside as preferences a number of payments by the company to trade creditors. The first application was in respect of ten payments to Queensland Bacon Proprietary Limited (Queensland Bacon), the second was in respect of six payments to The Egg Marketing Board, the third was in respect of seventeen payments to Burns Philp and Company Limited (Burns Philp) and the fourth was in respect of seven payments to Foley Brothers Pty. Limited (Foley Brothers). (at p278)

3. Section 275 (1) and (2) of The Companies Acts imports the provisions of s. 95 of the Bankruptcy Act 1924-1960 into the Act, treating the commencement of the winding up as corresponding to the presentation of a bankruptcy petition. Section 180 of the Act deems the date of the presentation of the petition upon which the company is wound up to be the commencement of the winding up. Accordingly, 10th February 1961 will be treated as the date of the presentation of a bankruptcy petition for the purpose of applying s. 95 of the Bankruptcy Act in the liquidation of the company. (at p278)

4. The convenient course taken by the Supreme Court was to hear all four applications together to determine the date as on which the company was unable to pay its debts, a matter common to all applications, and thereafter to decide in each application separately, whether any of the several payments challenged in the application constituted a preference which ought to be set aside under s. 275 of the Act. (at p279)

5. In a careful judgment which reviews all the facts and circumstances up till the time of the liquidation of the company, the learned Judge who constituted the Supreme Court for the purpose of hearing these applications reached the conclusion in the common hearing that on 1st November 1960 the company was unable to pay its debts as they became due within the meaning of s. 95 of the Bankruptcy Act and for the purpose of applying it in the liquidation. Although his Honour thought that there was ground upon all the material which he had before him on which he could suspect that it may have been unable to pay its debts as early as 30th August 1960, he was not prepared to hold that in fact it was so unable at any time before 1st November. (at p279)

6. In the course of reaching his ultimate conclusion on this question of fact, the learned Judge expressed himself as not satisfied that there was such a deficiency of available assets over liabilities established at any time relevant to the challenge to any payment to a creditor that, for that reason, the company was insolvent at an earlier time than that which he found. He examined a course followed by the company of issuing post-dated cheques in payment of accounts for goods delivered for the purposes of sale in the company's business and concluded that this extensive and fairly continuous course of conduct of the company did not itself satisfy him that the company was insolvent at an earlier time. (at p279)

7. However, the company had throughout the period from June 1960 onward issued cheques which were dishonoured on presentation, the answers given by its bankers being "No arrangements", "Arrangements incomplete" or "Present again" or some combination of these words. But until November 1960 such cheques were either paid on re-presentation or were replaced by arrangement with the payee by another cheque of the company which was itself met on presentation. His Honour found that no cheque dishonoured before 9th November 1960 remained unpaid at the date of the presentation of the petition. However, having examined the fate of cheques issued through November, and because of it, his Honour concluded that at and after 1st November the company was unable to pay its debts as they became due from its own money. He was unwilling to find that, although cheques of the company for goods sold or delivered to it were dishonoured and remained unpaid for short periods before 1st November, their dishonour and the delay in their payment led to the conclusion that the company was in fact unable to pay its debts before 1st November. (at p280)

8. None of the respondents to the four applications, who are now appellants in this Court, challenged his Honour's finding as to the date on which the company was first unable to pay its debts as they became due within the meaning and operation of s. 95 of the Bankruptcy Act: nor did the liquidator seek to support some earlier date than that found by his Honour. (at p280)

9. His Honour then heard the four applications by the liquidator in the order in which I have listed them and decided that in each case there were some payments by the company to the creditor in the period of six months prior to 10th February 1961 which had the effect of giving to that creditor a preference priority or advantage over other creditors. His Honour was satisfied in each case, and indeed it was not contested, that the payments which he thought to be de facto preferences were made in the ordinary course of business and for valuable consideration. But he was not satisfied that such payments were made bona fide within the meaning of sub-s. (2) (b) of s. 95 of the Bankruptcy Act, having regard to the provisions of sub-s. (4) of that section. (at p280)

10. Each of the four creditors has appealed to this Court against the order setting aside payments received by them from the company. The liquidators abandoned cross-appeals lodged by them in each matter, and did not seek any other findings more favourable to the liquidators than those made by the Supreme Court. (at p280)

11. Before proceeding to deal seriatim with the creditors' appeals, I should deal with two matters which are common to all of them though the points were not specifically raised in each of them. (at p280)

12. The first matter concerns the manner of determining whether a payment by a debtor, who has a number of creditors, to one of them has the effect of giving that creditor a preference priority or an advantage over other creditors in a case where there is a "running account" between the debtor and that creditor which continues operative after the receipt of the payment which is challenged, though that payment considered in isolation would, when made, have the effect of preferring that creditor to others who were not then being paid. (at p280)

13. The second matter concerns the extent of the onus of proof which sub-s. (3) of s. 95 of the Bankruptcy Act places upon a creditor who has received a payment from a debtor who is at the time of payment unable to pay his debts as they fall due. (at p280)

14. Each of the four appellants at the time of the receipt by it of a payment from the company whilst it was unable to pay its debts as they became due had been trading with the company for some time, some of them for a longer period than others, on the footing that goods of the kind dealt in by both the company and the creditor would be supplied by the creditor on agreed terms of credit upon the order of the company. There was not in any case any binding agreement that the company's order would be accepted, or that payment according to the agreed terms for goods already delivered would entitle the company to obtain further supplies on credit. But clearly the course of business between the company and each creditor was such that the company could reasonably expect that so long as it paid the creditor's accounts according to the current credit arrangements between them, the creditor would continue to supply upon the company's order and upon the agreed terms of credit, goods in which they were mutually dealing. On the other hand, that course of business was such that the company could expect a rejection of its further orders for goods to be supplied on credit if it failed so to pay the creditor's account. All purchases of the company from the creditor were placed to the debit of the company in a single account in the books of the creditor and all payments made by the company, though generally made in response to and in accordance with specific accounts rendered by the creditor, were credited generally to that account. (at p281)

15. In each case his Honour accepted the evidence given on behalf of the creditor that the creditor did not know and did not in fact suspect that the company was unable to pay its debts at the time of the receipt of any of the challenged payments. These creditors thought that the company was experiencing a temporary difficulty caused by the cumulative effect of the general restriction of bank credit of the time, and the lull in consumer demand with resultant overstocking of goods bought on not unusual terms of credit. The creditors believed that the stocks on hand were sound, substantially in excess of liabilities and that they would be realized at such a rate as would make the company's embarrassment by a temporary lack of liquidity short-lived. Consequently, each creditor continued to trade with the company, at least one of them not unconscious of a business risk in so doing, though because of the season of the year and of the size of the stocks held by the company, in some instances on a reduced scale. As a result, whereas the company's account with Queensland Bacon stood at 20,826 pounds at the end of October, it was in debit 28,232 pounds at the date of the presentation of the petition. The comparable figures in the case of the other creditors were: Egg Marketing Board 8,732 pounds and 7,962 pounds; Burns Philp 7,784 pounds and 2,743 pounds; and Foley Brothers 10,592 pounds and 10,032 pounds. The dates of the earliest payments to these creditors which his Honour set aside were, in the case of Queensland Bacon, 1st November 1960; Egg Marketing Board, 2nd December 1960; Burns Philp, 20th December 1960; Foley Brothers, 14th December 1960. Without taking out the specific figures, it may be taken in the case of each of the appellants that by reason of the continuing supply of goods after the date of the earliest payment which the Supreme Court set aside as a preference the balance due to the creditor at the date of the commencement of the winding up was different from the balance due to him at the date of that payment; and that the total of the payments set aside by the Supreme Court as preferences would be greater than the difference between the debit in the running account immediately prior to the first of such payments and the debit therein at the commencement of the winding up. (at p282)

16. There is thus considerable importance for the appellants in the resolution of the question whether these payments should each be regarded in isolation, the immediate effect of the payment to one creditor and not to others being taken as the relevant effect or whether these payments should be regarded as part of the overall series of not unrelated transactions recorded in the running account so that the net effect of the operations from the date of the first impugned payment to the date of liquidation becomes the determinant both of the fact and of the extent of preference. There is also great significance in the matter for the business community generally. (at p282)

17. I have been able to express the question in this fashion without taking any distinction between one of the voided payments and another because, as his Honour dealt with the matter, no fact or event existed or occurred between such limiting dates to warrant any different conclusion being drawn between one such payment and another. But there will be occasions when there will be such facts or events intervening between the first payment which is impugned and the commencement of the liquidation as will require the limiting dates to be different, the terminal date for consideration of the state of the running account being for that reason earlier than the date of the commencement of the liquidation. (at p282)

18. It is clear that it is the effect in fact of the making, incurring, or occurrence of the challenged conveyance, charge, payment, obligation or judicial proceeding which will determine whether or not a preference priority or advantage is given to the creditor: Downs Distributing Co. Pty. Ltd. v. Associated Blue Star Stores Pty. Ltd. (In Liquidation) [1948] HCA 14; (1948) 76 CLR 463 In general, to pay one of a number of creditors, and neither paying, securing nor arranging with the others, is to prefer the creditor who is paid. But it seems to me that it is one thing to pay a sum of money in the liquidation of an indebtedness, so as to end the relationship of debtor and creditor and, that it may be quite another to make a payment on account of a "running" indebtedness, the payment not in anywise intended or understood to end the relationship of the debtor and creditor, but rather to ensure its continuance. (at p283)

19. In Richardson v. The Commercial Banking Co. of Sydney Ltd. [1952] HCA 8; (1952) 85 CLR 110 the following material passages appear: "In considering what is the effect of the transaction impeached under s. 95, in this case a deposit, or each of a succession of deposits, to the credit of an overdrawn current account or an overdrawn trust account at a bank, there are two things that it is important to have clearly in mind. One of them is the kind of 'effect' which the provision treats as decisive. It must be 'the effect of giving the creditor a preference, a priority or advantage over the other creditors': it is then void in bankruptcy if the sequestration is within six months. Section 95 supposes a bankruptcy, and it is in relation to that bankruptcy that the question arises whether, over the other creditors, a preference priority or advantage has been given to the particular creditor" (1952) 85 CLR, at p 129 And "The second thing is that the effect is a consequence of the payment and that where the payment forms an integral, an inseparable, part of an entire transaction its effect as a preference involves a consideration of the whole transaction" (1952) 85 CLR, at p 129 (at p283)

20. Later in the judgment the Court applied these views in a particular illustration. It said: "A running account of any debtor who has reached insolvency must present difficulties under s. 95. A debtor who pays something off his grocer's account in order to induce the shopkeeper to give him further supplies of groceries can hardly be held, as it seems to us, to give the grocer a preference, if that was the clear basis of the payment. If the grocer credited the money as a payment for the future deliveries instead of the past deliveries of groceries he would in the end be in exactly the same position and yet he could not be attacked as having received a preference. But without stating any principle with an application beyond the facts of this case, it is enough to decide that the payments into the office account possessed in point of fact a business purpose common to both parties which so connected them with the subsequent debits to the account as to make it impossible to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed and so to be adjudged a preference" (1952) 85 CLR, at p 133 (at p284)

21. These expressions were guarded and appear to cover two different types of situation; one in which the payment is part of a larger single transaction and the other where the payment, though in discharge of a specific and identifiable indebtedness, is none the less linked in some fashion with other items in what is described, for want of any more precise nomenclature, as a "running account". But though guarded they do indicate that the mere fact that the payment is in discharge of an existing or past indebtedness is not enough to require in all circumstances that the effect of the payment vis-a-vis other creditors and their claims is to be estimated in complete isolation. (at p284)

22. The learned Judge was pressed on behalf of one of the creditors, Foley Brothers, with the view that in deciding whether any of the payments under challenge by the liquidator had the effect of giving the creditor a preference, he should compare the amount due on "current" account by the company to the creditor at the time of the payment, with the amount due on that account at the date of the commencement of the winding up and only find that the payment effected a preference if, having regard to the deliveries of further goods and of further payments made by the company in the meantime, the running account at the commencement of the liquidation was less in debit at the date of liquidation than it was immediately prior to the challenged payment; and that he should find that the extent of the preference was the amount of the ultimate reduction in the running account between the date of the payment and the date of the commencement of the liquidation. His Honour rejected the contention saying: "In my opinion, the present case is distinguishable from Richardson v. The Commercial Banking Co. of Sydney Ltd. [1952] HCA 8; (1952) 85 CLR 110 Each of the payments was made in respect of an indebtedness that had accrued at some time in the past, and was treated by both parties as being made in discharge of an existing indebtedness. No payment was made pursuant to any arrangement or understanding that the purpose of the payment was to ensure that further supplies of butter would be made available to the company. It is no doubt true that the company believed that if it did not pay for the butter it had received in the past, it would not be supplied with butter on credit in the future, but it was not the basis on which any payment was made or received that the respondent would give the company further supplies of butter. The payments were made and received on the footing that they were in discharge of a past debt, not on the footing that the respondent would supply butter to the value of the payments. The position was very different after 7th February 1961, when the respondent only supplied butter in exchange for cash. Each of the payments in question was the payment of an existing debt, and the effect of the payment was that the respondent was paid that debt in full, whereas the other creditors will not be paid in full. Each of the payments was a preferential payment". (at p285)

23. There is, in my opinion, no real analogy between the facts of the instant cases and the facts in Richardson's Case [1952] HCA 8; (1952) 85 CLR 110 The Court was able there to conclude that "To infer that at a point the bank obtained one" - that is, a preference in fact - "but that it was freely sacrificed by the spontaneous making of further advances by honouring cheques would we think be wrong. The true reading of the circumstances, we feel little doubt, is that the deposits were made on the footing that so far as the respective deposits would carry, the cheques coming in would be honoured, if it was not decided in consultation that to dishonour them was a safe and better course" (1952) 85 CLR, at p 135 The "footing" upon which the deposits were made to which the Court makes reference was in reality an express arrangement to be derived from the evidence in that case, as well as from the conduct of the parties. (at p285)

24. Here, no express arrangement could be found to exist whereby the creditor undertook to continue the supply of goods to the company. His Honour, in the passage I have quoted from his reasons for judgment, rightly, in my opinion, so held. His Honour also found however that a continuance of supply "was not the basis on which any payment was made or received". If his Honour is correct in concluding that the payment was made and received simply in discharge of an existing indebtedness, as it were isolated from the continuing relationship of purchaser and supplier of goods, there would be an end to the matter on any view. The payment and receipt would not in any sense have been made on the basis of or the footing of a continuance of supply. (at p285)

25. However, as I read his Honour's reasons, he was seeking the basis of the payments in some arrangement between the parties which made the ensuring of further supplies an express purpose of the payment. But, although in one of the quotations I have made from Richardson's Case (1952) 85 CLR, at p 133, it was said that the stated basis of the payment should be "clear", the Court in so expressing itself was not, in my view, limiting the type of situation to which its remarks were addressed to those occasions on which the payment was made under express arrangements for a continuance of supply. In my opinion, it is enough if, on the facts of any case, the court can feel confident that implicit in the circumstances in which the payment is made is a mutual assumption by the parties that there will be a continuance of the relationship of buyer and seller with resultant continuance of the relation of debtor and creditor in the running account, so that, to use the expressions employed in Richardson's Case (1952) 85 CLR, at p 133, "it is impossible" - I interpolate, in a business sense - "to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed . . . ". (at p286)

26. If his Honour meant to negative the existence of any such mutual assumption implicitly accompanying any of the payments with which he dealt in the application against Foley Brothers, I am not only unable to agree with him but, with respect, I am of opinion that upon the evidence in that case, he was in error in not inferring such an assumption. I shall need to turn to that matter as I later deal individually with the several applications. (at p286)

27. I now turn to the second matter common to all appeals, namely, the question whether, if he is to escape avoidance of the preference, s. 95 (4) casts any onus upon the preferred creditor to negative the existence of any circumstances from which the court could infer that he knew or ought to have suspected his debtor's insolvency. Although his Honour made no express finding in that respect in all the cases, it would seem from his reasons for judgment that, the terms and consequences of s. 95 (4) apart, he would have been prepared to find that the appellants received the payments which he found to be preferences in good faith. But in each case he found that the creditor had not satisfied him that the circumstances of the receipt of the payment did not justify the inference that the creditor knew or had reason to suspect that his debtor was then insolvent and that the effect of the payment would be to give him a preference, priority or advantage over other creditors. His Honour does not express his conclusion in this respect in precisely the same terms in each case but his view is substantially the same in each. His expression of it in the application against Queensland Bacon indicates that view. He there said: "The burden of proof that the payments impeached were not made under such circumstances as to lead to the inference that the respondent had reason to suspect the matters mentioned in s. 95 (4) of the Bankruptcy Act is cast upon the respondent by s. 95 (2)". And again: "However I need not consider that aspect of the matter" - i.e. the extent of the creditor's conclusions from the facts it knew about the company and its dealings - "if I find that the respondent has not discharged the onus of proving that the payment was not made under such circumstances as to lead to the inference that the respondent had reason to suspect that the company was unable to pay its debts as they became due". (at p287)

28. In my respectful opinion, his Honour was in error in reading s. 95 as casting such an onus on the creditor. No doubt s. 95 (3) casts upon the creditor who has received a preference the onus of bringing himself within one of the paragraphs of s. 95 (2). The existence of knowledge or suspicion of insolvency negatives good faith: and the knowledge of circumstances from which ordinary men of business would conclude that the debtor is unable to meet his liabilities is knowledge of insolvency: Bank of Australasia v. Hall [1907] HCA 78; (1907) 4 CLR 1514; National Bank of Australasia v Morris (1892) AC 287; Tomkins v Saffery (1877) 3 App Cas 213 The proof of the circumstances under which the payment was made would seem to be an indispensable step in an attempt to prove that the creditor in receiving it was acting in good faith within the meaning of s. 95 (2). But, though s. 95 (4) relates to good faith, it does not extend the onus cast by sub-s. (3) so to require the creditor to negative the existence of circumstances from which the described inference could be drawn by the court. (at p287)

29. It was pointed out in S. Richards & Co. Ltd. v. Lloyd [1933] HCA 26; (1933) 49 CLR 49, at p 60 that s. 95 (4) is in terms a prohibition, addressed to the court, denying the possibility of a finding of good faith if its conditions are satisfied. "It says nothing about onus" (1933) 49 CLR, at pp 60, 61 The condition it raises is that the court is positively satisfied that the circumstances of the payment justify the inference by it that the creditor knew or had reason to suspect the insolvency and the preference. To treat this as imposing an onus on the creditor to negative the existence of any such circumstances is, in my respectful opinion, to misread the sub-section. (at p287)

30. If the court, otherwise satisfied of good faith, has no material or insufficient material from which it can draw the inference mentioned in s. 95 (4), the creditors' exculpation under s. 95 (2), if otherwise made out, will be complete; or if, in such circumstances, the court is in doubt as to whether or not the inference should be drawn, the preference should not be avoided. (at p288)

31. But, though his Honour thus, in my opinion, incorrectly stated the effect of s. 95 (4), he did not, in my opinion, actually decide any of the applications upon the basis of the view he so expressed. A fair reading of his reasons for judgment indicates that in reality in each case his Honour was satisfied for reasons which he expressed that the circumstances of the payments which were fully before him did lead to the inference that the creditor in each case had reason to suspect the insolvency of his debtor and the preferential effect of the payment. His Honour, to my mind, really held that, because he was so satisfied, the onus cast by sub-s. (3) in respect of good faith was not discharged. This was, in my opinion, in conformity with the true effect of s. 95 as a whole. Accordingly, though, as I have said, I am of opinion that his Honour was in error in his statement of the effect of sub-s. (4) of s. 95, I am also of opinion that error was not in reality reflected in the result so as to warrant for that reason the reversal of his Honour's declarations that the several payments were de facto preferences. (at p288)

32. It will now be convenient to deal with each appeal individually.
Queensland Bacon (at p288)

33. The payments to this appellant avoided by the Supreme Court's declaration were as follows:

Amount Date of payment
2,700 pounds 0 0 1.11.60
2,700 0 0 8.11.60
2,700 0 0 15.11.60
2,700 0 0 23.11.60
2,940 12 6 29.11.60
2,700 0 0 6.12.60
2,700 0 0 21.12.60
2,700 0 0 16. 1.61 (at p288)

34. The appellant had dealt with Hennessy prior to the formation of the company and thereafter throughout with the company. Goods were supplied, as his Honour found, on thirty days credit. Satisfactory bank reports had been received about the company in the middle of 1960. In August or September the general manager of the appellant saw a satisfactory balance sheet of the company. Those in control of the appellant at all times believed that the company was well managed, that it exercised a proper stock control, that it had large saleable stocks and that the management of the company was in the hands of persons of integrity. It seems that so far as the knowledge of the appellant went, business between the appellant and the company proceeded in accordance with the arrangements between them until October 1960. (at p289)

35. On 30th September 1960 an amount of 6,858 pounds 10s. 8d. fell due for payment in respect of the July delivery of goods. At this time the total debit in the company's account with the appellant was 24,434 pounds 10s. 3d., 17,545 pounds 19s. 5d. not having become due for payment. The company did not pay the amount of 6,858 pounds 10s. 8d. on its due date but, by arrangement with the appellant, two cheques were given by the company to the appellant, one dated 3rd October for 2,000 pounds which was duly paid on presentation and one dated 10th October for 4,858 pounds 10s. 8d. This cheque was dishonoured on presentation marked "Arrangements incomplete. Present again in a week". It was so re-presented and was paid on 22nd October. (at p289)

36. When the general manager of the appellant heard of this dishonour he spoke to Hennessy and asked him thereafter to make weekly payments in order to bring the company's account into conformity with the existing credit arrangements. A weekly amount of 2,700 pounds was settled upon between the company and the appellant as a sum calculated to cover anticipated future deliveries and overdue payments to an extent sufficient to bring the account into credit conformity within a given time. Thereafter and until 13th December 1960 cheques of the company each for 2,700 pounds were paid weekly on presentation, the cheque paid on 29th November being actually for 2,940 pounds 12s. 6d., of which 240 pounds 12s. 6d. represented payment upon a different account called the "fresh meat account" which had been opened between the appellant and the company in October 1960 to cover the supply of packed fresh meat on a seven day credit basis. During November and December the appellant also supplied the company with goods to the value of 11,000 pounds specially required for Christmas trading on the basis that payment would be made at the end of January. (at p289)

37. A cheque of the company in favour of the appellant dated 12th December 1960 presented on 13th December was dishonoured marked "Present again 19/12/60" and was paid on 21st December. A further cheque of the company for 2,700 pounds dated 24th December 1960 was dishonoured on 28th December marked "Present again in a few days". It was dishonoured again on 3rd January 1961, 6th January and 12th January not being paid till 16th January. His Honour found the appellant to have been aware of these dishonours. The appellant none the less continued to supply goods to the company not knowing, nor actually suspecting, as his Honour found, that the company was then insolvent. The appellant, of course, at all material times knew that there were other creditors but had no knowledge of whether or not they were being duly paid. (at p290)

38. His Honour took the view that the dishonour of the cheque for 4,858 pounds 10s. 8d. in October 1960 marked "Arrangements incomplete. Present again in one week" was sufficient to raise a suspicion that the company was having difficulty in meeting other debts as well and that that dishonour in the circumstances - the amount of the cheque being relatively small in relation to the trade being done - gave reason to suspect that the company was unable to pay its debts as they became due and that the effect of the payment of it would be to give the appellant a preference over other creditors. Having, in his Honour's view, reason thus to suspect insolvency at the date of the dishonour of the cheque for 4,858 pounds 10s. 8d. in October, his Honour held that the appellant had failed to establish that this reason to suspect had ceased to exist at the time of the succeeding payments. His Honour did not avoid the payment of 4,858 pounds 10s. 8d. for the reason that at the time of its payment the company was not in fact unable to pay its debts as they became due but he did avoid all the subsequent payments of 2,700 pounds each, all of which were paid as arranged, except the two payments in December to which I have referred. (at p290)

39. Before turning to deal with that part of his Honour's reasons which express his conclusions on the matter of good faith, I should deal with the prior question, namely, whether any of the payments which his Honour avoided amounted to a preference within the section. I have already referred to the circumstances in which the arrangement was made in October 1960 between the appellant and the company for the making thereafter of the weekly payments of 2,700 pounds. It seems to me that the clear basis of that arrangement was the continuing supply of goods by the appellant. The amount of each of the payments of 2,700 pounds was referable in part to the value of the further supply anticipated at the time the amount of 2,700 pounds was agreed upon. It seems to me that in this instance the basis of the payments was a continuation of the relationship of buyer and seller and of the running account. Therefore the question of preference or no preference, in my opinion, was not to be determined payment by payment but was to be determined by the fate of the running account between the date of the first of the payments of 2,700 pounds and the date of the liquidation. (at p290)

40. The debit to the company in the running account as at the end of October was 20,826 pounds and as at the date of liquidation approximately 16,000 pounds. The matter is a little complicated because of the special deliveries amounting to 11,000 pounds, which were given to the company in respect of Christmas trade; but this sum, not really being part of the running account, ought to be deducted as I have done from the total debit to the company at the date of liquidation which was 28,232 pounds, leaving the sum of 16,000 pounds (approximately). It would seem that the effect of the payments received by the appellant between 1st November 1960 and the date of the presentation of the petition was a reduction in the running account of some 4,000 pounds odd. There was therefore a preference to that extent given to the appellant by those payments. (at p291)

41. The question remains whether the appellant in the circumstances brings itself within s. 95 (2) with respect to this sum of money. This in turn raises the question whether the circumstances of the payment of that 4,000 pounds odd which amounts to a preference were such as to lead to the inferences of which s. 95 (4) speaks. To identify the 4,000 pounds odd which effected the preference, it would be necessary, it seems to me, to take the two payments of 2,700 pounds each made in December 1960 which were the two last payments made by the company to the appellant. (at p291)

42. Before dealing with the question whether the appellant was a payee in good faith in respect of these payments, I should briefly draw attention to his Honour's reasons for not accepting the appellant as such a payee in respect of the payments which his Honour avoided. Although, as I have already mentioned, his Honour's reasons are expressed in language which might suggest that his conclusion was reached because of the failure on the part of the appellant to discharge an onus cast upon it by sub-s. (4) of s. 95, his Honour really found that the reason to suspect which he found to exist on 15th October at the time of the dishonour of the cheque for 4,858 pounds persisted throughout the period of the receipt of the subsequent cheques because nothing was proved to have intervened to disabuse the mind of the appellant of what his Honour found it had reason to suspect on 15th October. (at p291)

43. With respect to his Honour, there are, in my opinion, several reasons why I am unable to accept his reasoning to that conclusion. In the first place, to satisfy s. 95 (4) the circumstances of the voided payment must be such as to lead to the inference that the creditor knew or had reason to suspect the fact of the debtor's insolvency. It is not enough that the circumstances are such as to lead to the inference that the creditor had reason to suspect that the debtor might be insolvent. The words of the sub-section, to my mind, are quite clear that it is the fact of actual insolvency which must be known or suspected. To be insolvent, the debtor must be unable, as distinct from being merely unwilling, to pay his debts as they fall due. It is one thing to suspect a man's solvency in the sense that one doubts whether he is solvent or insolvent. It is another thing to suspect that he is in fact insolvent. It is of the latter suspicion that s. 95 (4), in my opinion, speaks. (at p292)

44. The whole structure of s. 95 is built round the fact of actual insolvency. It is only a payment made by an insolvent debtor which comes within the section, and it is the circumstances of such a payment which must give rise to the inference of knowledge of insolvency or of suspicion of it. Again, the further inference must be that the creditor knew or had reason to suspect that the payment amounted to a preference. The preference that is here spoken of is the preference to which s. 95 (1) refers: namely, a preference given by a debtor who is in fact insolvent when the preference is given. His Honour refused to find that the company was in fact insolvent on 15th October. It seems to me, therefore, impossible to say that the creditor had reason to suspect a state of affairs actually to exist which, according to that finding, did not exist. (at p292)

45. But it seems to me there is further objection to the course of reasoning which his Honour followed. It is the circumstances under which the voided payment was made which must support the inferences which the sub-section describes, though of course those circumstances would include the creditors' knowledge of anterior events. But his Honour has taken the circumstances of a payment which his Honour has not avoided to be the relevant circumstances: if his Honour had taken the circumstances of the payment of the first sum of 2,700 pounds and included in those circumstances the fact that there had been the dishonour of the cheque for 4,858 pounds 10s. 8d., that explanation of its non-payment had been sought and given, and that it had been paid, according to the endorsement at the time of dishonour, it seems to me that his Honour would have reached a very different conclusion from that at which he arrived. Because his Honour inferred the reason to suspect from the dishonour no sufficient weight was given to the explanations given and to the circumstance that the cheque for 4,858 pounds 10s. 8d. had been paid prior to the receipt of the first cheque for 2,700 pounds. (at p292)

46. In the third place, his Honour had evidence from bank officers that the marking on the dishonour of 15th October indicated that arrangements to put the drawer in funds were in train and that payment on re-presentation was probable. It is, to my mind, too narrow a view of insolvency to say that the dishonour of the cheque in such circumstances gave reason to suspect that the debtor was insolvent. The general restriction of credit then present must have affected a great number of quite solvent people who would find themselves temporarily short of cash and under a necessity to make arrangements to cover the "short fall" in their overdraft accommodation. The appellant had every reason, in my opinion, to think, in the circumstances, that the debtor whom he understood to have a large, valuable, saleable and well-managed stock would be in a position speedily to make arrangements to remedy what appeared to the appellant to be his temporary lack of liquidity. I would not wish to minimize the significance of the issue of a cheque by a trader which is dishonoured by his banker - particularly by a trader whose credit is focal to his survival in business. That the dishonour calls for inquiry and probably some action is undoubted and, in some circumstances, it may provide ground for suspicion of insolvency. But, here in the circumstances I have outlined, although it indicated a lack of liquidity, it did not, in my respectful opinion, indicate insolvency. (at p293)

47. To sum up my view of this aspect of his Honour's reasons, in the first place he could not infer that the appellant had reason to suspect actual insolvency in the face of his own finding that there was no insolvency prior to 1st November: secondly, he did not take the circumstances of the payment which he had found to be a preference as the relevant circumstances for the purposes of s. 95 (4), but rather took the circumstances of a payment which he was not prepared to find to be a preference. Thirdly, the dishonour of the cheque for 4,858 pounds 10s. 8d. in the circumstances with its particular notation and its subsequent payment according to the endorsement did not afford reason on the first of November to suspect that the company was then insolvent. (at p293)

48. But the matter does not end there. As on my view of the case, there was a preference as to some 4,000 pounds, the payments of 2,700 pounds in December and January need separate consideration. In my opinion, the dishonour with the marking "Present again" occurring on 13th December, bearing in mind the knowledge and reasonable belief of the appellant as to the company's position to which I have already referred did not make the circumstances of its payment on 21st December such as to give rise to a suspicion of insolvency. But, with respect to the second of these two payments, there is not merely a dishonour with the subsequent payment conformably to the endorsement "Present again" etc. but there are repeated dishonours over a substantial period of time. (at p294)

49. His Honour has negatived actual knowledge by the appellant of the company's insolvency prior to February 1961. But it seems to me that at the time the cheque for 2,700 pounds was paid on 16th January the circumstances of its payment were such as to lead to the inference that the appellant ought then to have suspected what was the fact, namely, that the company was insolvent. By this time, the arrangements of which the notation on the cheque for pounds4,858 spoke were presumably complete and the Christmas period was past. The appellant was no longer, in my opinion, entitled to think that stock realization would speedily provide the required cash to meet all commitments as they fell due. It should then have suspected that the company was unable to pay its debts. (at p294)

50. Whilst the payment of these two cheques amounted as I have said to a preference in fact, and the circumstances of the payment of the second of them gave the appellant reason to suspect insolvency, did those circumstances justify the further inference that the appellant then had reason to suspect that the receipt on 16th January actually gave it a preference over other creditors? During the period from 21st December to 16th January and indeed beyond that date, the appellant was continuing to supply goods to the company. On the material before this Court which does not enable a comparison to be made between the amounts received from 16th January onwards and the amount of goods supplied on credit on the running account in that period, the supply of further goods must have been in contemplation at the time of the receipt on 16th January. I do not think that the circumstances of that receipt ought to be regarded as affording the appellant reason to suspect the fact of preference. (at p294)

51. In the result in the case of the Queensland Bacon his Honour's declaration and order that the payments which I have listed were void as de facto preferences, ought to be set aside.
Burns Philp (at p294)

52. I will deal next with the application against Burns Philp as his Honour applied his decision on certain aspects of this application in deciding the applications against The Egg Marketing Board and Foley Brothers. (at p294)

53. The appellant commenced to trade with the company in July 1960. It opened two accounts, one for sugar on the basis of payment within seven days of delivery and one for other goods on the basis of payment within thirty days of monthly statement. But in the latter connexion, it was arranged that the company should give to the appellant at the end of each thirty day period its cheque post-dated to the fourteenth day of the succeeding month. (at p295)

54. Payments were received by the appellants by the company's cheques paid in due course, so far as the appellant was aware, up to and during November. However, the company's cheque dated 14th December for 3,082 pounds 3s. 5d. in payment for goods other than sugar was dishonoured, noticed "Present again in a few days". It was re-presented and again dishonoured on 22nd December, noticed with the same endorsement. It was paid on 6th January 1961. On receipt on 19th December of the first notice of dishonour, the appellant through its officer spoke to Hennessy and, at his invitation, to the company's banker who said that Hennessy had been affected by the "credit squeeze", had been told to reduce his overdraft, that he was overstocked and had to reduce his stock but that when this was done the cheque would be paid - an event expected in a few days. Contemporaneous inquiries from a mercantile agency produced the information that there was no bill of sale over the company's assets, that there were no judgments against the company, that the agency had no accounts for collection from the company and that the company was paying accounts for 1,000 pounds to 3,000 pounds in the ordinary course of business. (at p295)

55. His Honour accepted the evidence of the appellant's manager that, whilst such a dishonour was a danger signal, particularly in the case of a trader selling commodities for cash, about the time in question traders were being asked to reduce their overdrafts and that it was fairly common to receive a cheque dishonoured with the answer "Present again in a few days". No information was expressly afforded that such cheques were met on re-presentation or that the drawers did not go into liquidation or become bankrupt. But, the sense of the evidence appears to have been that the dishonours were followed by payment and not by declared insolvency. The appellant knew of the expansion of the company's business which was taking place, knew that other traders with whom the appellant's manager spoke were being paid, though it may be that the appellant ought to have realized that at least some other creditors were experiencing a like dishonour of the company's cheques. (at p295)

56. At this time the company was in fact insolvent; so the particular difficulty which arose in connexion with the application against Queensland Bacon does not arise here. No doubt in normal conditions the issue by a trader, particularly by one who depends upon ability to buy extensively on credit of a cheque which is not certain to be honoured by his bank is so damaging a step that its issue and dishonour suggests immediately a desperate situation; and in any case calls for some inquiry upon the part of the creditor. But here the cheque, in accordance with arrangements made at the outset of the trading, was post-dated and the reduction of overdrafts generally had begun somewhere about the time of its issue. So far as the payee was concerned, the reduction of the company's overdraft may have supervened on the issue of the cheque. An inquiry was made by the appellant which indicated that the lack of liquidity was due to a combination of overstocking and the reduction in overdraft accommodation. It seemed also a fair inference from the information furnished on inquiry that there could be a stock reduction, i.e. a realization of a saleable asset, in so short a time that only a few days were needed to convert the asset into the necessary cash. The appellant's manager said that he thought the continuance of supply was a reasonable commercial risk meaning, I think, not that he was taking a risk that the insolvency he suspected would mature into liquidation but that the temporary lack of liquidity would mature into insolvency. (at p296)

57. The question of what inference should be drawn from all these circumstances is a question for the court. But the inference being sought is the inference which a reasonable business man in the situation ought to draw. It must be remembered that trading of the kind with which these applications are concerned is, as of present times, predominantly carried on by means of extensive credit and that overdraft accommodation supplements that credit to furnish the circulating capital. Consequently, liquidity can be lost overnight upon a reduction of overdraft limits. Whether this spells insolvency must be determined, it seems to me, by the speed with which assets of a readily realizable kind can be turned into cash. That time will be relative at least to the nature or extent of the indebtedness. Although in the full knowledge of all the facts the company was insolvent, his Honour found that the circumstances did not lead to the conclusion that the appellant knew of that insolvency. The question remains what is the proper inference which the court thinks a reasonable and prudent business man should draw from those circumstances. After much consideration I have come to the conclusion that, with the knowledge and belief of the extent of the stock in trade and with no circumstance to suggest it was in any significant degree "dead" stock, the reasonable business man ought not to suspect actual insolvency, though the circumstances demonstrated a serious and perhaps a dangerous lack of liquidity. Just the same I would not set aside his Honour's finding as to the inference which ought to be drawn from the circumstances known to the appellant were it not that, in my opinion, his Honour, in considering the question both in this and in the other applications, gave insufficient weight to the effect which the anticipated realization of the trading stock must have upon the question of insolvency. The situation of the appellant was very different from that of the bank in Rees v. Bank of New South Wales [1964] HCA 47; (1964) 111 CLR 210 There the bank, with much more information than the appellant had, knew that the trading stock could not be realized in such an interval of time as would prevent the lack of liquidity becoming insolvency. In my opinion, therefore, the circumstances did not justify the inference required by s. 95 (4). (at p297)

58. But, in discussing this aspect of the application I have passed over the prior question, namely, whether the payments did have the effect of giving this appellant a preference, priority or advantage. The answer depends on whether or not the payments were made on the basis of a continuance of supply. The position in this instance is not as clear to my mind as was the case in the application against Queensland Bacon. As I would be prepared to find that the payments to the appellant were received in the ordinary course of business, for valuable consideration and in good faith, there is no need for me to express a concluded opinion of this aspect of the case and I refrain from doing so. In my opinion, for the reason I have given, his Honour's declarations in the case of this appellant should be set aside.
Egg Marketing Board (at p297)

59. Two payments by the company to this appellant were declared to be void as preferences within s. 95 (1):

(1) a cheque for 10,083 pounds 3s. 5d. issued on 17th November but by arrangement post-dated to 25th November in respect of

eggs purchased up to 12th November. The cheque was
dishonoured on 26th November, noticed "Present again
in a few days" and was paid on 2nd December.
(2) a cheque for 1,714 pounds 15s. 6d. issued on 28th January and

dishonoured on 31st January. This cheque was given by

arrangement in part payment of an account for 5,144 pounds 6s. 6d.
for eggs purchased during the four weeks preceding 10th
December 1960, for which a cheque had been given and had
been twice dishonoured. (at p297)

60. So far as the matter depends on s. 95 (1), in my opinion, the circumstances of the payment of the first of these cheques, including its prior dishonour, did not require the inference that the appellant had reason to suspect that the company was insolvent. On the other hand, the circumstances of the payment of the second did. In that instance, the appellant ought to have inferred that the company's stock was not moving in such a way as to enable it to overcome in an adequately brief time the lack of liquidity which the earlier dishonours and the several dishonours of the cheque for 1,714 pounds 15s. 6d. indicated. In the circumstances, the appellant ought to have also suspected that the receipt by it of that payment would effect a preference in its favour. (at p298)

61. Even treating the payments as having been made as part of a running account, the appellant received an advantage by them of more than 1,714 pounds 15s. 6d. Consequently, in my opinion, there should be a declaration that the payment of the sum of 1,714 pounds 15s. 6d. amounted to a preference and that, by reason of the circumstances of that payment, the court could not find that the payment, though otherwise made in the ordinary course of business and for valuable consideration, was received in good faith.
Foley Brothers (at p298)

62. This company had dealt with Hennessy prior to the formation of the company, and evidently with satisfaction to both parties. On the formation of the company, the appellant supplied it principally with butter but also with cheese, small goods, and, for the Christmas trade, with hams. The initial credit arrangements were for payment by the company once each month of the four or five preceding weekly statements of account furnished by the appellant. Later, and for the convenience of the appellant, this arrangement was varied to require the company to make two payments each month, each in respect of two or three prior weekly statements according to the number of Fridays in the month. Although cheques of the company were in fact dishonoured prior to December 1960, the appellant, as his Honour found, had no knowledge of such dishonours. But on 7th December 1960 a cheque for 7,809 pounds 9s. 2d., which covered supplies for which statements had been rendered in mid-November, was dishonoured on presentation of which dishonour, noticed "Present again", the appellant's manager became aware on 12th December. (at p298)

63. He communicated with Hennessy who said that there must be some mistake and that he would see to the matter right away. Inquiries by an officer of the appellant, presumably of the bank, produced the information that payment of the cheque could be expected in a few days. Hennessy meantime saw the appellant's manager, whose evidence the learned judge of the Supreme Court accepted. The manager informed his Honour that the dishonour did not give him concern as he knew that company had a large stock - which in fact he had seen in the company's bulk store and on which he had put a value. He knew (meaning that he believed) that the company's turnover was considerable and that the company's position must be very sound. Hennessy, when he called, affirmed that he had a very large stock, that his trading results to June had been satisfactory, but that October and November trading had not been as high as he had expected. The manager thought the company had overbought, temporarily overstocked, and that its liquidity would be restored "in a little time". Hennessy asked whether the appellant in the circumstances would allow him to pay the 7,809 pounds 9s. 2d. by two cheques, one for 2,000 pounds for immediate presentation and one for the balance to be presented on 23rd December. (at p299)

64. The appellant's manager agreed to this proposal, and offered further assistance which Hennessy refused saying that he had no need of it. Both these cheques were paid on the arranged dates. (at p299)

65. On 21st December Hennessy again saw the appellant's manager, said that as Christmas trading had not come up to expectation, he still had a large stock, including Christmas lines. The manager agreed that 3,000 pounds should be paid by the company on 30th December in part payment for purchases made up to 23rd December totalling 8,501 pounds 1s. 1d. and 1,000 pounds per week thereafter plus the amount of his then current weekly purchases. A cheque for 3,000 pounds was accordingly given and was duly paid. A cheque for 2,217 pounds 3s. 9d., being 1,000 pounds on account as agreed, and 1,217 pounds 3s. 9d. for purchases between 23rd and 30th December was in fact dishonoured on 11th January marked "Present again" but paid on 13th January. But, as his Honour found the appellant did not become aware of this or any subsequent dishonour until a cheque for 2,558 pounds 3s. 11d. was dishonoured on 6th February endorsed "Present again" whereupon the appellant put the company on a cash on delivery basis. (at p299)

66. His Honour set aside the payment of 12th December and all subsequent payments, finding each to be a preference and that the appellant had failed to satisfy him that any of such payments were received in good faith. (at p299)

67. In this application, to my mind, the basis of the payments which his Honour has avoided was the continuance of the supply of goods by the appellant. This application in that respect is very like that made against Queensland Bacon. For the purpose of determining whether there was none the less a preference, comparison must be made between the state of the account as at 12th December and as at 7th February whent he running account was closed. As at 12th December the debit was at least 12,292 pounds 4s. 10d. and as at 7th February it was 8,240 pounds 12s. 7d. The preference in effect of the payments was thus approximately 4,052 pounds. To apply s. 95 (2), (3) and (4) to this situation, it is of course necessary to identify specific payments so that their circumstances can be considered for the purposes of s. 95 (4). Cf. per Kitto J. in Rees v. Bank of New South Wales (1964) 111 CLR, at pp 222, 223 (at p300)

68. However, there is no need, in my opinion, to trouble to do this in connexion with this appeal as, in my opinion, in accordance with the views I have already expressed, no inference that the appellant had reason to suspect the actual insolvency of the company or an actual preference ought to be drawn from any of the circumstances of any of the payments which his Honour has avoided. No doubt, neither the provision of considerable stocks of commodities, nor the optimism of a creditor that, given time, all will be well, will prevent in some circumstances the necessary inference being drawn from a demonstrated serious lack of liquidity. But, here, the consensus of business opinion expressed in the evidence was that, upon the facts as each creditor knew them, the time interval to be allowed for the realization of the stock was believed, and reasonably upon their information believed, to be brief. That business men do not infer insolvency or find ground to suspect its existence does not of course mean that the court cannot find that the circumstances were such that the creditors had reason to know or to suspect that insolvency. But their optimism, backed up as it was in this case, by their action in continuing to give credit to the company cannot, in my opinion, be ignored when deciding whether the recipient of a preferential payment ought to have known or suspected the insolvency of his debtor. The trade with which the parties were concerned was carried on by means of large stocks obtained on credit; the extent of the stocks depended upon judgment as to the rate of their realization. A down turn in that rate maintained for a sufficient time might spell insolvency if bank credit was not available to maintain liquidity. An estimate of the anticipated rate of realization would be a vital factor in deciding whether or not insolvency had arrived. I find great difficulty in refusing to accept the business man's contemporaneous view as to what was a proper estimate of that rate and I am not prepared to hold that a reasonable and responsible business man ought in the circumstances of the payment of the cheque of 2,000 pounds on 14th December to have suspected that his debtor was in fact insolvent. It would follow that I would not be satisfied that the inferences required by s. 95 (4) ought to be drawn in respect of any of the payments which his Honour has avoided. Accordingly, in my opinion, his Honour's declaration in this application ought to be set aside. (at p301)

KITTO J. The payments that have been declared void by the orders under appeal were made by a company now in liquidation, which formerly carried on a large business as a retail seller of groceries and the like in a chain of stores in Queensland, to four wholesale suppliers from whom it had purchased goods for resale. The period in which the payments were made extended from 1st November 1960 to 10th February 1961. Throughout that period and for some months before, the company was rapidly extending its business, stocking and opening new branches with evident optimism and seemingly with justification. The management was in the hands of a Mr. Hennessy, who had carried on the business with success before the company took it over and was known as a competent man in the trade. None of the four creditors at any material time doubted Hennessy's ability or integrity. The general character of the goods in which the company dealt was such that a fast turn-over of large volume might be expected, though fluctuations in demand might at times disappoint expectations. Until late in December 1960 it must have been evident to all the suppliers that in spite of any temporary difficulties Hennessy was intent upon expansion. In November 1960 the company's business was adversely affected by a sudden restriction of bank credit in the community generally; but even that did not deter Hennessy from opening still more branches. (at p301)

2. Now, it was against this general background that first the suppliers, and later the Supreme Court, had to consider what inference to draw from certain abnormalities that occurred in regard to the company's paying for its supplies. A certain amount of credit was allowed in accordance with trade custom, and more by special arrangement. Prompt payment in accordance with the credit terms was often not made. Sometimes cheques, including some that had been post-dated by arrangement with the payee, were dishonoured on presentation, but were either met subsequently or superseded by new arrangements made. At all times the company had, as the suppliers knew, large and valuable stocks of readily saleable goods free of encumbrances, and in assessing now what significance might have attached at an earlier time to delays in payment and even the dishonouring of cheques it is important to remember that one possible explanation which might have suggested itself to anyone who considered the total picture was that the company was able to pay all its debts as they became due, e.g. by speedy liquidation of stocks, but only if it was willing to curtail its expansionary programme, and that Hennessy would not submit in that way to the frustration of his ambitions if he could avoid it by staving off creditors. Even the serious danger to the company's credit that might be involved in allowing cheques to be dishonoured may well have seemed to him to be worth incurring, so long as creditors could be induced to wait and to continue to supply the company with trading stock. In many situations, of course, the dishonour of a cheque, unless otherwise explained, carries a strong suggestion of insolvency; but in others it may indicate, to those who are constantly dealing with the drawer and know the general course he is pursuing in his business, no more than a policy of wringing the last ounce of credit out of everyone who can be fobbed off with promises. (at p302)

3. With this general caveat against too ready an assumption that the dishonour of a trader's cheque must in all circumstances and inevitably create in the mind of a reasonably worldly-wise creditor a suspicion of insolvency, I shall deal separately with the facts of each case. But as they must be examined with the provisions of s. 95 of the Bankruptcy Act in mind a few observations should be made at once as to the interpretation of that section. The general provision in sub-s. (1) for the avoidance of de facto preferences is well known. I need not say anything of it, for in the view I take of these four cases there is no need to review the findings under it which the learned Judge made against the appellants. Assuming those findings to be correct, the appeals depend upon the meaning and application of sub-ss. (2), (3) and (4). By virtue of sub-ss. (2) and (3) the appellants were under the necessity in the Supreme Court of proving that in respect of the payments in question they were payees in good faith, for valuable consideration and in the ordinary course of business. The learned Judge made findings which meant that they had proved they were payees for valuable consideration and (subject to what was involved in the question of good faith) in the ordinary course of business. His Honour decided, however, that because of the provisions of sub-s. (4) they should not be deemed to be payees in good faith. He considered that the burden of proof which sub-s. (3) placed upon the payees extended to proving, in relation to each of the payments in question, that the circumstances were such as to lead to the inference that the payee, although (as was established) it did not know, had reason to suspect, that the company was unable to pay its debts as they became due, and that the effect of the payment would be to give the payee a preference, a priority or an advantage over the other creditors. He was of opinion that the burden of disproving reason to suspect these matters had not been discharged, and for that reason he held the payments to be void. (at p303)

4. In view of the conclusion which I reach upon the facts I need not consider the burden of proof; but some observations as to the interpretation of sub-s. (4) in other respects will serve as a preface to what I have to say of the individual cases. In the first place, the precise force of the word "suspect" needs to be noticed. A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to "a slight opinion, but without sufficient evidence", as Chambers's Dictionary expresses it. Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence. The notion which "reason to suspect" expresses in sub-s. (4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the sub-section describes - a mistrust of the payer's ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors. (at p303)

5. The question thus posed by the sub-section is to be answered in the present cases as at the time when each of the relevant payments was about to be accepted. It is an objective question. What the payee or anyone else inferred at the time is not to be treated as decisive, though the Court may be assisted in reaching its own conclusion by seeing how business men in fact reacted to the circumstances. The character of the circumstances is what has to be decided: were they such as to lead to the specified inference? The inference is that the payee had cause to suspect the existence of two states of fact. As to the first, the word "unable" must be given its full force. The second goes further: it is that the payer's affairs are in such a state that acceptance of the payment (assuming that it would be allowed to stand) would put the payee in a better position vis-a-vis the other creditors than he would be in if the payer were bankrupt or, in the case of a company, were in liquidation. If the proper inference from the circumstances is that there was a sufficient reason for the payee to form an actual suspicion - a real apprehension though with insufficient warrant for a positive conclusion - that the situation had both these features, he is debarred by sub-s. (4) from being deemed a payee in good faith. Otherwise he is not.
Queensland Bacon Pty. Ltd. v. Rees. (at p304)

6. In this case the learned Judge held to be void as preferences all payments made by the company to the appellant on or after 1st November 1960, that being the commencing date of the period during which he found that the company was unable to pay its debts as they became due from its own money. There were eight such payments. Each was for valuable consideration being a payment for goods supplied. Each, his Honour thought and I shall assume, had the effect of giving the appellant a preference over the other creditors, but his Honour would apparently have found in respect of each that the appellant was a payee in good faith and in the ordinary course of business, had it not been for one circumstance. This was that before the beginning of the period of insolvency as found, a cheque for 4,858 pounds dated 10th October 1960 had been dishonoured. It was dishonoured on 15th October 1960, being marked by the bank "Arrangements incomplete. Present again in a week." It was accordingly re-presented and paid on 22nd October 1960. His Honour observed that the company's total indebtedness to the appellant at that time exceeded 24,000 pounds, that the appellant knew that there were other creditors, and that although it did not in fact suspect, it had had reason to suspect (i.e. on 15th October 1960) both that the dishonour of the cheque was due to inability on the part of the company to pay its debts as they became due and that the effect of the payment would be to give the appellant a preference, a priority or an advantage over the other creditors. His Honour considered that this reason for suspicion was never dispelled, and that on the contrary it was strengthened as time went on, by the dishonour of one cheque on 13th December 1960 and another on 28th December 1960, though the first of these was honoured on 21st December 1960 and the second on 16th January 1961. His Honour considered that the burden lay upon the appellant of satisfying him that the reason to suspect which the appellant had on 15th October 1960 had ceased to exist before the eight payments now in question were made, and he held that the burden had not been discharged. (at p305)

7. With great respect, even assuming that it was correct to place upon the appellant the burden of proving the absence of reason to suspect the two matters mentioned in s. 95 (4), it seems to me, upon consideration of the whole of the circumstances attending the payments, that the burden was discharged in respect of at least the first six payments. The company's business was to all appearances going well, its stores were well patronized, its management apparently energetic and efficient, its overheads reasonable, its assets substantial and readily saleable. The bank's notification on the cheque of 10th October 1960 suggested only that so far as the bank was concerned arrangements already in train had to be completed before the cheque could be honoured, but that they would be completed within a week. If one asks why a company with so active a business and such readily convertible stocks would have insufficient in a current bank account to meet a cheque for 4,858 pounds, and would leave it outstanding for a week, the answer must obviously depend upon the circumstances. It seems to me that a reasonable person in the position of the appellant on the respective dates of the first six payments, looking at the whole picture as he then saw it, with its emphasis on expansion and the fact that the cheque of 10th October had been honoured, as the bank had forecast, in a week, would have rejected the idea of insolvency, and would have concluded that he had no reason at all for a suspicion on the point. He would, I think, have regarded the episode of the dishonoured cheque as having been due to some temporary difficulty, which had been quickly overcome and which there was no reason to suggest was symptomatic of a general inability, still existing, to pay debts as they became due. (at p305)

8. In the case of the seventh payment there is an additional circumstance to consider, namely that the cheque was dishonoured once before being met; but I do not think that even that was enough to create a suspicion with respect to a company so active and so seemingly progressive that at the date the payment was made it could not, rather than would not, pay its debts as they became due. (at p305)

9. The final payment, a payment of 2,700 pounds made on 16th January 1961, needs special consideration. It was paid by a cheque which was dishonoured three times before it was met, and although the first two dishonours, on 28th December and 3rd January respectively, might by themselves have been insufficient in the special circumstances of the case to suggest inability to pay debts as they became due, it seems to me that by the time the third dishonour had taken place, namely on 12th January, there was reason for such a suspicion. But there was no reason to suspect that this was due to anything but overstocking for the Christmas trade and unexpectedly restricted sales. In other words, there was no reason to suspect that the situation would last long, or that it could not have been immediately rectified if the company had been willing to take drastic measures to realize sufficient stocks regardless of its own plans. If the situation had dragged on for a substantial time, and a payment had then been offered to the appellant, the proper inference might have been that the appellant had reason to suspect both that the company could not pay its debts as they became due and that the payment would prefer the appellant over other creditors. But that is not what happened. On 16th January 1961 the cheque was re-presented and met. The circumstances to be considered are those which existed and were known to the appellant on that date, including the fact that so far as the appellant was aware no other creditor had had a cheque of the company's dishonoured. From those circumstances it seems to me that a reasonable person in the position of the appellant would have concluded that the temporary difficulty, disturbing while it lasted, had been surmounted, and that there was no longer any reason, if there ever had been any, to be suspicious of the company's solvency. In fact, as his Honour found, the business man who was in charge of the appellant's business did not form any suspicion relevant to s. 95, and went on thereafter supplying more goods to the company on credit. While that is not the test under sub-s. (4), it is not without confirmatory value. (at p306)

10. In my opinion the defence under sub-s. (2) should have succeeded as to all the relevant payments, and the appeal should therefore be allowed and the order of the Supreme Court set aside.
The Egg Marketing Board v. Rees. (at p306)

11. Two payments are in question in this appeal, one made on 2nd December 1960 and the other on 31st January 1961. The only question for decision is whether the appellant is entitled to the protection of sub-s. (2) of s. 95 of the Bankruptcy Act 1924- 1960 (Cth) (as applied to the winding up of companies by s. 275 of The Companies Acts, 1931 to 1955 (Q.)), having regard to the provisions of sub-s. (4) of that section. (at p306)

12. The circumstances surrounding the first payment, which was of an amount of 10,083 pounds 5s. 5d. seem to me to lead to no more serious an inference than that the appellant had reason to regard the company as a slow payer, carrying on a large and growing business, with plenty of means of obtaining money to pay debts if it chose to pay them, but with not enough money readily available at any given moment to do all that it wanted to do as well as pay its creditors. The appellant had had one earlier experience of the dishonouring of a cheque of the company, namely in July 1960, but any effect that might have had in the mind of a creditor in the position of the appellant had long since been dispelled, for the cheque had been paid a week later, a subsequent inquiry as to the company's financial position had elicited a favourable reply from its bank, and nothing of the sort had happened since. More important is the fact that a cheque for the amount now in question, 10,083 pounds 5s. 5d., was dishonoured on 26th November 1960 and not met until 2nd December 1960. The cheque was dated 25th November 1960, and Hennessy, on behalf of the appellant, had asked that it be not presented until the 28th. After its dishonour on the 26th the appellant's accountant spoke to Hennessy, and was referred by him to his bank manager. The latter said that the company had committed itself in heavy stock purchases which had to be obtained for the Christmas trade, that the position was "being re-arranged for release from any burdensome encumbrances in this connexion" (whatever that may mean), that there was no need to worry "regarding its" (the company's) "present position", and that the cheque was safe for payment within a few days. He said that everything would "adjust itself in due course"; and, as I have indicated, everything was adjusted, so far as the appellant was concerned, in less than a week. (at p307)

13. It was evident to the appellant by the date of the payment that throughout the preceding week the company could not have paid its debts as they became due without such a disturbance of its arrangements that the potential injury to its credit due to the dishonour of a cheque seemed to it to be preferable. The bank manager's statements showed that to make a payment of so large an amount as 10,083 pounds 5s. 5d. while meeting other commitments required some adjustment of the company's affairs. But the implication should not be overstated. It was clear that without a few days' grace the company would have to take steps which it was not prepared to take, but non constat that it was actually unable to take them. Moreover, the dishonour of the cheque was an isolated occurence so far as the appellant had any reason to suppose (leaving aside the dishonour in July, which had by then lost any real significance it ever had); and although the appellant knew that the company was constantly incurring substantial debts to other suppliers of stocks, it had learned nothing whatever to suggest that any other creditor was having difficulty in obtaining payment. The learned Judge said in his judgment that the appellant knew that the company had other creditors, and added: "although it did not know that any cheques given in favour of other creditors had been dishonoured, it had reason to suspect that this might have been so". If I may say so with respect, this suggests that the word "suspect" is not being given its true force. To say that there was reason to suspect that other creditors' cheques "might have been" dishonoured is only to say that what had occurred over the appellant's cheque provided a reason for wondering whether it might have been so; and that, as I have said earlier, falls short, in my opinion, of a reason to entertain a suspicion that it actually was so. When, in the circumstances I have described, the few days' grace having been given, the cheque is met without further difficulty, it seems to me that it would be out of accord with business reality to hold that the appellant not only had had in the past reason to suspect that the payer was unable to pay its debts as they became due but at the time of the payment had reason to suspect that that was still so. I should have thought that the only suspicion for which the circumstances as known to the appellant on 2nd December 1960 really provided reason was a suspicion that the company, in its endeavours to obtain all the credit it could coax out of its various suppliers, was treating The Egg Marketing Board as the least likely to take extreme action, and so was paying other creditors first. (at p308)

14. The other payment, of 1,714 pounds 15s. 6d., was made on 31st January 1961. In the time that had elapsed since the previous payment some significant events had occurred. A cheque for 5,144 pounds 6s. 6d. had been dishonoured on 30th December, with the answer "Present again", and the appellant had been so informed. Hennessy, being spoken to by the appellant's accountant, had promised that the cheque would be met on 6th January 1961. The company's bank manager had used to the appellant's accountant soothing words which were enough by themselves to show that this time the dishonour was in truth due to inability to pay debts. He had said that due "mainly" to a drop in trading during November, "certain repercussions" were being experienced by the company, which "should" only be of a temporary nature. He had added that there was "no need to panic", and that provided a little patience were extended to the company "the present position" would be overcome in due course; and he had asked the accountant to telephone on 12th January. The cheque had been again dishonoured in the meantime. On 12th January, the bank manager had said that trading had improved and was improving, and that he would do everything to ensure that the cheque was met either in whole or in part within a few days. A week had gone by without any payment having been made, and on 19th January a meeting had taken place between Hennessy and some representatives of the appellant. It had then been arranged that the company should give the appellant three cheques, each for 1,714 pounds 15s. 6d., to cover the amount of the cheque dishonoured on 30th December. These cheques had been given, and Hennessy had agreed in addition to make every effort to pay the appellant a further 500 pounds before 18th February. The first of the three cheques was met on 31st January, and thus the payment now in question was made. (at p309)

15. The events that followed upon the dishonour of the cheque for 5,144 pounds 6s. 6d. on 30th December 1960, if they had been considered by any reasonable business man on 31st January 1961, could not have failed, I think, to make him suspect, and even to feel sure, that the company was then unable to pay its debts as they became due and that to accept the payment would be to obtain a preference over the other creditors. If one had to nominate the time when cause for these suspicions arose, there would be much to be said for fixing upon the time when the bank manager made his observations on the dishonour which occurred on 30th December. From that time onwards, the causes for suspicion were added to by every event that occurred. In my opinion, the learned Judge's decision as to the second payment was plainly right. (at p309)

16. I would therefore allow the appeal as to the first payment and dismiss it as to the second.
Burns Philp and Co. Ltd. v. Rees. (at p309)

17. By the order under appeal in this case, nine payments to the appellant have been declared void as de facto preferences, the first having been made on 20th December 1960 and the last on 31st January 1961. The learned primary Judge would have held all these payments to be protected by s. 95 (2) of the Bankruptcy Act 1924-1960 had he not been of opinion that the appellant had failed to discharge the burden of proving that it had had no reason, on and from 19th December 1960, to suspect that the company was unable to pay its debts as they became due and that the effect of payments made by it would be to give the appellant a preference, a priority or an advantage over the other creditors. But his Honour was of that opinion, and accordingly held that the section rendered the payments void. (at p310)

18. The event which his Honour regarded most seriously on the question of cause for suspicion was the receipt by the appellant on 19th December 1960 of notice that a cheque for 3,082 pounds 3s. 5d. which had been received from the company had been dishonoured. His Honour put aside, as circumstances which ought not to govern his decision, the established facts that the company appeared to have an expanding business and unencumbered assets of considerable value, that it had regularly paid its debts to the appellant in the past, that both a bank and a business inquiry agency had reported favourably upon it, and that the dishonour had been made with the notation by the bank: "Present again in a few days". The very facts that the company appeared to be expanding and to have large assets seemed to his Honour to make it the more remarkable that the bank should dishonour the cheque. (at p310)

19. With great respect, I am unable to take that view. To a reasonable business man the facts I have mentioned might have been expected to suggest, not an inability to pay debts as they became due, but an understandable disinclination on the part of the company's general manager, Hennessy, to sell stocks improvidently or to forego the attractions of expansion of business for the sake of overcoming what might well be a temporary shortage of cash brought about by a general restriction of bank credit in the community, a consequential unexpected drop in retail sales, and by reason of these events the disappointment of expectations that had led to heavy purchases of stock. Inability to pay debts is one thing; but willingness to accept the possible damage to one's credit which the dishonour of a cheque may cause, rather than to take drastic steps by which all debts can be paid is quite another thing. I do not say that the learned primary Judge failed to recognize the distinction; but he laid stress upon the fact that the appellant's Brisbane manager, a Mr. Campbell, regarded the dishonour of the cheque on 19th December 1960 as a danger signal and, in his evidence, described his decision to continue trading with the company as a risk, though a reasonable risk. The dishonour undoubtedly was a danger signal, but would a reasonable man in Campbell's position not only have thought that the possibility of the company's being insolvent had to be considered but have formed an actual suspicion that the company was in fact insolvent? Or would he have dismissed the possibility as not sufficient to found a suspicion in the circumstances? With great respect, I think the latter. His Honour said that Campbell admitted in effect that he should have suspected that other creditors were also receiving cheques that were dishonoured. He had in fact no reason for such a suspicion. No doubt he had ample reason to believe that the company was buying stocks constantly from other suppliers and was therefore incurring debts to them; and he might well have wondered whether his company was the only one which had had a cheque of the company's dishonoured. But there is no reason to suppose that he had heard even so much as a whisper to suggest that the dishonour of the cheque for 3,082 pounds 3s. 5d. was not an isolated occurrence. It is true that Campbell thought that to continue trading with the company on credit was a risk, though a reasonable risk; but too much can be read into a statement of that kind. I do not understand it to mean more than that Campbell realized when the cheque was dishonoured that he had to make up his mind what view to take of it, and that when he considered it in the light of all the information he had he decided that there was not enough to justify a real suspicion of insolvency, and accordingly he proceeded to give credit which he would not have given had he formed such a suspicion. But whether or not that is what Campbell meant in giving his evidence, it describes the manner in which, in my opinion, a reasonable business man in his position would have regarded the matter. The true inference from the circumstances of each of the payments now in question seems to me to be that the appellant had no reason to suspect either of the matters mentioned in s. 95 (4). (at p311)

20. I would therefore allow the appeal.
Foley Brothers Pty. Ltd. v. Rees. (at p311)

21. This appeal is against a declaration that six payments, the first made on 14th December 1960 and the last on 31st January 1961, are void under s. 95 of the Bankruptcy Act as de facto preferences. The facts are recounted in the judgment of the Chief Justice, with whom I agree in thinking that even if the payments had the effect of giving a preference the appellant proved the facts necessary for the protection afforded by sub-s. (2). The ground upon which the learned primary Judge took a different view was that in his opinion it was not disproved that the circumstances of the payments were such as to lead to the inference that the appellant had cause to suspect that the company was unable to pay its debts as they became due and that the payment would have the effect of giving the appellant a preference, a priority or an advantage over the other creditors: sub-s. (4). (at p312)

22. As in the other three cases, there is great need to keep steadily in view what the precise inference is to which sub-s. (4) refers. It is an inference which the Court draws from the circumstances known to the creditor at the time when he accepted the payment. It is an inference that the creditor at that time had reason for an actual suspicion of a particular state of facts, that is to say a ground which a reasonable man in his position would have considered sufficient to raise in his mind a real suspicion that the state of facts existed. I venture to repeat that the state of facts consists of two elements. The first is an actual inability on the part of the payer to pay his debts as they became due, as distinguished from a reluctance to accommodate his wider purposes to the limitations of his resources. The second is that the effect of the payment, i.e. its ultimate, substantial effect, would be that the payee would be in a better position vis-a-vis the other creditors than he would have been if the company's assets had been converted and distributed amongst all the creditors in a due course of winding up. (at p312)

23. The payments in question in this appeal were preceded by the dishonour, on 7th December 1960, of a cheque for 7,809 pounds 9s. 2d. The receipt of the cheque by the appellant had been accompanied by information that trading for the preceding two months had been lower than expected but that stocks in hand were worth over 200,000 pounds. They were stocks of a readily saleable kind; the company was actively trading through twenty stores; the Christmas trade was beginning; everything known to the appellant except the bare fact of the dishonour suggested soundness of the company's position. Suppose that a reasonable person in the position of the appellant's manager had asked himself at the time: "What does this dishonour suggest as to the company's solvency and as to the position the appellant would occupy vis-a-vis the other creditors in a liquidation if it were to accept a payment now?" I should have thought that, all things considered, he would have answered that it suggested nothing more serious than that one of the ups and downs of a business that in any case was suffering from growing pains had caused a temporary difficulty, but a difficulty which was not an impossibility of payment; that if the company had been put into liquidation there would be enough to pay every creditor in full; but that there was no occasion for a winding up. This was, in substance, the view the manager took; and when he was asked a few days later to accommodate the company by accepting 2,000 pounds at once and the balance of 5,809 pounds 9s. 2d. by a cheque to be presented on 23rd December, he agreed. The 2,000 pounds was paid at once, and the cheque for the balance was duly met. It was in fact presented earlier than agreed, and at that stage it was dishonoured, but no adverse inference could possibly be drawn from that. (at p313)

24. Then a difficulty did undoubtedly arise. Hennessy told the appellant's manager, Mackay, that the Christmas trading had not come up to expectations and that he still had a large stock including Christmas lines. Mackay offered to assist him and it was agreed that the company should pay 3,000 pounds on 30th December 1960 in part payment of the purchases made up to 23rd December (totalling 8,501 pounds 1s. 1d.), and 1,000 pounds per week plus the amount of weekly purchases thereafter. No doubt the fact that such an arrangement was made was enough to raise a suspicion that at the time ready cash to meet all the company's debts as they became due was not available without the taking of drastic steps to sell off stocks. But that is not equivalent to a suspicion that with the substitution of the newly agreed dates as the dates for payment of what was and would be owing to the appellant the company would not be able, on those dates, to pay all debts as they became due. The arrangement was duly carried out. At least, it was duly carried out so far as the appellant knew. Cheques for the various amounts were received in due time, and though the last three of them were dishonoured at first, each was paid within a very few days and the appellant never learned of any of the dishonours until long afterwards. (at p313)

25. In these very special circumstances I do not think it sould be inferred that the appellant had any reason for the suspicions to which s. 95 (4) refers. To consider the actual reactions of a business man whom the primary Judge has thought a reliable witness is not without its utility as a check on one's own endeavours to draw the correct inferences with due wariness of hind-sight. Mackay, in evidence which his Honour accepted, said that he was not concerned by the dishonour of the cheque for 7,809 pounds 9s. 2d. when he learned of it on 12th December 1960. His Honour observed that Hennessy, having said that there must be some mistake, apparently did not at any time explain what mistake there had been, but, instead, asked to be allowed to pay the amount in two instalments; but this seems to me rather to highlight Mackay's continuing confidence that the explanation was not insolvency. He went on supplying the company with goods without further restriction of credit. That he was not lacking in alertness to see cause for suspicion of insolvency if any arose may be inferred from the fact that at later date, when he learned that a cheque for 2,558 pounds 3s. 11d. had been dishonoured on 6th February 1961, he immediately placed the company's dealings with the appellant on a cash basis. What he suspected or did not suspect is of course by no means decisive; he might have failed to suspect while yet having reason to suspect; but it seems to me that reason to suspect the matters mentioned in s. 95 (4) was lacking in all the circumstances of this case. (at p314)

26. I would therefore allow the appeal. (at p314)

MENZIES J.

Burns Philp and Co. Ltd. v. Rees.

There are, so it seems to me, two matters of critical importance to be decided upon this appeal from a decision of Gibbs J. declaring void as preferences certain payments made to the appellant by Hennessy's Self Service Stores Pty. Ltd. (hereinafter called "the debtor") which is in liquidation. The payments in question, amounting to 9,455 pounds 0s. 10d., were made after 1st November 1960, the date upon which it has been found that the debtor became unable to pay its debts, as they became due, from its own money. (at p314)

2. The first is whether his Honour attributed too much significance to the dishonour of a cheque dated 14th December 1960 for a large sum given by the debtor to the appellant to pay for goods supplied when the appellant knew that, at the date of the dishonoured cheque, payment for the goods was overdue and that, in the ordinary course of business, the goods would already have been sold by the debtor for cash. His Honour held that the appellant was not to be deemed a payee in good faith of that cheque, when later paid, and cheques subsequently given to it by the debtor in reduction of its account because, by reason of the appellant's knowledge of the dishonour of the aforementioned cheque, it had reason to suspect that the debtor was unable to pay its debts as they became due and that the effect of the later payments would be to give the appellant an advantage over the other creditors of the debtor. (at p314)

3. His Honour's judgment sets out all the circumstances, including the relevant dates, which with the dishonour of the earlier cheque gave rise to the inference stated. In short, when 5,500 pounds approximately was owing, a cheque dated 14th December 1960 for 3,082 pounds 3s. 5d. was on 19th December dishonoured with the notation "Present again in a few days". The cheque was re-presented on 22nd December and again dishonoured. It was paid on 6th January 1961. His Honour held that from 20th December, when it knew that the cheque for 3,082 pounds 3s. 5d. had been dishonoured, the appellant was not a payee in good faith of cheques for 9,455 pounds 0s. 10d. paid from 20th December 1960 to 31st January 1961. His Honour's view that a retailer of goods whose circumstances are such that he is reduced to the desperate expedient of giving his wholesale supplier a bad cheque ought thereafter, until his solvency is established, at least to be suspected of inability to pay his debts, is not one with which I can disagree. Although it may be possible to imagine a case where inquiry would allay the suspicion naturally engendered by the dishonour of a cheque in the circumstances stated, I find it impossible to think that, upon dishonour of the cheque, the supplier could do otherwise than suspect that the reason for the dishonour was simply lack of funds. What debtor, able to pay, would, except in error, give his creditor a cheque that would be dishonoured? I cannot suppose that it would occur to a creditor that a debtor, being able to pay his debt, had deliberately passed a cheque that would be dishonoured simply as a means of obtaining further credit. In fact, the debtor here was hopelessly insolvent on 19th December, and I agree that what happened on that day gave the appellant a compelling reason for suspecting that fact. I therefore agree with his Honour's conclusion and his reasons for the conclusion that the appellant is not to be deemed to have been a payee in good faith of the payments now in question. (at p315)

4. The other question is whether, upon the authority of Richardson v. The Commercial Banking Co. of Sydney Ltd. [1952] HCA 8; (1952) 85 CLR 110, certain payments made by the debtor to the appellant after the date of the dishonour of the earlier cheque ought not to be regarded as preferences. Here it is necessary to distinguish between what may be called the company's General Account and the company's Sugar Account with the appellant. (at p315)

5. As to the former, the appellant did not at any time relevant for present purposes require the debtor to pay cash for goods supplied. It did, however, make the further supply of goods upon credit dependent upon the debtor agreeing to make, and making, payments in reduction of its outstanding indebtedness. Payments so made have, by his Honour's order, been avoided as preferences. All that can be said about the quantum of the monthly payments required to be made is that it was anticipated that they would exceed the value of goods that would, in the ordinary course, be supplied monthly, so that as time went on the account would be reduced. It can be extracted from the figures in evidence that, between September 1960 and February 1961, monthly purchases, payments, and balances were as follows: -

Month Purchases Payments Balance
1960 September 9,010 pounds 5,403 pounds 6,481 pounds
October 6,547 5,244 7,784
November 5,829 8,096 5,517
December 3,971 3,597 5,891
1961 January 3,842 7,572 2,161
February 582 - 2,743

In these circumstances, I do not think that the payments in question ought to be regarded as giving no preference. Surely the January figures give a very strong indication to the contrary. Richardson's Case [1952] HCA 8; (1952) 85 CLR 110 was a very special case in that the payments there in question5were5made by0a debtor to his bank, not to reduce the debt owing)to5theRbank, but to be dispersed forthwith by the bank honouring cheques to be drawn by arrangement upon the account. In other words, the payments into the account were measured exactly by the payments to be made out of the account so that the account would remain as it was, notwithstanding the payments in and the payments out. As the Court said of these payments: "They were not, in our opinion, payments made to the bank independently of the arrangement by Price with Commins that the latter should honour cheques outstanding, but, on the contrary, they were made only to enable him to meet cheques which Price had given or was about to give. If Commins, as representing the bank, had accepted the amount deposited with him on any occasion and had forthwith closed the account he would have been guilty of a breach of faith with Price. Doubtless Price could not have complained legally of such a breach of faith; for during the six months, and apparently for some time before, Price's banking transactions were rooted in dishonesty. But what is important here is the severability of the deposits from the payments out of the account; the payments out which were entered as subsequent, whatever the actual sequence. It was rightly remarked by counsel for the respondent bank that Commins was not seeking to get money into the account for the benefit of the bank but out of it for the benefit of Price" (1952) 85 CLR, at p 132 It is true that the Court said: "A running account of any debtor who has reached insolvency must present difficulties under s. 95. A debtor who pays something off his grocer's account in order to induce the shopkeeper to give him further supplies of groceries can hardly be held, as it seems to us, to give the grocer a preference, if that was the clear basis of the payment. If the grocer credited the money as a payment for the future deliveries instead of the past deliveries of groceries he would in the end be in exactly the same position and yet he could not be attacked as having received a preference" (1952) 85 CLR, at p 133 It is to be observed, however, that the Court had in mind a case where the payments to be made would not exceed the value of the groceries to be supplied, for the statement is: "If the grocer credited the money as a payment for the future deliveries instead of the past deliveries of groceries he would in the end be in exactly the same position and yet he could not be attacked as having received a preference". In the present case it seems to me that it was intended that, upon each occasion in the future when the appellant was to receive a cheque from its debtor, its position would be improved, notwithstanding current supplies and that the object of the arrangement was to bring about a reduction of an existing liability. Every payment having that effect would improve the position of the creditor and it is sufficient that the payment actually made should give the creditor some advantage over other creditors. I consider that payments made in the carrying out of such an arrangement could constitute preferences, and his Honour's finding that they were is not one that should be disturbed. (at p317)

6. The Sugar Account is in a somewhat different position. It seems that sugar was supplied on seven days' credit and cheques were called for, and paid, weekly. As to sugar there was, therefore, no running account and the decision in Richardson's Case [1952] HCA 8; (1952) 85 CLR 110 is inapplicable. It was put, however, that in the circumstances sugar was not bought upon credit at all and that each payment was in reality a cash payment for goods then and there supplied and was therefore not a preference. It seems to me, however, that Gibbs J. was correct in treating each payment as a payment in respect of an existing debt and so capable of being regarded as a preference. (at p317)

7. Accordingly, I think this appeal should be dismissed.
Queensland Bacon Pty. Ltd. v. Rees. (at p317)

8. This appeal raises similar questions to those set out in my reasons for judgment in Burns Philp and Co. Ltd. v. Rees, but it raises a further question. (at p317)

9. Here, by reason of the appellant's knowledge on 15th October 1960 of the dishonour of a cheque dated 10th October 1960 for 4,858 pounds 10s. 8d., his Honour considered that the appellant had notice of Hennessy's difficulties in meeting its payments and so, after Hennessy's became insolvent on 1st November 1960, it ought to be concluded that the appellant had reason to suspect that eight payments thereafter received in reduction of the account were made when Hennessy's was unable to pay its debts as they became due and that the effect of such payments would be to give the appellant an advantage over other creditors. It is to be observed that the debtor was not, in fact, insolvent on 15th October 1960 when, in my view, the appellant first had reason to suspect that it was. The debtor was, however, insolvent when the eight payments in question were made and, in my opinion, Gibbs J. was correct in treating what happened on 15th October 1960 as affording solid grounds for suspicion at the time when the eight payments in question were made that the debtor was insolvent. It seems to me that what a person does before insolvency may afford reasons to suspect insolvency and that the suspicion may continue to exist when, after insolvency, payments are made which are impeached in the insolvency. A simple instance would be a debtor informing a creditor of the likelihood that he will become insolvent and then, after insolvency, making payments to the creditor which give that creditor a preference. Section 95 operates, in my opinion, if the debtor, being insolvent, makes payments which the creditor has reason to suspect were made by an insolvent and would have the effect of giving the creditor a preference. The section does not require that the reason to suspect insolvency should be something arising after actual insolvency; it is sufficient if, when the payments in question are made subsequent to insolvency, the creditor had reasons for suspicion. (at p318)

10. Here, after the dishonour of the cheque of 10th October 1960, an arrangement was made to give the debtor time and, pursuant to that arrangement, a total of eight payments was made after 1st November, seven being for 2,700 pounds and the eighth for 2,940 pounds 12s. 6d. This latter sum was composed of two sums - viz. 2,700 pounds as a payment to the General Account and 240 pounds 12s. 6d. as a payment to the Fresh Meat Account. It seems clear that each of the payments of 2,700 pounds was intended to reduce the indebtedness so that no moneys would be outstanding for more than sixty days. (at p318)

11. The dishonour of the cheque and the subsequent arrangement for extended payment provided, I think, sufficient grounds for Gibbs J. to hold, as he did, that the foregoing payments, which in total amounted to 21,840 pounds 12s. 6d., were not received in good faith. (at p318)

12. Furthermore, Richardson v. The Commercial Banking Co. of Sydney Ltd. [1952] HCA 8; (1952) 85 CLR 110 is distinguishable for the reason already given in the Burns Philp Case. The following statement of the account shows the position monthly:

Purchases Payments Balance
1960 September 7,406 pounds 83 pounds 24,435 pounds
October 5,565 9,174 20,826
November 8,466 11,667 17,625
December 10,717 5,400 22,942
1961 January 7,101 2,978 27,065
February 1,167 - 28,232 (at p319)

13. Looked at overall, it is true that more was owing at the end of February 1961 than was owing on 1st November 1960 but, notwithstanding that the parties' intention was not in fact realized, there can be no doubt that the payments which were received were to the advantage of the appellant. (at p319)

14. I would dismiss this appeal.
Foley Brothers Pty. Ltd. v. Rees. (at p319)

15. This appeal also raises similar questions to those set out in my reasons for judgment in Burns Philp and Co. Ltd. v. Rees. (at p319)

16. Here, by reason of the appellant's knowledge of the dishonour of a cheque dated 6th December for 7,809 pounds 9s. 2d., his Honour considered that the appellant had notice of Hennessy's difficulties in meeting its payments and so, Hennessy's having become insolvent on 1st November 1960, it ought to be concluded that the appellant had reason to suspect that the payments received after 6th December in reduction of the account were made when Hennessy's was unable to pay its debts as they became due and that the effect of such payments would be to give the appellant an advantage over other creditors. (at p319)

17. The following payments were made after this date: -

Date of Payment Sum
1960 14th December 2,000 pounds 0s. 0d.
23rd December 5,809 9s. 2d.
1961 3rd January 3,000 0s. 0d.
13th January 2,217 3s. 9d.
20th January 2,397 8s. 1d.
31st January 2,677 2s. 2d.

There can be no doubt that the payments for the sums of 2,217 pounds 3s. 9d., 2,397 pounds 8s. 1d. and 2,677 pounds 2s. 2d. were made to reduce progressively an earlier debt, and the other sums seem to have been similarly intended. (at p320)

18. There were sufficient grounds for Gibbs J. to hold, as he did, that the foregoing payments, which in total amounted to 18,101 pounds 3s. 2d., were not received in good faith. That the payments in question did give the appellant some advantage is revealed by the following statement of account:

Month Purchases Payments Balance
August 15,064 pounds 15,038 pounds 15,064 pounds
September 9,712 21,305 3,471
October 13,662 6,541 10,592
November 8,207 10,374 8,425
December 9,102 10,809 6,718
January 6,392 7,392 5,718 (at p320)

19. I would dismiss this appeal.
Egg Marketing Board v. Rees. (at p320)

20. This appeal also raises similar questions to those set out in my reasons for judgment in Burns Philp and Co. Ltd. v. Rees. (at p320)

21. Here, by reason of the appellant's knowledge on 26th November of the dishonour of a cheque dated 25th November for 10,083 pounds 5s. 5d., his Honour considered that the appellant had reason to suspect the insolvency of the debtor and, Hennessy's having become insolvent on 1st November 1960, it ought to be concluded that the appellant had reason to suspect that payments made after the date of the dishonour of the cheque aforesaid, i.e. 26th November, were made when Hennessy's was unable to pay its debts as they became due and that the effect of such payments would be to give the appellant an advantage over other creditors. (at p320)

22. After an exhaustive review of all the circumstances, Gibbs J. relied upon three circumstances for his conclusion. Firstly, the dishonour of an earlier cheque on 11th July; secondly, the failure to settle the account by 5th October, as had been promised; and thirdly, the dishonour of the cheque for 10,083 pounds 5s. 5d. and the circumstances in which that occurred, viz. that the debtor had requested The Egg Marketing Board not to present the cheque before 28th November. (at p320)

23. The two payments avoided consisted of the cheque referred to above for the sum of 10,083 pounds 5s. 5d., which was finally honoured on 2nd December, and a further cheque for 1,714 pounds 15s. 6d. presented and paid on 31st January. (at p320)

24. There were sufficient grounds for Gibbs J. to hold, as he did, that the foregoing payments, which in total amounted to 11,798 pounds 0s. 11d., were not received in good faith. (at p321)

25. I would dismiss this appeal. (at p321)

ORDER

QUEENSLAND BACON PROPRIETARY LIMITED V. REES.

Appeal allowed with costs. Order of the Supreme Court of Queensland set aside and in lieu thereof order that the application of the respondent be dismissed with costs.

THE EGG MARKETING BOARD V. REES.

Appeal allowed. Order of the Supreme Court of Queensland set aside. In lieu thereof declare that the payment of the sum of 1,714 pounds 15s. 6d. by Hennessy's Self Service Stores to the appellant on 31st January 1961 had the effect of giving to the appellant a preference within the meaning of s. 275 of "The Companies Acts, 1931 to 1960" and that the said payment is void as against the respondent, and order that the application of the respondent be dismissed save as to the sum of 1,754 pounds 15s. 6d. which the appellant is ordered to pay to the respondent within twenty-eight days of the service of this order, the respondent to pay three-quarters of the appellant's costs of the proceedings in the Supreme Court and of this appeal.

BURNS PHILP AND COMPANY LIMITED V. REES.

Appeal allowed with costs. Order of the Supreme Court of Queensland set aside and in lieu thereof order that the application of the respondent be dismissed with costs.

FOLEY BROTHERS PTY. LIMITED V. REES.

Appeal allowed with costs. Order of the Supreme Court of Queensland set aside and in lieu thereof order that the application of the respondent be dismissed with costs.