—* eae ee ee ee ei cen em a a ttt a te i el tees IN THE FLDERAL COURT OF AUSTRALIA ) GENERAL DIVISION . ) BANKRUPTCY DISTRICT OF THE STATE } No. 38 of 1974/X ) . ) OF NEW SOUTH VIALES AND THE AUSTRALIAN CAPITAL TERRITORY RE: BRYAN GEORGE SHAW Debtor EX PARTE: WILLIAM EDWARD ANDREW Trustee a AUSTRALIA & NEW ZEALAND * BANKING GROUP LIMITED Respondent JUDGE MAKING ORDER: RILEY J. - DATE OF ORDER: 14 November 1977 WHERE MADE: Sydney DECLARATIONS AND ORDERS on DECLARE: 1. That the payment to the debtor's No. 2 account of $61,871.32 was by reason of s. 122 of the ' Bankruptcy Act 1966 void to the extent of A $58,864.98 as against the trustee of the deed of assignment executed under Part X of the Act on 23 October 1974. 2. that the amount of $1,069.08 standing to the credit of the debtor's No. 2 account on and after 8 November 1974 was property of the debtor ' divisible amongst his creditors. ORDER: 1. That the respondent bank pay to the trustee a sum equal to the total, namely $59,934.06, of the two said amounts of $58,864.98 and $1,069.08, and his costs of and incidental to the application. CATCHVWIORDS BANKRUPTCY - VOIDABLE PREFERENCES -— BANK -— COMBINATION OF ACCOUNTS - WHETHER DEBTOR ABLE TO PAY OUT OF OWN MONEY —- WHETHER BANK PAYEE IN GOOD FAITH -— BANKRUPTCY ACT 1966 SEC. 122, . REASONS FOR JUDGMENT Bryan George Shaw executed a deed of assignment under Part X of the Bankruptcy Act 1966 on 23 october 1974. The date when the relevant resolution under s. 204 (1) (b) was passed is not shown by evidence formally adduced before me on the hearing of this application, but it is shown by the certificate filed pursuant to s. 204 (7) to have also been 23 October. Mr. W. E. Andre is the trustee of the deed. His application to the Court for certain declarations is primarily based on s. 122 of the Act, which by s. 231(2) applies, in the events which have happened, in relation to the deed of assignment as if on 23 October 1974 a sequestration order had been made against Mr. Shaw on a creditor's petition presented that day, and which avoids as against the trustee certain transactions as having the effect of giving a creditor a preference, priority or advantage over other creditors. The creditor alleged to have been preferred is the Australia and New Zealand Banking Group Limited, the banker for Mr. Shaw ana for certain companies controlled by him. The companies concerned were called Talga Limited, Australian Memorial Parks Pty. Limited, Mekol Pty. Limited and Bidges Pty. Limited. I shall call them respectively Talga, Parks, Mekol and Bidges. t Mr. Shaw and the companies banked with the respondent's branch at Martin Place and George Street, Sydney where on behalf of the bank the assistant manager, Mr. Stapleton, had the effective conduct of their affairs. On 1 October 1962 Mr. Shaw had given the bank a letter of set-off, which was still operative at all relevant times. So far as it is material, it reads as follows:- "T hereby acknowledge the right of the Bank at any time without notice to me to apply the whole or any part of any balance that now or at any future tine may stand to my credit in any account to payment of any balance that may be to my debit in any other account, and to close all or any of such accounts, and whether any book entries shall or shall not have been made to treat such credit balance as having been so applied and to deal with my drawings thereon accordingly." On 8 July 1974 Mr. Shaw's account (which I shall call his No. 1 account) was overdrawn by $53,080.64. That account , and the accounts of the companies as a whole were in an , unsatisfactory state having regard to the arrangements with the bank under which they were being operated. Mr. Stapleton therefore | concluded that the accounts should be controlled. Accordingly a procedure was adopted which Mr. Stapleton described as follows in his affidavit of 29 July 1977: "It is a practice of the respondent in the course of controlling its customers' accounts to control the customer's activity by closing a then current account and opening a new account often styled the No. 2 account which must then remain in credit. * In such circumstances, it is normal practice to seek regular reductions to the debtor account or other arrangements for clearance of the borrowing". So Mr. Shaw's No. 1 account was closed and a No. 2 account was opened. Relevant movements on those accounts, as shown by the relevant bank statements, can be summarised as follows: No. 1 Account ° Balance 8 July: 53,080.64 Dr 21 Aug: Overdraft service fee 40.00 Dr 53,120.64 Dr 23 Sep: 53,120.64 Dr 27 Sep: Deposit 1,260.00 Cr 51,860.64 Dr 20 Nov: Deposit 4.98 Cr 51,855.66 Dr 22 Nov: 51,855.66 Dr No. 2 Account 8 July: . 0.00 Cr 12 Sep: Deposit 61,871.32 Cr 61,784.32 Cr 23 Sep: Debit . 57,600.00 Dr 3,981.97 Cr 24 Sep: , 1,077.97 Cr 25 Oct: 1,068.72 Cr 8 Nov: : 1,069.08 Cr 22 Nov: . 1,069.08 Cr acaret enepen memmer = The trustee's claims may be conveniently stated as follows. When the deposit of a cheque for $61,871.32, representince the proceeds of the sale of cattle, was made to the No. 2 account on 12 September, or at any rate on 13 September when the cheque was cleared, the bank was entitled by reason of the letter of set-off of 1 October 1962 and the general law (see 3 Hals., 4th edn, para. 87) to apply that amount or a sufficient part of it in discharge of Mr. Shaw's then existing liability to the bank. Therefore, it is said, the payment of the $61,871.32 was a preferential payment within the reach of s. 122 to the extent of that indebtedness, which is said to be $58,865.98 but was in fact $58,864.98. Alternatively it is said that, in the exercise of its right to combine the No. 1 and No. 2 accounts, or to set-off the debit in the No. 1 account against the credit in the No. 2 account, ard thus be liable to the customer only for the balance, the bank did in fact on 23 September debit $57,600 to the No. 2 account and transfer it to a suspense account to be used as a set-off against Mr. Shaw's liabilities to the bank (see annexures "D" and "E" to the trustee's affidavit of 29 March 1977), and thus there was a preferential payment of $57,600. Next, the trustee says that on 21 August the debit balance in the No. 1 account was $53,120.64 and on 22 November it was $51,855.66. The amount of the reduction (said to be $1,265.98 but in fact being $1,264.98), represented by the two amounts shown above as credited to the No. 1 account, he therefore claims on the principle of Rees v. Bank of N.S.W. (1964), 111 C.L.R. 210. This claim is cumulative on the claim for $57,600. Last, there is the final balance of $1,069.08 which stood to the credit of the No. 2 Account. The bank does not contest the trustee's claim that that amount was either a preferential payment within s. 122 or property of the debtor divisible amongst his creditors. . In this case, the matters for decision under s. 122 (1) are: (1) whether there was a payment made (2) by a person who was unable to pay his debts as they became due from his own money (3) in favour of a creditor (4) having the effect of giving that creditor a preference, priority or advantage over other creditors (5) being a payment made within six months before 23 October 1974. If each of those matters is answered in the affirmative, the further question will arise whether the bank is, as it claims to be, nevertheless entitled to the protection of s. 122(2). It would be so entitled if it could prove that it was a payee in good faith and for valuable consideration and in the ordinary course of business: s. 122(2), (3); but the trustee contends that the bank cannot get that protection because the payment, whenever it was made, was made under such circumstances as to lead to the inference that the bank knew or had reason to suspect that Mr. Shaw was unable to pay his debts as they became due from his oym money and that the effect of the payment would be to give the bank a preference, priority or advantage over other creditors. It was not disputed that a payment was made either of $61,871.32 or of $57,600, or that it was made within the relevant period of six months, or that it was made in favour of a creditor and had the effect of giving that creditor a preference, priority or advantage over other creditors. The remaining questions arising under s. 122(1) are when the payment was made, and whether at that time the debtorwas unable to pay his debts as they became due. - -5- Independently of the letter of 1 October 1962 the bank had a right, there being no agreement with its customer to the contrary, which entitled it aS soon as Mr. Shaw opened a second current account to combine the two accounts whenever it pleased and set off the debit in one account against the credit in the other. (See Halesowen Presswork & Assemblies Ltd. v. Westminster Bank Limited, (1971) 1 Q.B.1, 34 per Lord Denning M.R., whose statement of principle remains unaffected by the reversal of the decision by the House of Lords, (1972) A.C. 785). The letter of 1 October 1962 confirmed the existence of that right. It also established that the right could be exercised without notice to Mr. Shaw and that, whether or not any book entries had been made, the bank could treat a credit balance as having been applied to payment of a debit balance and deal with any drawing accordingly. It was not suggested that the bank's right to combine accounts did not apply to the No. 1 and No. 2 accounts because when the latter was opened the former was frozen: see In re E. J. Morel (1934) Limited, (1962) Ch. 21, 23, 30-32; and it appears from a letter from Mr. Shaw of 24 September 1974 and the bank's reply of 1 October 1974 that the arrangement was that the xight should apply to those-two accounts. Counsel for the trustee submitted however that set-off, and therefore payment for the purposes of s. 122(1), did not occur until on 23 September the Bank actually debited the No. 2 account with $57,600 and transferred that amount to a suspense account. (That later date simplified his submission that Mr. Shaw was insolvent when the payment was made.) He proposed this test: if on say 20 September, when there was a credit balance of $61,581.97 in the No. 2 account, Mr. Shaw had drawn a cheque for $60,000 on that account, would the bank have been bound to honovr it? Counsel suggested that it would. I do not think so. At that time there ~6- was a debit balance of some $53,000 in the No. 1 account, and "The customer must be taken to know the state of each account, and if the balance on Lhe whole is against him or does not equal the cheques he draws, he has no right to expect those cheques to be cashed": Garnett v. M'Kewan (1872), L.R. 8 Exch. 10, 13 per Kelly C.B.) Mr. Stapleton gave evidence the effect of which was that in the normal course of events if a cheque is deposited to a customer's account, and credited to that account, on 12 September (as was the cheque for $61,871.32, which was drawn on the Wales House branch of the Bank of New South Wales) the credit entry is treated as provisional until the time for dishonour has elapsed, the cheque would be presented for payment on 13 September, and the paying bank would have 24 hours after presentment in which to dishonour it. There is no evidence of departure in this case from the normal, and therefore the funds represented by the cheque for $61,871.32 became available to the respondent bank on 14 September, and on that date Mr. Shaw, by having paid the cheque for $61,871.32 into his No. 2 account on 12 September, accordingly put the bank in a position in which it could exercise its right to combine the accounts. In my opinion, on that date, and if not on that date then on 13 September, a payment of $61,871.32 was made within s. 122(1). If I am wrong in that view, then I think the relevant payment was made on 23 September when the bank appropriated $57,600 from the No. 2 account to set off against Mr. Shaw's indebtedness. In doing so, in my opinion, it acted as his agent pursuant to the letter of 1 October 1962. I turn now to consider whether Mr. Shaw was at either of the relevant dates in September unable to pay his debts as they became due from his own money. In my opinion he was in that state on both dates. At all relevant times Mr. Shaw was a solicitor with an interest in each of two practices.' Through the companies, each of which seems to have had an attendant group of companies, he also had interests in various commercial, pastoral, construction and other enterprises. His affairs and those of the companies were inextricably interwoven and he was heavily.engaged in their financial arrangements as guarantor. The bank's standard form of guarantee states the extent of the guarantor's li8bility in a single sentence. That is not to say, however, that the bank can be accused- of being unduly laconic: the sentence runs for 57 lines of print and contains probably some 1,200 words. Patient analysis reveals embedded in it a provision that the guarantor of a customer guarantees the payment by the customer to the bank of all sums ' owing by the customer to the bank in respect of any guarantee given by the customer to the bank. Mr. Shaw had guaranteed the accounts of Mekol and Bidges with the bank and as a result was also guarantor of Parks and Talga. He had also given guarantees to F.N.C.B.-Waltons Finance Limited and a company called Cadea (No. 7) Pty. Limited. . On 23 July 1974 Mr. Shaw's accountant submitted to the Bank a statement (Exhibit F) of Mr. Shaw's estimated assets and liabilities as at 9 July 1974. It showed the following: ASSETS: Interest in legal practices 46,662 Cattle 250,000 Shares in Legal Holdings Ltd, 69,706 Other 71,000 $437,368 ares Me ene LIABILITIES: ANZ Banking Group Ltd. 53,081 Owing to B.G. & E.J. Shaw Farm Partnership . 23,574 Owing to associated companies: Tisami Pty Ltd Group 14,320 Mekol Pty Ltd Group 153,310 Legal Holdings Pty Ltd 20,798 188,428 Other 18,800 5 $283,883 NET ASSETS $153,485 The document also stated that no allowance had been made for contingent liabilities as at 8 July 1974 in respect of the following guarantees (a) To the ANZ Banking Group Ltd in respect of advances to $ - the Mekol Group 324,000 - the Talga Group : 409 ,000 - Bidges 148,000 (b) Guarantees in respect of advances to Talga Ltd by M.B.C. International Ltd and Cadea (No. 7) Pty Ltd 5,000,000 : {c) Guarantees in respect of advances by FNCB-WALTONS Finance Ltd to: (i) Nuninuna Pastoral Co. Pty Ltd 488,750 \ (ii) Cloontyclogher Pastoral Co. Pty Ltd 446,250 (ad) Other guarantees 151,900 It was known by 14 August 1974 that Mr. Shaw's cattle valued at $250,000 and cattle belonging to Mekol valued at $50,000 would together realise on sale only $110,000, and therefore that Mr. Shaw's cattle were worth only about 5/6ths of that amount - i.e. less than $92,000 - so that that asset had decreased in value by $158,000. And on 12 September Cadea (No. 7) Pty Ltd served on Mr. Shaw a document requiring him to pay $5,000,000 pursuant to his guarantee of advances to Talga. At that stage Mr. Shaw had available to him nothing like sufficient resources to meet his liabilities. In cross~examination he was asked whether ~9- before receiving that notice he was paying his debts. He replied, "No, Iwas not. By the last few days of August I was in a very aistressed condition, and I believed that there was no way out of my financial problem". It also appears from an affidavit sworn on 10 August 1977 by the trustee that creditors have proved for debts amounting to at least about $23,000 which had been incurred before 9 July 1974 and were not included in the liabilities shown in Exhibit F as existing at that date. Furthermore, early in July 1974 there was submitted to the bank a cash flow budget (Exhibit E), for the period from 24 June to 31 December 1974, in respect of Mr. Shaw and the family company Tisami Pty Ltd which he controlled and which held most of its assets on discretionary trusts. That document showed estimated receipts and outgoings for every month from June to December, both inclusive, and the total for the seven months. It may be summarised by the following table:-. $!'000 Jun Jul Aug Sept Oct Nov Dec Tota RECEIPTS Repayments by Talga 8 - 26 42 76 " Mekol 250 250 Sale of cattle 40 309 349 Other 18 3 21 8 58 309 - 3 26 292 696 - OUTGOINGS Repay FNCB-Walton 489 489 Other ° 8 34 62 60 Ll 30 17 222 Total 8 34 62 6O 11 30 506 Wil SURPLUS ~- 24 247 - - - - 7 DEFICIT - -) = 60 8 4 214 15 ee re ener en eeTonee -10- - As I have said, it was known by 14 August that by the end of August the sale of cattle would bring not $349,000 but only $110,000. It followed that the surplus accumulated at the end of August would be not $271,000 but only $32,000. According to the budget September and October would bring in only $3,000. But during those months outgoings would be respectively $60,000 and $11,000. On 12 September Cadea (No. 7) Pty Ltd appointed a receiver ,of Talga. Therefore, taking a longer view, it became improbable that the $76,000 due to be repaid by Talga in November and December would in fact be received. A letter from Mekol to the Bank dated 3 July 1974 had made it clear that Mekol was heavily dependent on the prosperity of Talga and was "in a position to fund its requirements to 30th November at least, by calling upon Talga for progressive repayments of amounts owing by that company". So it was also improbable that the $250,000 due to be repaid to Mr. Shaw and the Tisami Group in December by Iekol would be received. And in that month $489,000 would be payable to FNCB-Waltons Pinance Ltd, which had lent that amount on mortgage to a company called Nuninuna Pastoral Co. Pty Ltd. That loan had been repayable on 17 May 1974, and was jointly and severally guaranteed by Mr. Shaw, Tisami and Talga. The lender had granted an extension of time -for six months. At no time were the moneys available to Mr. Shaw sufficient to enable him to meet his liabilities. In my opinion, whether one considers the position as at 13 or 14 September 1974 or as at 23 September 1974, and whether one then takes a view of the future extending for one month or for three, Mr. Shaw was not able to pay his debts as they became due out of his own money. Finally, in my opinion, the bank must be deemed, in accordance with s. 122(4)(c), not to be a payee in good faith, and therefore is not entitled to the protection of s.122(2). -l1- On 8 July 1974, though the account of Mr. Shaw himself was overdrawn by only some $3,000 over his agreed limit of $50,000, the accounts of Talga, Parks, Mekol, Bidges and Mr. Shaw were in total overdrawn by $144,815 beyond their combined credit limits of $763,000. That state of affairs deepened the concern which it is apparent Mr. Stapleton had been feeling for more than a month and which he expressed thus in a diary note made on 28 June | when recording an interview he had with Mr. Shaw and others connected with the companies: "It was explained ... that we were very concerned about the present position of the Talga and Mekol group firstly, because of the present economic climate, secondly, because the balance sheet of Talga as at 30th April shows a very overweighted position and thirdly, we are unable to obtain from the Company any worthwhile information as to what is proposed regarding clearance of all the accounts or details of a cash flow for each company to demonstrate what funds are liable to flow un. It was pointed out that we have sought this information for more than 1 month but to date are no better informed". There was a further interview on 3 July when balance sheets and cash flow projections were submitted for each of the accounts in the group. Mr. Stapleton's diary note of this interview is lengthy. It noted as to Talga that its position had deteriorated in as much as liabilities had increased by $2,000,000, and that it was being proposed in effect that the bank should forego a security valued at about $380,000 - a proposal whict Mr. Stapleton described as "really ridiculous". As to Bidges and Mr. Shaw, Mr. Stapleton noted as follows:- "Balance sheets presented here do not show a strong position and the accompanying cash flow shows that the debts in these two accounts will be cleared from sale of cattle by Mr. Shaw, which sale is expected to realise $349,000 by the end of August. The accompanying letter suggests that the overdraft be frozen and separate accounts be opened pending clearance of overdraft from sale of live stock. The cash flow also shows that this group is expecting to receive $250,000 loans repayable by Talga Group in December". As to Mekol, Mr. Stapleton noted that unaudited balance sheets ~12- as at 30 April showed an effective capital deficiency of $57,000, which he said "could be very much higher depending on the realisable worth of investments and loans to shareholders. The company has accumulated losses of $1.4 million and is clearly in serious straits". Mr. Stapleton summarised by saying "Repayment of the borrowings of Mekol and the continued activity of Talga are both clearly contingent upon the bank foregoing funds from sale of our security which would clearly be unacceptable". There was a further discussion on 5 July. Mr. Shaw noted that the company representatives were very disappointed that the bank was unwilling to assist them further. It was agreed that all the accounts in the group should be ruled off and that the bank would meet certain outstanding cheques because of covering funds placed in the account. When those outstanding cheques were received the accounts of the Talga group, Bidges, Mr. Shaw and Mekol would be in debit to a total of $933,600, or $25,785 more than they were on 8 July. Mr. Stapleton noted also that the directors would now have discussion with their major creditors with a view to deferring repayment of almost every loan, but that on the information the bank then had he doubted very much that the Talga group could continue for very long unless they received substantial funds from other sources to enable completion of existing projects and payment of overhead expenses. He also noted that "The position regarding Shaw and Bidges would seem able to be covered from sale of cattle however our position in regard to Mekol is uncertain, but we will be relying heavily on Shaw as guarantor ..." By 1l July Mr, Stapleton's Giary shows his view that the bank would need to give serious consideration to the appointment of a receiver to control the flow of funds of Mekol \ -13- * & and to ensure that unsecured creditors were not benefited to the disadvantage of the bank. He had requested that in the meantime no payments be made to creditors. . On 22 July Mr. Shaw noted that it had been arranged that most of Talga's creditors would defer payments during July, and that Talga had cut back developments. Mr. Stapleton continued to watch the position. on 7 August he noted that Mr. Shaw and others had advised that the cattle sale was very disappointing. On 14 August he noted that the cattle sale would now realise only $110,000 "which is very substantially short of the expectation". On 13 September Mr. Stapleton noted: | "At 9 a.m. this morning we were informed ... that ; Cadea (No. 7) Pty Ltd had appointed a receiver under their securities to Talga Ltd. ... At this stage we have stopped the Talga account here and at Blacktown. We have also submitted brie= advices to State Administration indicating that we could take losses in Bidges and Mekol. It does seem that we will now need to rely on our securities to recover . the bank's funds ... ." Finally, on 19 September Mr. Stapleton noted that "On information now available Mr. Shaw would not be in a position to meet his liabilities and after fealising on our securities we would face a loss of say $15/20,000." It is in my opinion clear that, on whatever date in September the payment was made, the bank then had reason to suspect, if it did not know, that Mr. Shaw was unable to pay his debts as they became due. Mr. Stapleton plainly recorded on 19 September that he had then actually so concluded, but I think his assistant Mr. Pritchard, who also was conversant with Mr. Shaw's affairs, was nearer the mark in saying that it was apparent at the beginning of July 1974 that Mr. Shaw "could not meet his commitments as they became due". I think reason for the suspicion to which s. 122(4) (c) (i) refers certainly existed on 14 August. And there o -14- can be no doubt that the bank knew that the effect of the . payment in question would be to give it a preference over ' other creditors. Accordingly the bank is not protected by s. 122(2). , It is necessary only to add that on 22 November 1974 the bank wrote to Mr. Andrew saying, as to the balance of the No. 2 account (which then stood at $1,069.08), that it had exercised its right of set-off and had applied those funds against liabilities owing to it by Mr. Shaw. I declare (1) that the payment to the debtor's No. 2 account of $61,871.32 was by reason of s. 122 of the Bankruptcy Act 1966 void to the extent of $58,864.98 as against the trustee of the deed of assignment executed under Part X of the Act on 23 October 1974; (2) that the amount of $1,069.08 standing to the credit of the debtor's No, 2 account on and after 8 November 1974 was property of the debtor divisible : amongst his creditors; and I order that the respondent bank pay to the trustee of that deed a sum equal to the total, namely $59,934.06, of the two said amounts of $58,864.98 and $1,069.08, and his costs of and incidental to the application. The trustee has abandoned his application for an order for payrent of interest. # 83)99 Co m wion werkt oF Nutreal iw IN He Feder Court - No Naw 2 OF of ustrRalia : 914 + Geneeae Nwiseom Ra teupaly RE . Byun GEORGE g Haw DisiRuT of tHe Mie oF Exp. Welliae Egdwrea HWaRew N ow OaAM r a TT. "TRUM EE ust « UN 2 Bake G Roub {Th —- Resp. 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AUSTRALIAN CAPITAL TERRITORY COURT OF AUSTRALIA ) ) BANKRUPTCY PISERICT OF WIE STATE ) No. 38 of 1974/x ) . ) RE: BRYAN GEORGE SHAW Debtor EX PARTE: WILLIAM EDWAPD ANDLUG Trustee JUDGE MAKING Py AUSTRALIA & NEW ZED LAND ; ' BANKING GROUP LIWTTHD Respondent ORDER: RILEY J. ~ DATE OF ORDER: WHERE MADE: DECLARE: ORDER: 1. 14 November 1977 Sydney DECLARATIONS AND ORDERS That the payment to the debtor's No. 2 account of $61,871.32 was by reason of s. 122 of the Bankruptcy Act 1966 void to the extent of $58,864.98 as against the trustee of the deed of assignment executed under Part X of the Act on 23 October 1974. that the amount of $1,062.08 standing to the credit of the debtor's No. 2 account on and after 8 November 1974 was property of the d@cbtor @ivisible amongst his creditors. That the respondent bank pay to the trusicc a sum equal to the total, namely $59,934.06, of the two said amounts of $58,864.98 and $1,069.08, and his costs of and incidental to the application. a a at BANKRUPTCY ~ VOIDABLE PREFERENCES -— BANK - COMBINATTON OF ACCOUNTS ~- WHETHER DEBTOR ABLE TO PaY OUT OF OW MONEY - WHETHER BANK PAYEE IN GOOD FAITH - BANKRUPTCY ACT 1966 SEC, 122. RGACONS FOR TUDGUENT Bryan George Shaw executed a deed of assignment uncer Part KX of the Bankruptcy Act 1966 on 23 October 1974. The date when the relevant resolution under s. 204(1)(b) was passed is not shown by evidence formally adduced before me on the hearing of this application, but it is shown by the cértificate filed pursuant to s. 204 (7) to have also been 23 October. Mr. W. E. Ander is the trustee of the deed. . His appiication to the Court for certain declarations is primarily based on s. 122 of the Act, which by s. 231(2) applies, in the events which have happened, in relation to the deed of assignment as if on 23 October 1974 a sequestration order had been made against Mr. Shaw on a creditor's petition presented that day, and which avoids as against the trustee certain transactions as having the effect of giving a creditor a prefecence, priority or advantage over other creditors. The ereditor alleged to have been preferred is the Australia and New Zealand Panking Group Limited, the banker for Mr. Shaw and for certain companies controlled by him. The companies concerned were | called Talga Lamited, Australian Memorial Parks Pty. Limited, Mekol Pty. Lamited and Badges Pty. Limited, I shall call them respectively Talga, Parks, Mekol and Bidges. Mx. Shaw and the companies banked with the respondent's _ branch at Martin Place and George Street, Sydney where on behalf ) of the bank the assistant manager, Mr. Stapleton, had the effective conduct of their affairs. On 1 October 1962 Mr. Shaw had given the bank a letter of set-off, which was still operative at all relevant timer. So far as it is material, it reads as follows:- "T hereby acknowledge the right of the any time without notice to me to apply the any part of any balance that nov or at any time may stand to my crcdit in any account any balance that may be to my debit in any account, and to close all or any of such a and whether any book entraes shall or shal been made to treat such credit balance as been so applied and to @eal with my drawin accordingly." On 8 July 1974 Mr. Shaw's account ~(which I call his No. 1 account) was overdrawn by $53,080.64. and the accounts of the companies as a whole were in a unsatisfactory state having regard to the arrangements bank under which they vere being operated. Mr. Staple concluded that the accounts should be controlled. Acc procedure was adopted which Mr. Stapleton described as in his affidavit of 29 July 1977: "It is a practice of the respondent in . of controlling its customers' accounts to the customer's actawity by closing a then account and opening a new account often st No. 2 account which must then remain in cr « In such circumstances, 1t js normal practi seek regular reductions to the debtor acco other arrangements for clearance of the bo So lir. Shaw's No. 1 account was closed and account was opened. Relevant movements on those accou shown by the relevant bank statements, can be summaris , : No. 1 Account B Bais at whole or futnuce to payment o other ccounts, L not have having gs thereon shall That account n with the ton therefore ordingly a follows the course control current yled the edit. ce to unt or rrowing". a No. 2 nts, as ed as follows alance 8 July: 21 Aug: Overdraft service fee 23 Sep: 27 Sep: Deposit 20 Nov: Deposit 22 Nov: No. 2 Account 8 July: 12 Sep: Deposit 23 Sep: Debit 24 Sep: . 25 Oct: 8 Nov: 22 Nov: 40.00 Dr 1,260.00 Cr 4.98 Cr 61,871.32 Cr 57,600.00 Dr 53,080.64 Dr 53,120.64 53,120.64 51,860.64 51,855.66 51,855.66 0.00 61,784.32 3,981.97 1,077.97 1,068.72 1,069.05 1,069.09 Cr Cr cr er ty L Cr Cr ee ee ee eee awe ee ~3~ The trustee's claims may be convenzently stated os £ollows. When the deposit of a cheque for $61,871.32; representi. the procecds of the sale of cattle, was made to the Mo. 2 account on 12 September, or at any rate on 13 September when the clirque was cleared, the bank was entitled by reason of the letter of set-off of 1 October 1962 and the general law (see 3 Hals., 4th edn, para. 87) to apply that amount or a sufficient part of 1% in discharge of Mr. Shaw's then existing liability to the bank. Yherefore, it is said, the payment of the $61,871.32 was a preferential payment within the reach of s. 122 to the extent of that indebtedness, which is said to be $58,865.98 but was in fact $58,864.98. Alternatively it is said that, in the exercise of its right to combine the No. 1 and No. 2 accounts, or to set-off the debit in the No. 1 account against the credit in the No. 2 account, and thus be liable to the customer only for the balance, 'the bank did in fact on 23 September debit $57,600 to the No. 2 account ane transfer it to a suspense account to be used as a set-off against Mr. Shaw's liabilities to the bank (see annexures "D" and "E" to the trustee's affidavit of 29 March 1977), and thus there was a preferential payment of $57,600. Next, the trustee says that on 21 August the dehit balance ain the No. 1 account was $53,120.64 and on 22 November it was $51,855.66. The amount of the reduction (said to be $1,265.98 but in fact being $1,264.98), represented by the two amounts shown above as credited to the No. 1 account, he therefore claims on the pcinciple of Rees v. Pauk of N.S.W. (1964), Lil C.L.R 210. YThis claim is cumulative on the claim for $57,600. Last, there is the final balance of $1,069.08 whach stood to the credit of the No. 2 Account. The bank docs not contes t the trustee's claim that that amount was eilher a preferential payment within s. 122 or property of the debtor divasible amongst his creditors. Tn this case, the matters for decision under s. 122(1} are: (1) whether there was a payment made a (2) by a person who was unable to pay his debts as they became due from his own money (3) in favour of a creditor (4) having the effect of giving that creditor a preference, priority or advantage over other creditors (5) being a payment made within six months before 23 October 1974. If each of those matters is answered in the affirmative, the ° further question will arise whether the bank is, as it claims be, nevertheless entitled to the protection of gs. 122(2). It would be so entitled if it could prove that it was a payee in good faith and for valuable consideration and in the ordinary course of business: s. 122(2), (3); but the trustee contends that the bank cannot get that protection because the payment, whenever it was made, was made under such circumstances as to lead to the inference tha' the bank knew or had reason to suspect that Mr. Shaw was unable to pay his debts as they became due from his own money and that the effect of the payment would be to give the bank a preference, priority on advantage over other creditors. Tt was not disputed that a payment was made either of $61,871.32 or of $57,600, or that it was made within the relevant period of six months, or that it was made in favour of a creditor and had the offect of giving that ercditor a preference, priority or advantage over other creditors. The remaining questions arising under s. 122(1) are when the payment was made, and whether at that time the debterwas unable to pay his debts as they became due. Independently of the letter of 1 Oclober 1962 the bank had a right, there being no agreement with its custorer to the contrary, which entitled it as soon as Mr. shaw opened a second current account to combine the two accounts whenever it pleased and set off the debit in one account against the credit in the other. (See HWalesoven Presswork & Assemblies Ltd. v. x Westminster Bank Limited, (1971) 1 Q.B.1, 34 per Lord Denning N.R., whose statement of principle remains unaffected by the reversal of the decision by the House of Lords, (1972) A.C. 785). The Jetta, of 1 October 1962 confirmed the existence of that right. It also established that the right could be exercised without notice toa Mr. Shaw and that, whether or not any book entries had been made, the bank could treat a credit balance as having been applied to payment of a debit balance and deal with any drawing accordingly. It was not suggested that the bank's right to combine accounts did not apply to the No. 1 and No. 2 accounts because when the latter was opened the former was frozen: see In re BE. J. Morel (1934) Limited, (1962) Ch. 21, 23, 30-32; and it appears from a letter from Mr. Shaw of 24 'September 1974 and the bank's reply of 1 October 1974 that the arrangement was that the right should apply ko those two accounts. Counsel for the trustee submitted however that set-off, ana therefore payment for the purposes of s. 122(1), did not occur ; until on 23 September the Bank actually debited the No. 2 account with $57,600 and transferred that amount to a suspense account. (That later date simplified his submission that Mr. Shaw was insolvent when the payment was made.) He proposed this test: if on say 20 September, when there was a eredit balance of $61,581.97 in the No. 2 account, Mr. Shaw had drawn a cheque for $60,000 on that account, would the bank have been bound to honour it? Counsel] suggested that it vould. I do not think so. At that tame there -6- was a debit balance of some $53,000 12n the No. 1 account, end "The customer must be taken to know the state of cach accoust, ari 2z£ the balance on the whole 1s against him or does not equal the cheques he draws, he has no right to expect those cheques to be cashed": Garnett v. M'Kewan (1872), L.R. 8 Exch. 10, 13 per Kelly C.B.) Mr. Stapleton gave evidence the effect of which wes that in the normal- course of events if a cheque is deposited to a customer's account, and credited to that account, on 12 Septenibcz (as was the cheque for $61,871.32, which was drawn on the Wales House branch of the Bank of Nev South Wales) the credit entry is treated as provisional until] the time for dishonour has elepssd, the cheque would be presented for payment on 13 September, and th paying bank would have 24 hours after presentment in which to e dishonour it. There is no evidence of departure in this case fron the normal, and therefore the funds represented by the checue for $61,871.32 became available to the respondent bank on 14 Septcmbzr, and on that' date Mr. Shaw, by having paid the cheque for $61,871. into his No. 2 account on 12 September, accordingly put the bank in a position in which it could exercise its right to combine the accounts. In jay opinion, on that date, and if not on that date then on 13 September; a payment of $61,871.32 was made within s. 122(1). I£ I am vrong in that view, then I think the relevant payment was made on 23 September when the bank appropriated $57,600 from the No. 2 account to set off against Mr. Shaw's indebtedness. In doing so, in my opinion, it acted as his agent pursuant to the letter of 1 Octoher 1962. . I turn now to consider whether Mr. Shaw was at either of the relevant dates in September unalble to pay his debts as they became duc from his own money. In my opinion he was in that ve N e state on both dates. AL all relevant' times JiL. Shav vas a solicitor wath an interest in each of two practices. Through the companies, each of which seems to have had an attendant group of companies, he also had interests in various commercial, pastoral, construction and other enterprises. His affairs and those of the companies "4 were inextricably interwoven and he was heavily engaged in their financial arrangements as guarantor. The bank's standard form of guarantee states the extent of the guarantor's lisbility in a singl: sentence. That is not to say, however, that the bank can be accusec of being unduly laconic: the sentence runs for 57 lines of print and contains probably some 1,200 words. Patient analysis reveals embedded in it a provision that the guarantor of a customer guarantees the payment by the customer to the bank of all sums owing by the customer to the bank in respect of any guarantee given by the customer to the bank, lr. Shaw had guaranteed the accounts of Nekol and Bidges with the bank and as a result was also guarantor of Parks and Taiga. He had also given guarantees to F.N.C.B.-Waltons Finance Limited and a company called Cadea (No. 7) Pty. Limited. On 23 July 1974 Mr. Shaw's accountant submitted to the Bank a statement (Exhibit F) of Mr. Shaw's estimated assets and liabilities as at 9 July 1974. It showed the following: ASSEPS: Interest in legal practices 46,662 Cattle 250,000 Shares in Legal Holdings Ltd. 69,706 Other 71,000 $437,368 LIABILIVINS : ANZ Banhiuy Group Ltd. 53,081 OvwLug to B.G. & EB.d.é Shaw Farm Partnership 23,574 Owing to associated companies: Tisami Pty Ltd Group 14,320 Mekol Pty Ltd Group 153,310 Legal Holdings Pty Ltd 20,798 L&6 ,428 Other 18,800 * $283,883 NET ASSETS $153,485 The document also stated that no allowance had been made for contingent liabilities as at 8 July 1974 in respect of « the following guarantees (a) To the ANZ Banking Group Ltd in respect of advances to g - the Mekol Group 324,000 - the Taliga Group 403 ,000 - Bidges 148,000 (b) Guarantees in respect of advances : to Talga Ltd by M.B.C. International Ltd and Cadea (Mo. 7) Pty Ltd 5,006,000 '(c) Guarantees in respect of advances by FNCB-WALTONS Finance Ltd to: (i.) Wuninuna Pastoral Co. Pty Lrd 482,750 (ii) Cloontyclogher Pastoral Co. Pty Ltd 446,250 (d) Other guarantees 151,900 It was known by 14 August 1974 that Mr. Shaw's cattle valued at $250,000 and cattle belonging to Mekol valued at $50,000 vould together realise on sale only $110,000, and therefore that Mr. Shaw's cattle were worth only about 5/6ths of that amount - i.e. less than $92,000 - so that that asset had decreased in value by $158,000. And on 12 September Cadea (No. 7) Pty Ltd sexved on Mr. Shaw a document requiring him to pay $5,000,0¢ pursuant to his guarantee of advances to Talga. At that stage Mr. Shaw had available to him nothing like sufficient resources to meet his liabilities. In cross-examination he was asked wheti or -9~ before receiving thac novice he was paying his debts. We relics, "No, Twas not. By the last few days of August 1 vas in a vay distressed condition, and I believe@a that there was no tay out of my financial problem". It also appears from an affidavit sworn on 1O August 1977 by the trustee that creditors have proved for debts amounting to at least about $23,000 which had been incurred before 9 July 1974 and were not included in the liabilities shown in Exhibit F as existing at that date. ; Furthermore, early in July 1974 there was submitted to the bank'a cash flow budget (Exhibit LD), for the period from 24 June to 31 December 3974, in respect of It. Shaw and the fart: company Tisami Pty Ltd which he controlled and which held most of its assets on discretionary trusts. That document showed estinated receipts and outgoings for every month from June to December, both inclusive, and the total for the seven months. It may be summarised by the following tahle:- . $'000 Jun dul Aug Sept Oct Nov Dec Tar RECEIPTS . Repayments by Talga 8 26 42 " Kekol 250 2t Sale of cattle . 40 309 3 Other ' 18 3 z OUTGOINGS Repay FNCB-Waiton 489 "t Other . 8 3A 62. 60 11 30 17 2 Total 8 34 62 GO 1] 30 506 7 SURPLUS - 24 247 -~— = = - DEF LCIT - ~ ~ 60 8 4 214 ~1o- - As T have said, it was knoim by 14 Angust that by che end of August the sale of cattle would bxing not $349,000 bur only $110,000. It followed that the surplus accumulated at tho end of August would be not $271,000 but only $32,000. According to the budget September and October would bring in only $3,000. But duxing those months outgoings would be respectively $60,000 and $11,000. On 12 September Cadea (No. 7) pty Ltd appointed a receiver of Talga. Therefore, taking a longer view, it became improbable that the $76,000 due to be repaid by Talga in November and December would in fact be received, A letter from Mekol to the Bank dated 3 July 1974 had made at clear that Mekol was heavily dependent on the prosperity of Talga and was "in a position to func its requirements to 30th November at least, by calling upon Talga for progressive repayments of amounts owing by that company". So it was also improbable that the $250,000 due to be repaid to lir. Shay and the Tisami Group in December by Hekol would ba received. '.And in that month $489,000 would be payable to FNCB-Waltons Finance Ltd, which had lent that amount on mortgage to a company called Nuninuna Pastoral Co. Pty Ltd. That loan had been repayable on 17 May 1974, and was jointly and severally guaranteed by Mr. Shaw, Tisami and Talga. The icnder had granted an extension of tame for six months. At no time were the moneys available to Mr. Shaw sufficient to enable him to meet his liabilities. In my opinion, whether one considers the position as at 13 or 14 September 1974 or as at 23 September 1974, and whether one then takes a view of the futuce extending for one month or for three, Mr. Shaw was not able to pay his debts as they became due out of his own money. Finally, in my opinion, the bank must bé @eemed, in accordance with s. 122(4)(c), not to be a payee in good faith, and therefore is not entitled to the protection of 5.122(2). -~Li- - ' On 8 July 1974, though the account of Mr. Shay hess was overdrarn by only some, $3,000 over his agreed Limit of ' $50,000, the accounts of Talga, Parks, Mekol, Bidges and tir. Shay were in total overdrawn by $144,815 beyond their combined credit limits of $763,000. That state of affairs deepencd the concern which it is apparent Mr. Stapleton had been feeling for more than a month and which he expressed thus in a diary hote made on 28 June ' when recording an interview he had with Mr. Shaw and others connected with the companies: "It was explained ... that we were very concerned about the present position of the Taiga and Mekol group firstly, because of the present economic Climate, secondly, because the balance sheet of Pricr as at 30th April shows a vecy overweighted posiiicn ' and thirdly, we are unable to obtain from the Compan: ' any worthwhile information as to what is proposcad | regarding clearance of all the accounts or details of a cash flow for each company to demonstrate what funds are liable to flow in. It was pointed out that we have sought this information for more than 1 month hut to date are no better informed". There was a further interview on 3 July when balance « sheets and'cash flow projections were submitted for each of the accounts in the group. Mr. Stapleton's diary note of this interview is lengthy. It noted as to Talga that its position had deteriorated in as much as liabilities had increased by $2,000,000, and that it was being proposed in effect that the bar should forego a security valued at about $380,000 - a proposal whic ~ Mr. Stapleton described as "really ridiculous". As to Bidges and Mr. Shaw, lir. Stapleton noted as follows:- "Balance sheets presented here do not show a strong position and the accompanying cash flow shows that the debts in these tvo accounts will be clcared from sale of cattle by Mr. Shaw, which sale is expected to realise $349,000 by the end of August. The ' accompanying lettex suggests that the overdraft t be frozen and separate accounts be opened pending clearance of overdraft from sale of live stocl. The cash flow also shows that this group is expecting to receive $250,000 loans repayable by Talga Group in December". As to Mekol, Mr. Stapleton noted that unaudited balance shv. :ts , ~12- as at 30 April shoved an effective capital deficiency of $57,000, which he said "could be vew, much higher depending on the xrealisable worth of investmenls and loans to shareholders. fhe company has accumulated losses of $1.4 million and as clearly in serious straits". Mr. Stapleton summarised by saying "Repayment of the borrowings of Mekol and the continued activity of Talga are both clearly contingent upon the bank foregoing funds from sale of our security which would clearly be unacceptable". There was a further discussion on 5 July. Mr. Shay noted that the company representatives were very disappointed that the bank was unwilling to assist them further. Tt wes acgrecd that all the accounts in the group should be ruled off and that the bank would meet certain outstanding cheques because of covering funds placed in the account. When those outstanding cheques vere received the accounts of the Talga group, Bidges, Mr, Shaw and Mekol would be in debit to a total of $933,600, or $25,785 mone than they were on 8 July. Mr. Stapleton noted also that the dixectors would now have discussion with their major eredittors with a view to deferring repayment of almost every loan, but that on the information the bank then had he doubted very much that the Talga group coulda continue for very long unless they received substantial funds from other sources to enable completion of existing projects and payment of overhead expenses. He also noted that "The position regarding Shaw and Bidges would seem able to be covered from sale of cattle however our position in regard to Mekol is uncertain, but we will be relying heavily on Shav as guarantor ..." : By 11 July Mr. Stapleton's diary shovs his view that the bank would necd to give serious consideration to the appointment of a receiver to control the flow of funds of Mekol se -j13- and to ensure that unsecured credators were not benefited to the disadvantage of the bank. (Ie had requested that in the meanzaime no payments be made to crediters. , On 22 July Mr. Shaw noted that it had been arranged that most of Talga's creditors would defer payments during July, and that Talga had cut back developments. Mr. Stapleton continued to watch the position. On 7 Augusce he noted that Mr. Shaw and others had advised that the cattle sale was very disappointing. On 14 August he noted that the cattle sale would now realise only $110,000 "which is very substantially short of the expectation". On 13 September lir. Stapleton noted: "At 9 a.m. this morning we were informed ... that Cadea (No. 7) Pty Ltd had appointed a receiver under their securities to Talga Ltd. ... At this stage we have stopped the Talga account here and at Blacktown. We have also submitted brief advices to State Administration indacating that we could take losses in Bidges and Mekol. It does seem that we will now need to cely on our securities co recover the bank's funds ... ." Finally, on 19 September Mr. Stapleton noted that "On information now available Mr. Shaw would not be ina position to meet his liabilities and after realising on our securities wc would face a loss of say $15/20,000." It is inemy opinion clear that, on whatever date in September the payment was made, the bank then had reason to suspect, if it did not know, that Mr. Shaw was unable to pay his debts as they became due. Mr. Stapleton plainly recorded on 19 September that he had then actually so concluded, but I think his assistant Mr. Pritchard, who also was conversant with Mr. Shaw' affairs, was nearer the mark in saying that it was apparent at the beginning of July 1974 that lir. Shaw "could not meet his comartment as they became due". I think reason for the suspicion to which S. 122(4) (c) (i) refers certainly existed on 14 August. And there can be no doubt that the bank knew that the effect of the payment in question would be to give it a preference over other creditors. Accordingly the bank is not protected lay s. 122(2). It is necessary only to add that on 22 November 1974 the bank wrote to Mr. Andrew saying, as to, the balance of the Wo. 2 account (which then stood at $1,069.08), that it had exercised its right of set-off and had applied those funds against liabilities owing to it by Mr. Shaw. I declare (1) that the payment to the debtor's Me. 2 account of $61,871.32 was by reason of s. 122 of the Bantiuurt Act 1966 void to the extent of $58,864.98 as against the trustee of the deed of assignment executed under Part X of the Act on 23 October 1974; (2) that the amount of $1,069.08 standing to the credit of the @ebtor's No. 2 account cn and after 8 November 1°74 was property of the debtor divisible amongst his creditors; and I order that the respondent bank pay to the trustee of that deed s sun equal to the total, namely $59,934.06, of the two said amounts of $58,864.98 and $1,069.08, and his costs of and incidental to the application. The txustee has 'abandoned his application for an order for payment of interest. (> mM non wait H oF Hust peak re ! , 4 Ios ; IW THe Kedewwh Couer NO NNw 38 oF jajyy of HUssRaALiA ; IE ~ eye & done GeEMeeal Niiseom Rea alien.pel4 RE Brytw Ceowce SI DistkeT of alle Mine of AP - [W{lune Edwina Haaren —T ku yA ke NG wo aad nh. aT. Hust Ni DZ 13. oli 1 wt G Ro wb Lah - Resp Aememee em ma ee hk ee ene he meme ORXee at -e ) a i DudGE _Nilinc_oxdee IB. 8B KRhey | Ht.S 949 {Dmes of Heres, 5-Q-19 : 7-8 99 | ; ; | {Counsel Coie A bbhicwer D. Béennd(y . Flereilerd I Nya Nut — SybtcT ORS mis Lobb. ently « Hsewe| ; So MARGARET ST Syd 'i 4 OWING' 7 Net Ructine = Sodiccror''s No RON Sone . or Bo wWhyeiu Place yd net SR eb "IN Cin LMPERAL COURT OF AUSTRALTA ) ee ) BARKLUPYTCY DISTRICT OF WHE STATE ) No. 38 of 1974/x ) « ) OF NE Sout TATES AND THE - AUSTRAL LAT CAPITAL TERRITORY RE: BRYAN GEORGE SIIAW Nebtor EX PARTE: VILLTAM EDWARD ANDRUG Trustee AUSTRALIA & NEW ZRALAND . 'BANKING GROUP LINiTED Responden JUDGE MAKING ORDER: RILEY J. .- , DATE OF ORDER: 14 November 1977 WHERE MADE: Sydney DECLARATIONS AND ORDERS DECLARE: 1. That the payment to the debtor's No. 2 account of $61,871.32 was by reason of s. 122 of the Bankruptcy Act 1966 void to the extent of eat $58,864.98 as against the trustee of the deed of assignment executed undex Part X of the Act on 23 October 15974. 2, that the amount of $1,069.08 standing to the credit of the debtor's No. 2 account on and after 8 November 1974 was property of the debto. @ivisible amongst his creditors. ORDER: 1. That the respondent bank pay to the trustce a sum equal to the total, namely $59,934.06, of the two said amounts of $58,864.98 and $1,069.08, and his costs of and incidental to the application. a an* BANKRUPTCY - VOZDABLE PREFERENCES - BANK — COMBINATION OF ACCOUNTS - WHETHER DEBTOR ABLE TO PAY OUT OF ON MONEY ~ WHETHER 1966 SEC. 122. BANK PAYEE IN GOOD FAITH - BANKRUPTCY ACT . Bem me ee ec en oe et ee i REASONS FOR aupeENT Bryan George Shaw executed a deed of assignmene under Part X of the Bankruptcy Act 1966 on 23 October 1974. 'The date when the relevant resolution under s. 204{1) (b) was passed is not shown by evidence formally adduced before me on the hearing of this application, but it is shown by the ceéxtificate filed pursuant to s. 204(7) to have also been 23 October. Mr. W. E. An&® is the trustee of the deed. His application to the Court for certain declarations is primarily based on s. 122 of the Act, which by s. 231(2) applies, in the events which have happened, in relation to the deed of assignment as if on 23 October 1974 a sequestration order . had been made against Mr. Shay on a creditor's petition presented that day, and which avoids as against the trustee certain transactions as having the effect of giving a creditor a preference, priority or advantage over other creditors. The ereditor alleged to have been. preferred is the Australia and New Zealand Banking Group Limited, the banker for Mr. Shaw and for certain companies controlled by hin. The companies concerned vere" called Talga Limited, Australian Memorial Parks Pty. Limited, Mekol Pty. Limited and Bidges Pty. Limited. I shall call them xespectively Talga, Parks, Mekol and Bidges. Mr. Shaw and the companies banked with the respondent' tbranch at Martin Place and George Street, Sydney where on behalf ®£ the bank the assistant manager, Mr. Stapleton, had the effective conduct of their affairs. - On 1 October 1962 Mr. Shaw had given the bank a Letter Of set-otf, which was still operative at all relevant times So £ar as it is material, it reads as follows:- eee seee nee eee wee ee ") hereby acknowledge the right of the Bank at any time withouc notice to me to apply the any part of any balance that nov or at any time may stand to my credit in any account to payment any balance that may be to my debit in any shole future other or account, and to close all or any of such accouncs, and whether any book entries shall or shall not have becn made to treat such credit balance as having been so applied and to deal with my drawings thereon accordingly." On 8 July 1974 Mr. Shaw's account -(which I call his No. 1 account) was overdrawn by $53,080.64. shall That ac and the accounts of the companies as a whole were in an count unsatisfactory state having regard to the arrangements with the bank under which they were being operated. Mr. Stapleton therefor. ¥ g b ; concluded that the accounts should be controlied. Accordingly a procedure was adopted which Mr. Stapleton described as follows an his affidavit of 29 July 1877: "Tt is a practice of the respondent in the course . of controlling its customers! accounts to the customer's activity by closiug a then « account and opening a new account often st * No. 2 account which must then remain in cr -. In such circumstances, it is normal practi seek regular reductions to the debtor acco control current yicd th edit. ce to unt or e other arrangements for clearance of the borrowing". So Mr. Shaw's No. 1 account was closed and account was opened. Relevant movements on those accou shown by the relevant bank statements, can be summarised as follow No. 1 Account . B 8 July: 53, 21 Bug: Overdraft service fee 40.00 Dr 53, 23 Sep: 53, 27 Sep: Deposit 1,260.00 Cr 51, 20 Nov: Deposit 4.98 Cr 51, 22 Nov: ~ $2, Wo. 2 Account 8 July: 12 Sep: 23 Sep: 24 Sep: 25 Oct: 8 Nov: AN ost Deposit . 61,871.32 Cr 61, Debit. . 57,600.00 Dr 3, 1, . 1, : ; 1, a No. nts, as alance 080. 64 120.64 120.64 860.64 855.66 855.66 0.00 784.32 981.97 077.97 068.7? 069.038 -«6 ee ee ee wee Ne re eaten Meter = ~3- . tye The trustee's claims way be conveniently stated «as follows. When the deposit of a cheque for $61,871.32; represent the proceeds of the sale of cattle, was made to the Mo. 2 account on 12 September, or at any rate on 13 September when the cheque was cleared, the bank was entitled by reason of the letter of set~off£ of 1 October 1962 and the general law (See 3 Halis., 4th edn, para. 87) to apply that amount or a sufficient part of it in discharge of Mr. Shaw's then existing liability to the bank. Therefore, it is said, the payment of the $61,871.32 was a - preferential payment within the reach of s. 122 to the extent of that indebtedness, which is said to be $58,865.98 but was in fact $58,864.98. Alternatively it is said that, in the exercise of its right to combine the No. 1 and No. 2 accounts, or to set-off the debit in the No. 1] account against the credit in the No. 2 account, and thus be liable to the customer only for the balance, . 'the bank did in fact on 23 September debit $57,600 to the No. 2 account an@ transfer it to a suspense account to be used as a set-off against Mr. Shaw's liabilities to the bank (see annexurcs "D" and "E" to the trustee's affidavit of 29 March 1977), and thus. there was a preferential payment of $57,600. —Next, the trustee says that on 21 August the debit balance in the No. 1 account was $53,120.64 and on 22 November it was $51,855.66. The amount of the reduction (said to be $1,265.98 but in fact being $1,264.98), xepresented by the two amounts shown above as credited to the No. 1 account, he therefore claims on the principle of Rees'v. Bank of N.S.W. (1964), 111 C.Le 210. 'This claim is cumulative on. the claim for $57,600. Last, there is the final balance of $1,069.08 which stood to the credit of the No. 2 Account. The bank does not conte aa -4— _ the trustee's claim that that umount was csther a pretcrential payment within s. 122 or property of the débtor divisible anongst his creditors. In this case, the matters for decision under s. 122(1) are: (1) whether there was a payment made (2) by a-person who was unable to pay his debts as they became due from his own money (3) in favour of a creditor (4) having the effect of giving that creditor a preference, priority or advantage over other creditors (5) being a payment made within six months before 23 October 1974. . If each of those matters is answered in the affimmative, the Eurther guestion will arise whether the bank is, as it claims to be, nevertheless entitled to the protection of s. 122(2). It would be so entitled if it could prove that it was a payee in -good faith and for valuable consideration and in the ordinary course of business: s. 122(2), (3); but the trustee contends that the bank cannot get that protection because the payment, whenever it was made, was made under such circumstances as to lead,' to the inference that the bank knew or had reason to suspect that Mr. Shaw was unable to pay his debts as they became due from his own money and that the effect of the payment would be to give the bank a preference, priority om advantage over other creditors. It was not disputed that a payment was made eithec of $61,871.32 or of $57,600, or that it was made within the relevant period of six months , ox that it was made in favour of a creditor and had the offect of giving that creditor a preference, priority or advantage over other creditors. 'The remaining questions arisin: under s. 122(1) are when the payment was made, and whether at that ava . Sem A AIA ' - a5 independently of the letter of 1 October 1962 the bank had a right, there being no agreenent wath its custorer to the contrary, which entitled it as soon as Mr. shaw opened a second current account to combine the two accounts whenever it pleased and set off the debit in one account against the credit in the other. (See Halesoven Presswork & Assemblics Ltd. v. 7s Westminster Bank Limited, (1971) 1 Q.B.1, 34 per Lord Denning M.R.,: whose statement of principle remains unaffected by the reversal of the decision by the House of Lords, (1972) A.c. 785). The lett of 1 October 1962 confirmed the existence of that right. It also established that the right could be exercised without notice to Mr. Shaw and that, whether or not any book entries had been made, the bank could treat a credit balance as having been applied to payment of a debit balance and deal with any drawing accordingly. It was not suggested that the bank's right to combine accounts did not apply to the No. 1 and No. 2 accounts because -—when-the--latter was opened the former was frozen: see In re EB. J. Morel (1934) Limited, (1962) Ch. 21, 23, 30-32; and it appears from a letter from Mr. Shaw of 24 'September 1974 and the bank's reply of 1 October 1974 that the arrangement was that the xight should apply 'ko those two accounts. Counsel for the trustee submitted however that set-off, and therefore payment for the purposes of s. 122(1), did not occur until on 23 September the Bank actually debited the No. 2 account with $57,600 and transferred that amount to a suspense account. "(That later date simplified his submission that Mr. Shaw was insolvent when the payment was made. ) Ue proposed this test: if on say 20 September, when there was a credit balance of $61,561.97 am tthe Wo. 2 account, Mr. Shaw had drawn a cheque for $60,000 on that account, would the bank have been bound to honovr it? Counsel At an -G~ was a debit balance of some $53,000 in the Ko. 1 account, and "The customer aust be taken to know the state of each accourt, a if the balance on the whole is against him or Govs not equal the cheques he draws, he has no right to expect those cheques to be cashed": Garnett v. M'Kewan (1872), L.R. 8 Exch. 10, 13 per Kelly C.B.) Mr. Stapleton gave evidence the effect of which was that in the normal- course of events if a cheque is deposited to a customer's account, and credited to that account, on 12 Septerb¢ (as was the cheque for $61,871.32, which was drawn on the Wales ' House branch of the Bank of Wevw South Wales) the credit entry is treated as provisional until the time for dishonour has clapsea, the cheque would be presented for payment on 13 September, and the paying bank would have 24 hours after presentment in which to Gishonour it. There is no evidence of departure in this case Exon the normal, and therefore the funds represented by the cheague for. $61,871.32 became available to the respondent bank on 14 Septorber and on that date Mr. Shaw, by having paid the cheque for $61,871 .3 into his No. 2 account on 12 September, accordingly put the bank in a position in which it could exercise its right to combine the 7 accounts. In my opinion, on that date, and if not on that date then on 13 September; a payment of $61,871.32 was made within S. 122(1). ; ° If XT am wrong in that view, then I think the relevant payment was made on 23 September when the bank appropriated $57,600 from the No. 2 account to set off against Mr. Shaw's indebtedness. In doing so, in my opinion, it acted as his agent pursuant to the letter of 1 October, 1962. ° I turn now to consider whether Mr. Shaw was at either of the relevant dates in September unable to pay his debts as they became due from his own money. In my opinion he was in that state on both dates. At all relevant' times Nr. Shaw was a solicitor with an interest in each of two practices. Through the companics, each of which seems to have had an attendant group of companies, he also had interests in various commercial, pastoral, constructio and other enterprises. His affairs and those of the companies « « were inextricably interwoven and he was heavily engaged in their financial arrangements as guarantor, The bank's standard forin of guarantee states the extent of the guarantor's li8bility in a sing. sentence. That is not to say, however, that the bank can be accus . of being unduly laconic: the sentence runs for 57 lines of print and contains probably some 1,200 words. Patient analysis reveals embedded in it a provision that the guarantor of a customer guarantces the payment by the customer to -the bank of all sums owing by the customer to the bank in respect of any guarantee given by the customer to the bank. Mr. Shav had guarantecd the accounts of Mekol and Bidges with the bank and as a result was also guarantor of Parks and Talga. He had also given guarantees to F.N.C.B.-Waltons Finance Limited and a company called Cadea (No. 7) Pty. Limited. On 23 duly 1974 Mr. Shaw's accountant submitted to the Bank a statement (Exhibit F) of Mr. Shaw's estimated assets and - liabilities as at 9 July 1974. It showed the following: ASSES: Interest in legal practices 46,662 Cattle 250,000 Shares in Legal Holdings Ltd, ; 69,706 Other ~ 71,000 $437,368 J JABTLIVLES ANZ Banking Group Ltd. Owing to B.G. & EJ.) Shaw arm Partnership Owing to associated companies: Tasamt Pty Ltd Group 14,320 Meko] Pty Ltd Group 153,310 Legal Holdings Pty Ltd 20,798 Other . or? NET ASSETS 53,081 23,574 186,428 18,800 $283,883 The document also stated that no allowance had been made for contingent liabilities as at 8 July 1974 in respect of Ps the following guarantees (a) (b) -+ (c) (a) To the ANZ Banking Group Ltd in respect of advances to - the Mekol Group - the Talga Group ~- Bidges Guarantees in respect of advances to Talga Ltd by 11.B.C. International Ltd and Cadea (Mo. 7) Pty Ltd Guarantees in respect of advances by FNCB-WALTONS Finance Ltd to: (i) NBuninuna Pastoral .Co. Pty Ltd (ii) Cloontyclogher Pastoral Co. Pty Ltd OtHer guarantees e $ 324,000 408,000 148,000 5,006,000 488,750 446,250 151,900 It was known by 14 August 1974 that Mr. Shaw's cattle Walyed at $250,000 and cattle belonging to Mekol valued at $50,000 would together realise on sale only $110,000, and 'therefore that Mr. Shaw's cattle were worth only about 5/Gths of that amount + i.e. less than $92,000 - so that that asset had @ecreased in value by $158,000. And on 12 September Cadea (No. 7) Pty Ltd sexved on Mr. Shaw a document requiring him to pay $5,000,¢ pursuant to his guarantee of advances to Talga. At that stage Mr. 'Shaw had available to him nothing like sufficient resources to meet his liabilities. In cross-examination he was asked vhether -9- before receiving that notice he was paying lis debts. Me replac:, "No, 1 was not. By the last fev days of August I was in a very distressed condition, and I believed that there was no way out of my financial. problem". It also appeers from an affidavit sworn on 10 August 1977 by the trustee that creditors have proved for debts amounting to at least about $23,000 which had been incurred , « before 9 July 1974 and were not included in the liabilities shown in Exhibit fT as existing at that date. Furthermore, early in July 1974 there was submitted to the bank:a cash flow budget (Exhibit L), for the period from 24 June to 31 Decomber 1974, in respect of Ib. Shaw and the farii company Tisami Pty Ltd which he controlled and which beld most of its assets on discretionary trusts. That document showed estimatec Yecteipts and outgoings for every month from June to December, both inclusive, and the total for the seven months. It may be summarised by the following table:- ' $'000 Jun Jul aug Sept Oct Nov Dec RECEIPTS 7 Repayments by Talga 8 26 42 " Mekol 250 z Sale of cattle . . 40 309 : Other : ' 18 3 8 58 - 309 - 3 26 292 ' QUTGOINGS Repay FNCB-Walton 489 . Other . 8 34 62 60 Jl 30 17 Total 8 34 62 60 1] 30 506 SURPLUS : ined 24 247 - - - - DEL TCIT 'ms ~ 60 «68 4 214 ee we ewe wae ne -10- "7 re As I have said, it was known by 14 Avgust that by che end of August the sale of cattle would bring not $349,000 but only $110,000. It followed that the surplus accumulated at the end of August would be not $271,000 but only $32,000. According to the budget September and October would bring in only $3,000. But during those months outgoings would be respectively $60,000 and $11,000. On 12 September Cadea (No. 7) Pty Lta appointed areceiver of Talga. Thexefore, taking a longer view, it became improbabic that the $76,000 due to be repaid by Talga in November and December would in fact be received. A letter from Mekol to the Bank dated 3 July 1974 had made it clear that Mekol was heavi2 dependent on the prosperity of Talga and was "in a position to Sun, its requirements to 30th November at least, by calling upon Talga for progressive repayments of amounts owing by that company". - So it was also improbable that the $250,000 due to be repaid to Mr. Shav and the Tisami Group in December by Mekol would be received. '.and in that month $489,000 would be payable to FNCB-Waltons Finance Ltd, which had lent that amount on mortgage to a company called Nuninuna Pastoral Co. Pty Ltd. That loan had been repayable on 17 May 1974, and was jointly and severally guaranteed hy Mr. Shaw, fisami and Talga. The lender had granted an extension of time for six months. At no time were the moneys available to Mr. Shaw sufficient to enable him to meet his liabilities. In my opinion, whether one considers the position as at 13 or 14 September 1974 or as at 23 September 1974, and whether one then takes a view of the future extending for one month or for three, Mr. Shaw was not able to pay his debts as they became duc out of his own money. Finally, in my opinion, the bank must bé deemed, in accordance with' s. 122(4) (c), not to be a payee in good faith, anda therefore is not entitled to the protection of 5.122(2). ~L1- ' vs On 8 July 1974, though the account of Mr. Shaw hinsct7 was overdrawn by only some, $3,000 over his agrecd Limit of $50,000, the accounts of Talga, Parks, Mekol, Bidges* and lix. Shay were in total overdrawn by $144,815 beyond their combined credit limits of $763,000. That state of affairs deepened the concern which it is apparent Mr. Staplcton had been feeling for more than" a month and which he expressed thus in a diary note made on 28 Jun when recording an interview he had with Nr. Shaw and others connected with the companics: "It was explained ... that we were very concerned about the present position of the Palga and MUkol group firstly, because of the present economic i climate, secondly, because the balance shaoct of F : as at 30th April shows a very overveaghted posivicn and thirdly, we are unable to obtain from the Company ! any woxthwhile information as to vhat is proposed xegarding clearance' of all the accounts or details of a cash flow for each company to demonstrate vhat funds are liable to flow in. It was pointed out that we have sought this information for more than 1 month but to date are no better informed". Qu . There was a further interview on 3 July when belance sheets and cash flow projections were submitted for each of the accounts in the group. wr. Stapleton's diary note of this interview is lengthy. It noted as to Talga that its position had deteriorated in as much as liabilities had increased by $2,000,000, and that it was being proposed in effect that the han} should forego a security valued at about $380,000 - a proposal wh. Mr. Stapleton described as "really ridiculous". As to Bidges and Mr. Shaw, Mr. Stapleton noted as follovws:- "Balance sheets presentcd here do not show a strong position and the accompanying cash flow shows that the debts in these two accounts will be cleared from sale of cattle by Mr. Shaw, which sale is expected to realise $349,000 by the end of August. The accompanying letter suggests that the overdraft be frozen and separate accounts be opened pending Clearance of overdraft From sale of live stock. 'The cash flow also shows that this group is expecting 'to receive $250,000 loans repayable by Talga Group in December". ~ 7 . " , ae a a mA wlan wb. te a tsp ~12- as at 30 April showed an effective capital deficiency of $57,000, which he said "could lo ver. much higher depending on the xealisahble worth of investmenls and loans to shareholders. The company has accumulated losses of $1.4 million and is clearly in serious straits". Mr. Stapleton summarised by saying "Repayment of the borrowings of Mekol and the continued activity as of Talga are both clearly contingent upon the bank foregoing funds from sale of our security which would clearly be unacceptable", There was a further discussion on 5 July. Mr. Shaw noted that the company representatives were very disappointed that the bank was unwilling to assist them further. It wes agrees that all the accounts in the group should be ruled off and that the bank would meet certain outstanding cheques because of covering funds placed in the account. When those outstanding cheques were received the accounts of the Talga group, Bidges, Mr. Shaw and Mekol would be in Gebit to a total of $933,660, or ~7$25,785 wore' than they were on 8 July. MHir. Stapleton noted alsa that the directors would now have discussion with their major creditors with a view to deferring repayment of almost every loan but that on the information the bank then had he doubted very much that the Talga, group could continue for very long unless they, ' f received substantial funds from other sources to enable conpletion of existing projects and payment of overhead expenses. He also noted that "The position regarding Shaw and Bidges would scem able to be covered from sale of cattle however our position in regard Mekol 4% wncertain, but we will be relying heavily on Shav as guarantor ..." : : By 11 duly Mr. Stapleton's diary shows his view that the bank would need to give sexious consideration t6 the appointment of a receiver to control the' flow of funds of Mekol £ L -. "b3- ' a aos and to ensure that unsecured creditors were not bencfited to the + -> disadvantage of the bank. Ne had requesled that in the meancime no payments be made to creditors. ' On 22 July Mr. Shaw noted that it had been arcanged that most of Talga's creditors would defer payments during July, and that Talga had cut back developments. Mx. Stapleton continued to watch the position. On 7 August he noted that Mr. Shaw and others had advised that the cattle sale was very disappointing. On 14 August he noted that the cattle sale would now realise only $110,000 "which is very substantially short of the expectation". On 13 September Mr. Stapleton noted: "at 9 a.m. this morning we were informed ... that Cadea (No. 7) Pty Ltd had appointed a receiver under their securities to Talga Ltd. ... At this stage we have stopped the Talga account here and at Blacktown. We have also submitted brief advices to State Administxation indicating that ve could take losses in Bidses and Mekol. It does seer that we will now need to rely on our securities to recover | the bank's funds ... ." ' ae ' t Finally, on 19 September ftir. Stapleton noted that 1" "On information now available Mr. Shav would not be ina , ' position to meet his liabilities and after realising on our securities we would face a loss of say $15/20,000." It is im-my opinion clear that, on whatever date in September the payment vas made, the bank then had reason to "guepett, if it did not know, that Mr. Shaw was unable to pay his debts as they became due. Mr. Stapleton plainly recorded on 19 September that he had then actually so concluded, but I think Wis aASsistant Mr. Pritchard, who also was conversant with Mr. Shaw affairs, was nearer the mark in saying that it was apparent at the beginning of July 1974 that Mr. Shaw "could not meet his commaitmen as they became due". I think reason for the suspicion to which BS. 1£22(4) (c) (i) refers certainly existed on 14 August.' And Lhere , ~14-° " can be no doubt that the banh knew that the effect of the payment in question would be to give ita preference over other creditors. Accordingly the bank is not protected hy s. 122(2). It is necessary only to add that on 22 November 1974 the bank wrote to Mr. Andcew saying, as to, the balance of the No. 2 account (which then stood at $1,069.08), that it had exercised its right of set-off and had applied those funds against liabilities owing to it by Mr. Shaw. I @eclare (1) that the payment to the debtor's No. 2 account of $61,871.32 was by reason of s, 122 of the Ean: unt. Act 1966 void to the extent of $58,864.98 as against .the trustee of the deed of assignment executed under Part X of the Act on 23 October 1974; (2) that the amount of $1,065.08 standing to the credit of the debtor's No. 2 account on and after 8 November 1974 was property of the debtor Givisrible amongst! his creditors; and I order that the respondent bank pay to the trustee of that decd a swum equal to the total, namely $59,934.06, of the two said amounts of $58,864.98 and $1,069.08, and his costs of and incidental to the application. The trustee hag 'abandoned his application for an order for payment of interest. wee Te ese eee Be ene | Co rinon wealth of Nusipyah iat IN 4 ile Ie devl Cougr | DisikuT of ate Mite of| Co Po Oo GEw eyyae Nivisrom fq alty2u ay Hh. &@T. '! NO NSw 38 oF Jari y RE Byun Géopee X Hew Fup. | Wellin Eglveren nares —T Kusake . Hust «N Bamlirnwt Group LD - — esp. ere: DCE Mdbiac eedee | Dames of WHererwe | Counsel Foe Pbbbicgs et | ya eueti nd QobkteeT ORE { 3 [Coun ssi Fox Reslwnent INSTRact Ine = Solhiertrore's Ld (KS Aw c _ vy € Ss DP. Renney. Fleredere ms pLebhsane file Nrlly - Nie we] SO WRGARET XT: & 4d > i 'Jou Gs Norkten Sur . or Qo Weetiv Place Qua wee ee es 'TH TNE PUEDERAL COURT _OF AUSYRAT.TA GLNURAT, DivVistod ) v Ls ) BANKROUPICY DISTRICT QF YE STALE ) -) ) No. 38 of 1974/x OF NW SCOUT Th LesS AND INE . AUSTRALLAT CAPITAL TERRILORY RE: BRYAN GEORGE SILAW Debtor EX PARTE: WILLTAM EDWARD ARDRE Trustee AUSTRALIA & NEW ZRALAND * BANKING GROUP LINITHD Respondcn ' JUDGE LiIAKING ORDER: RTLEY J. .* DATE OF ORDER: 14 November 1977 WHERE MADD: Sydney DECLARATIONS AND ORDERS DECLARE: 1. That the payment to the debtor's No. 2 account of $61,871.32 was by reason of s. 122 of the Bankruptcy Act 1966 void to the extent of "eat $58,864.98 as against the txustee of the deed of assignment executed under Part X of the Act on 23 October 1974. . 2. that the amount of $1,069.08 standing to the credit of the debtor's No. 2 account on and after 8 November 1974 was property of the @ebto @ivisible amongst his creditors. ORDER: 1. That the respondent bank pay to the trustee a sum equal to the total, namely $59,934.06, of the two said amounts of $58,864.98 and $1,069.08, and his costs of and incidental to the application. 1 sta ' a . i. | 1966 SEC, 122. ] Wt a || e : . ' ty, I1 t ' qf y' e : . "s 1 . , { ' . ; I. 4d ay bosqos , : ; i 1 ' ly ¢ ' t if : CATCRVWORDS Pa ha a at TO PAY OUT OF OWN MONEY — WHITHER BANK PAYEE IN GOOD FAITH - BANKRUPTCY BANKRUPTCY - VOLDABLE PREFERENCES - BANK - COMBINATION OF ACCOUNTS - WHETHER DEBTOR ABLE ACT ee tne reer eee ee Ee em re ee ee te ee REASONS FOR JUDGEENT ee Bryan George Shaw executed a deed of assignment under Part X of the Bankruptcy Act 1966 on 23 October 1974. The date when the relevant resolution under s. 204(1)(b) was passed is not shown by evidence formally edduced before me on the hearing of this application, but it is shown by the certificate filed pursuant to s. 204(7) to have also been 23 October. Mr. W. E. And, D is the trustee of the deed. His application to the Court for certain declarations is primarily based on s. 122 of the Act, which by s. 231 (2) applies, in the events which have happened, in relation to the Geead of assignment as if on 23 October 1974 a sequestration order had been made against Mr. Shaw on a creditor's petition presented that day, and which avoids as against the trustee certain t transactions as having the effect of giving a creditor a preference, priority or advantage over other creditors. The creditor alleged to have been preferred is the Australia and New Zealand Banking Group Limited, the banker for Mr. Shaw and for certain companies controlled by him. The companies concerned were called Talga Limited, Australian Memorial Parks Pty. Limited, Mekol Pty. Limited and Bidges Pty. Limited. I shall call them respectively Talga, Parks, Mekol and Bidges. Mr. Shaw and the companies banked with the respondent' branch at Martin Place and George Street, Sydney where on behalf of the bank the assistant manager, Mr. Stapleton, had the effective conduct of their affairs. On 1 October 1962 Mr. Shaw had given the bank a letter of set-off, which was still operative at all relevant times So far as it is material, it reads as follows:- BN ee nee een an ewe Saree ee "T hereby acknowledge the right of the Rank at any time without notice to me to apply the whole or any part of any balance that now OX av any future time may stand to my crcedat in any accouht to paymen any halance that may be to my debit in any other account, and to close alj or any of such accounts, and whether any book entries shall or shall not have been made to treat such credit balance as having been so applied and to deal with my drawings thereon | accordingly." On 8 July 1974 Mr. Shaw's account. "Gvhich I shall call his No. 1 account) was overdrawn by $53,080.64. That accoun and the accounts of the companies as a whole were in an ' unsatisfactory state having regard to the arrangements with the bank under which they were being operated. Mr. Stapleton therefor concluded that the accounts should be controlled. Accordingly a procedure was adopted which Mr. Stapleton described as follows in his affidavit of 29 July 1977: "It is a practice of the respondent in the course' . of controlling its customers' accounts to control the customer's activity by closing a then current + account and opening a new account often stylcd the * No. 2 account which must then remain in credit. ". In such circumstances, it is normal practice to seek regular reductions to the debtor account or other arrangements for clearance of the borrowing". . So Mr. Shaw's No. 1 account was closed and a No. 2 account was opened. Relevant movements on those accounts, as shown by the relevant bank statements, can be summarised as follows No. 1 Account Balance 8 July: 53,080.64 Dr fy 21 Aug: Overdraft service fee 40.00 Dr 53,120.64 Dr mo 23 Sep: 53,120.64 Dr i 27 Sep: Deposit 1,260.00 Cr 51,860.64 T : "20 Nov: Deposit 4.98 Cr 51,855.66 i 22 Nov: 52,855. ' } No. 2 Account 7 8 July: ' ' | 12 Sep: Deposit 61,871.32 Cr e 23 Sep: Dehit 57,600.00 Dr 24 Sep: : ", : 25 Oct: Lye ' 8 Nov: 1,06. 22 Nov: yore -. -J3- and to ensure that wisecured creditors were not benefited to the disadvantage of the bank. He had requested that in the incantime no payments be made to credilors. .' On 22 July Mr. Shaw noted that it had been arranged that most of Talga's creditors would defer payments during July, and that Tajlga had cut back developments. Mr. Stapleton continved to watch the position. On ' 7 August he noted that Mr. Shay and others had advised that the cattle sale was very disappointing. On 14 August he noted that , the cattle sale would now realise only $110,000 "which is very substantially short of the expectation". ' On 13 SepLomber Mr. Stapleton noted: "At 9 a.m. this morning we were informed ... that Cadea (No. 7) Pty Ltd had appointed a receiver under their securities to Talga Ltd. ... At this stage we have stopped the TaJga account here and at ' Blacktown. We have also submitted brief advices to State Administration indacating that we could *: take losses in Bidges and Mekol. It does seem that 'we will now need to rely on our securities to recover ' the bank's funds ... ." '" Pinally, on 19 September Mr. Stapleton noted that "On information now available Mr. Shaw would not be ina position to meet his liabilities and after realising on our securities we would face a loss of say $15/20,000." It is im-my opinion clear that, on whatever date in September the payment was made, the bank then had reason to suspect, if it did not know, that Mr. Shaw was unable to pay his Gebts as they became due. Mr. Stapleton plainly recorded on 19 September that he had then actually so concluded, but I think his assistant Mr. Pritchard, who also was conversant with Mr. Shaw affairs, vas nearer the mark in saying that it was apparent at the beginning of July 1974 that Mr. Shaw "could not meet his commitmen as they became due". I think reason for the suspicion to which Ss. 122(4) (c) (i) refers certainly existed on 14 August.' And there 1 et ~12- as at 30 April shoved an cllective capital deficiency of $57,000, whach he said "could be veny much higher dependina on the xealisable worth of investmenls and loans to sharcholders. The company has accumulated losses of $1.4 million and is clearly in serious straits". Mr, Stapleton summarised by saying "Repayment of the borrowings of Mekol and the continued activity of Talga are both clearly contingent upon the bank foregoing funds from sale of our security which would clearly be unacceptable". There was a further discussion on 5 July. Mr. Shay noted that the company representatives were very disappoinced that the bank was unwilling to assist them further. It wos agree! that all the accounts in the graup should be ruled off and that the bank would meet certain outstanding cheques because of covering funds placed in the account. When those outstanding cheques were received the accounts of the Talga group, Bidges, Mr. Shay and KMekol would be in debit to a total of $933,600, or $25,785 more than they were on 8 July. Mr. Stapleton noted also that the directors would now have discussion with their Major creditors with a view to deferring repayment of almost every loan, e but that on the information the bank then had he doubted very much that the Talga, group could continue for very long untess they received substantial funds from other sources to enable compiction of existing projects and payment of overhead expenses. He also noted that "The position regarding Shaw and Bidges would seem able to be covered from sale of cattle however our position in regard t Mekol is uncertain, but we will be relying heavily on Shaw as guarantor..." . , By ll duly Mr. Stapleton's diary shows his view that the bank would necd to give serious consideration to the appointment of a receiver to control the flow of funds of Mekol nn eee ee Was overdrawn by onty some, § $50,000, the accounls of Talga, Parks, ~1L1l- On 8 July 1974, though the account Of Mr. Slaw hiwsel © 3,000 over his agreed limit of Mekol, Bidges and lixr. Shay were in total overdrawn by $144,815 beyond their combined credit limits of $763,000. That state of affairs deepened the concern which it is apparent Mr. Stapleton had been feeling for more than a month and which he expressed thus in a diary note made on 28 Ju when recording an interview he had with Mr. Shaw and others connected with the companies: "It was explained ... that we were very concerned about the present position of the Talga and Vekol group firstly, because of the present economr climate, secondly, because the balance sheet of Pnien as at 30th April shows a very ovecveighted posi.ion and thirdly, we are unable to obtain from the Company , any worthwhile information as to what is proposed regarding clearance' of all the accounts or details of a cash flow for each company to demonstrate what funds are liable to flow in. It was pointed out that we have sought this information for more than 1 month but to date are no better informed". . There was a further interview on 3 July when balance sheets an@ cash flow projections were submitted for each of the accounts in the group. Mr. Staplceton's diary note of this interview is lengthy. deteriorated in as much as liabilities had increased by $2,000,C00, . t | ' It noted as to Talya that its position had' and that it was being proposed in effect that the ban} should forego a security valued at about $380,000 ~ a proposal wh: Mr. Stapleton described as and Mr. "really ridiculous". As to Bidgyes Shaw, lr. Stapleton noted as follows:- "Balance shects presented here do not show a strong position and the accompanying cash flow shows that the debts in these two accounts will be cleared from sale of cattle by Mr. Shaw, which sale is expected to realise $349,000 by the end of August. The accompanying Letter suggests that the overdraft be frozen and separale accounts be opened pending clearance of overdraft from sale of live stoc}. The cash flow also shows that this group is expecting to xeccive $250,000 loans repayable hy Talga Group in December". a eh re a pa ee bee ee ae eae ee = Ta ~3- "het The trustee's claims way be convenuzently stated es follows. When the deposit of a cheque for $61,871.32; represent the proceeds of the sale of cattle, was made to the No. 2 account on 12 September, or at any rate on 13 September when the cheque was cleared, the bank was entitled by reason of the lettcr of set-off of 1 October 1962 and the gencral law (see 3 Hals., 4th edn, para. 87) to apply that amount or a sufficient part of it in discharge of Mr. Shaw's then existing liability to the bank. Therefore, it- is said, the payment of the $61,871.32 was a - preferential payment within the reach of s. 122 to the extent of that indebtedness, which is said to be $58,865.98 but was in fact, $58,864.98. Alternatively it is said that, in the exercise of its right to combine the No. 1 and No. 2 accounts, or to set-off the debit in the No. 1 account against the credit in the No. 2 account, and thus be liable to the customer only for the balance, . 'the bank did in fact on 23 September debit $57,600 to the No. 2 account and transfer it to a suspense account to be used as a set-off against Mr. Shaw's liabilities to the bank (see annexures "D" and "E" to the trustee's affidavit of 29 March 1977), and thus there was a preferential payment of $57,600. Next, the trustee says that on 21 August the debit balance in the No. 1 account was $53,120.64 and on 22 November it was $51,855.66. The amount of the reduction (said to be $1,265.98 but in fact being $1,264.98), represented by the two : amounts shown above as credited to the No. 1 account, he therefore claims on the principle of Recs v. Bank of N.S.W. (1964), Jil C.L. 210. This claim is cumulative on. the claim for $57,600. Last, there is the final balance of $1,069.08 which stood to the credit of the No. 2 Account. The bank does not conte . 4a . -- the trustee's claim that that amount was either a preferential payment within s. 122 or property of the debtor divisible amonest . his creditors. . In this case, the matters for decision under s. 122 (1) are: (1) whether there was a payment made (2) by a person who was unable to pay his debts as they became due from his own money (3) in favour of a creditor (4) having the effect of giving that creditor a preference, priority or advantage over other exeditors (5) being a payment made within six months before 23 October 1974. If each of those matters is answered in the affirmative, the further question will arise whether the bank is, as it clains to be, nevertheless entitled to the protection of s. 122(2). It vould be BO entitled if it could prove that it was a payee in good faith And for valuable consideration and in the ordinary course of business: s. 122(2), (3); but the trustee contends that the bank cannot get that protection because the payment, whenever it was made, was made under such circumstances as to lead to the inference tha't the bank knew or had reason to suspect that Mr. Shaw was unable to pay his debts as they became due from his own money and that the effect of the payment would be to give the bank a preference, priority on advantage over other creditoxs. It was not disputed that a payment was made either of $61,871.32 or of $57,600, or that it was made within the relevant period of six months, ox that it was made in favour of a creditor and had the effect of giving that creditor a preference, priority or advantage over other creditors. The remaining questions arisin under s. 122(1) are when the payment was made, and whether at that ane ca Te nama 7: meee we ree eee _ ~5- Independcnily of the letter of 1 October 1962 ine ' bank had a right, there being no agreenent with its customer to the contrary, which entitled it as soon as Mr. Shaw opened a second current account to combine the two accounts whenever it pleased and set off the debit in one account against the credit in the other. (See Halesowcn Presswork & Assemblies Ltd. v. Westminster Bank Limited, (1971) 1 Q.B.1, 34 per Lord Denning M.R., whose statement of principle remains unaffected by the reversal of the decision by the House of Lords, (1972) A.C. 785). The lett of 1 October 1962 confirmed the existence of that right, It also established that the right could be exercised without notice wo Mr. Shaw and that, whether or not any book entries had been made, the bank could treat a credit balance as having been applied to : payment of a debit balance and deal with any drawing accordingly. It was not suggested that the bank's right to combine accounts did not apply to the No. 1 and No. 2 accounts because when the latter was opened the former was frozen: see In re E. J. Morel (1934) Limited, (1962) Ch. 21, 23, 30-32; and it appears from a letter from Mr. Shaw of 24 'September 1974 and the bank's xeply of 1 October 1974 that the arrangement was that the right should apply to those two accounts. Counsel for the trustee submitted however that set-off, and therefore payment for the purposes of s. 122(1), did not occur until on 23 September the Bank actually debited the No. 2 account with $57,600 and transferred that amount to a suspense account. "(That later date simplificd his submission that Mr. Shaw was insolvent when the payment was made.) We proposed this test: if on say 20 September, when there was a credit balance of $61,581.97 in the No. 2 account, Mr. Shaw had drawn a cheque for $60,000 on that account, would the bank have been bound to honour it? Counsel er rn -6- was a debit balance of some $53,000 ian the No. 1 account, and "The customer musl be taken to know the state of cach account, a: if the balance on the whole is against him or Goes not eaual the . 'cheques he dravs, he has no right to expect those cheques to be cashed": Garnett v. M'Kewan (1872), L.R. 8 Exch. 10, 13 per Kelly C.B.) Mr. Stapleton gave evidence the effect of which was that in the normal course of events if a cheque is deposited to a customer's account, and credited to that account, on 12 Septerl<¢ (as was the cheque for $61,871.32, which was drawn on the Wales . House branch of the Bank of New South Wales) the credit entry is ' treated as provisional until the time for dishcnour has cleps: w fu f the cheque would be presented for payment on 13 September, and the paying bank would have 24 hours after presentment in which to dishonour it. There is no evidence of departure in this case from the normal, and therefore the funds represented by the cheque for $61,871.32 became available to the respondent bank on 14 Saptember 'and on that' date Mr. Shaw, by having paid the cheque for $61,871.3' into his No. 2 account on 12 September, accordingly put the bank in a position in which it could exercise its right to combine the accounts. In my opinion, on that date, and if not on that date then on 13 September; a payment of $61,871.32 was made within s. 122{1). . I£ I am wrong in that view, then I think the relevant payment was made on 23 September when the bank appropriated $57,600 from the No. 2 account to set off against Mr. Shav's indebtedness. In doing so, in ny opinion, it acted as his agent pursuant to the letter of 1 October, 1962. . I turn nov to consider whether Mr. Shaw was at either of the 'relevant dates in September unable to pay his, debts as they became due from his own money. In my opinion he was in that . a state on both dates. At all relevant times Mr. Shaw was a solicztorc with an interest in each of two practices. Through the companies, each of which seems to have had an attendant group of companies, he also had interests in various commercial, pastoral, constructioi and other enterprises. His affairs and those of the companies were inextricably intervoven and he was heavily engaged in their financial arrangements as guarantor. The bank's standard form of guarantee states the extent of the guarantor's lidbility in a sing sentence. That is not to say, however, that the bank can be accus:| « of being unduly laconic: the sentence runs for 57 lines of priat and contains probably some 1,200 words. Patient analysis reveals embedded in it a provision that the guarantor of a customer guarantees the payment by the customer to the bank of all sums owing by the customer to the bank in respect of any guarantee given by the customer to the bank. lHir. Shaw had guaranteed the accounts of: Nekol and Bidges with the bank and as a result was also guarantor of Parks and Talga. He had also given guarantees to F.N.C.B.~Waltons Finance Limited and a company called Cadea (No. 7) Pty. Limited. On 23 Joly 1974 Mr. Shaw's accountant submitted to the . Bank a statement (Exhibit F) of Mr: Shaw's estimated assets and liabilities as at 9 July 1974. It showed the following: ASSETS: Interest in legal practices 46,662 Cattle 250,000 Shares in Legal Holdings Ltd. . 69,706 Other : 71 ,OOO $437,368 LIABILITIES : ANZ Bankint Group Ltd. Oving to B.G. & E.d.' Shaw Marm Partnership Owing to associated compahies: Tisami Pty Ltd Group 14,320 Mekol Pty Ltd Group 153,310 Legal Holdings Pty Ltd 20,798 Other NET ASSETS 53,081 23,574 186,428 $283,883 $153,485 The document also stated that no allowance had been made for contingent liabilities as at 8 July 1974 in respect of « the following guarantees (a) (b) .« (c) (d) To the ANZ Banking Group Ltd in respect of advances to -~ the Mekol Group - the Talga Group - Bidges Guarantees in respect of advances to Talga Ltd by li.B.C. International Ltd and Cadea (ito. 7) Pty Ltd Guarantees in respect of advances by FNCB-WALTONS Finance Ltd to: (i) Nuninuna Pastoral Co. Pty Ltd (ii) Cloontyclegher Pastoral Co. Pty Ltd OtHer guarantees $ 324,000 409,000 148,000 5,000,000 488,750 446,250 151,900 It was known by 14 August 1974 that Mr. Shaw's cattle valued at $250,000 and cattle belonging to Mekol valued at $50,000 would together realise on sale only $110,000, and therefore that Mr. Shaw's cattle were worth only about 5/6ths of that amount - i.e. decreased in value by $158,000. Pty Ltd served on Mr. Shaw a document requiring him to pay $5,000, ¢ pursuant to his guaranttée of advances to Valga. Mr. meet his liabilities. less than $92,000 - so that that asset had At that stage In cross-examinat.ion he was asked whether t And on 12 September Cadea (No. 7)5 Shaw had available to him nothing Jike sufficient resources to! -9- . i. 4 2. t tice WAS aya is Aobtks. SO Spb Le os . before receiving that notice he was paying his @chts Ha rapt ; "No, 1. was not. By the last few days of August 1 vas in a very Saart distressed condition, and I believed that there was no way out of my financial problem". It also appears from an affidavit svorn on 10 August 1977 by the trustee that creditors have proved for debts amounting to at least about $23,000 which had been incurred befere 9 July 1974 and were not included in the liabilities shown in Exhibit F as existing at that date. Furthermore, early in July 1974 there was submitted to the bank:a cash £flov budget (Exhibit DC), for the period from 24 June to 31 December 1974, in respect of Ir. Shaw and the far company Tisami Pty Ltd which he controlled and which held wost of ' its assets on discretionary trusts. That document showed estimated receipts and outgoings for every month fxom June to December, both, inclusive, and the total for the seven months. It may be summarised by the following table:- ' $'000 Jun Jul Aug Sept Oct Nov Dec ec RECEIPTS . "Repayments by Talga 8 26 42 " Nekol 250 a Sale of cattle ' 40 309 Other ' 18 3 8 58° 309 - 3 26 292 . OUTGOINGS Repay INCB-VWalton 489 Other . 8 34 62 60 LL 30 17 Total 8 34 62 60 1] 30 506 SURPLUS . - 24 247 - = ~ DEFLCIT Sale ~ 60 8 4 214 ' . . -1o- - As I have said, it was known by 14 Angust that by rhe a ps ' : end of August the sale of catisle would bring not $349,000 but only $110,000. It followed that the surplus accumulated at the end of August would be not $271,000 but only $32,000. According to the budget September and October would bring in only $3,000. But during those months outgoings would be respectively $60,000 and $11,000. On 12 September Cadea (No. 7) pey Lta appointed a receiver of Talga. Therefore, taking a longer viow, it became improbabie that the $76,000 due to be repaid by Talga in November and December would jin fact be received, A letter from liekol to the Bank dated 3 July 1974 had made it clear that Mekol was heavils dependent on the prosperity of Talga and was "in a position to fui, its requirements to 30th November at least, by calling upon Talga for progressive repayments of amounts owing by that company". So it vas also improbable that the $250,000 due to be repaid to ' Mr. Shay and the Tisami Group in December by Liekol would be a received. 'And in that month $489,000 would be payable to 4 FNCB-Waltons Finance Ltd, which had lent that amount on mortgage to a company called Nuninuna Pastoral Co. Pty Lid. That loan had been repayable on 17 Nay 1974, and was jointly and severally an extension of time for six months. At no time were the moneys available to Mr. Shaw sufficient to enable him to meet his liabilities. In my opinion, i | ' guarantecd by Mr. Shaw, Tisami and Talga. The lender had granted | | ' whether one considers the position as at 13 or 14 September 1974 or as at 23 September 1974, and whether one then takes a view of eee ee the future extending for one month or for three, Mr. Shaw was not able to pay his debts as they became due out of his own money. accordance with s. 122(4) (c), not to be a payee in good faith, { | | { } , Finally, in my opinion, the bank must be deemed, in ; | and therefore is not entitled to the protection of s.]22(2). -1i- - On 8 July 1974, though the account of Ir. Shay was overdrawn by onty sonie, $3,000 over his agreed limit of $50,000, the accounLs of Talga, Parks, Mekol, Bidges and lir. Shay were in total overdrawn by $144,815 beyond their combined credit limits of $763,000. That state of affairs deepened the concern which it is apparent Mr. Stapleton had been feeling for more than a month and which he expressed thus in a diary hote made on 28 Jun when recording an interview he had with Mr. Shaw and others connected with the companies: "It was explained ... that we were very concerned about the present position of the Talga and Its*ol group firstly, because of the present economic climate, secondly, because the balance sheer cof oats as at 30th April shows a very overweichted pos? ction and thirdly, we are unable to obtain from the Company any worthwhile information as to what is proposed regarding clearance' of all the accounts or details of a cash flow for each company to demonstrate what funds are liable to flow in. It was pointed out that we have sought this information for more than 1 month but to date are no better informed". « There was a further interview on 3 July when balance sheets an@'cash flow projections were submitted for each of the accounts in the group. Mr. Stapleton's diary note of this interview is lengthy. It noted as to Talga that its position had deteriorated in as much as liabilities had increased by $2,000,000, and that it was being proposed in effect that the ban? - should forego a security valued at about $380,000 ~ a proposal whi' Me. Stapleton described as "really ridiculous". As to Bidges and Mr. Shaw, Mr. Stapleton noted as follows:- ; "Balance sheets presented here do not show a strong; position and the accompanying cash flow shows that the debts in these two accounts will be cleared from , sale of cattle by Mr. Shaw, which sale is expected to realise $349,000 by the end of August. The 1 accompanying letter suggests that the overdraft \ be frozen and separate accounts be opened pending . clearance of overdraft from sale of live stoclr. The cash flow also shows that this group is expecting.' to receive $250,000 loans repayable by Talga Group in December". -§25,785 more than they were on 8 July. Mr. Stapleton noted also toon TRH. as at 30 April shoved an cffective capital deficiency of $57,000, which he said "could be ver, much higher depending on the realisable worth of investmenls and loans to shareliolders. fhe company has accumulated losses of $1.4 million and is clearly in serious straits". Mr. Stapleton summarised by saying "Repayment of the borrowings of Mckol and the continued activity of Talga are both clearly contingent upon the bank foregoing funds £rom sale of our security which would clearly be unacceptable". There was a further discussion on 5 July. Mr. Shaw noted that the company representatives were very disappointed that the bank was unwilling to assist them further. It wes agrees that all the accounts in the group should be ruled of fF and that the bank would meet certain outstanding cheques because of covering funds placed in the account. When those outstanding cheques were received the accounts of the Talga group, Bidges, Mr. Shaw and Mekol would be in @cbit to a total of $933,600, or that the directors would now have discussion with their major creditors with a view to deferring repayment of almost every loan, we but that on the information the bank then had he doubted very much that the Talea, group could continue for very long unless they received substantial funds from other sources to enable completion of existing projects and payment of overhead expenses. He also noted that "The position regarding Shaw and Bidges would seom able ? to be covered from sale of cattle however our position in regard t Mekol is uncertain, but we will be relying heavily on Shav as ' 1 . ' guarantor ... By 11 July Mr. Stapleton's diary shows his view that | the bank would necd to give serious consideration to the ' u appointment of a receiver to control the flow of funds of Mekol a -- -J.3- and to ensure that wisecured creditors were not benefited to the Aisgadvantage of the bank. Ne had requested that in the meantame no payments be made to credilors. On 22 July Mr. Shaw noted that it had been arranged that most of Talga'ts creditors would defer payments during Suly, and that Talga had cut back devclopments. Mr. Stapleton continued to watch the position. On 7 August he noted that Mr. Shav and others had advised that the cattle sale was very disappointing. On 14 August he noted that the cattle sale would now realise only $110,000 "which is very substantially short of the expectation". On 13 SepLember Mr. Stapleton noted: "At 9 a.m. this morning we were informed ... that Cadea (No. 7) Pty Ltd had appointed a receiver under their securitzes to Talga Ltd. ... At this stage we have stopped the Talga account here and at Blacktown. We have also submitted brief advices to State Administration indicating that we could " take losses in Bidses and Mekol. It does secm that we will nov need to rely on our securities to recover the bank's funds ... ." . ae Finally, on 19 September Mr. Stapleton noted that "On information now available Mr. Shaw would not be in a ' position to meet his liabilities and after realising on our securities we would face a loss of say $15/20,000. " It is im my opinion clear that, on whatever date in September the payment was made, the bank then had reason to suspect, if it did not know, that Mr. Shav was unable to pay his debts as they became due. Mr. Stapleton plainly recorded on 19 September that he had then actually so concluded, but I think his assistant Mr. Pritchard, who also was conversant with Mr. Shaw affairs, was nearer the mark in saying that it was apparent at the beginning of July 1974-that Mr. Shaw "could not meet his commitmen as they became due". TI think reason for the suspicion to which Ss. 122(4) (c) (i) 'refers certainly existed on 14 August.' And there can be no goubt that the bank knew that the effect of the payment in question would be to g4ve it a preference over other creditors. Accordingly the bank is not protected by ' $s. 122(2). It is necessary only to add that on 22 November 1974 the bank wrote to Mr. Andrew saying, as to,the balance of the No. 2 account (which then stood at $1,069.08), that it had exercised its right of set-off and had applied those funds against liabilities owing to it by Mr. Shaw. I declare (1) that the payment to the debtor's Ne. 2 account of $61,871.32 was by reason of s. 122 of the Ean. ur. Act 1866 void to the extent of $58,864.98 as against the trustee of the deed of assignment executed under Part X of the Act on 23 October 1974; (2) that the amount of $1,065.08 standing to the credit of the debtor's No. 2 account on and after 8 November 1974 was property of the dcbtor divisible amongst his creditors; and I order that the respondent bank pay to the trustee of that deed a sun equal to the total, namely $59,934.06, of the two said amounts of $58,864.98 and $1,069.08, and his costs of and incidental to the application. The trustee has 'abandoned his application for an order for payment of interest. 3M INE TMMTRAL COURT OF AUSPRAL TA ) Te Sto ) BANKRUPTCY DLSTRICT OF THE STATE ) No. 38 of 1974/%x OF NEw SOUWHE Valais AND PIE -) AUSTRALLATE CAPLPAL TERRITORY ) . RE: BRYAN GEORGES SHAW Nebtor EX PARTE: WILLIAM EDWARD ALOR ' Trur Stee ° AUSTRALIA _& NEW ZFALAND : ' BARKING GROUP LITMTED . Regsponden JUDGE MAKING ORDER: RILEY J. - DATE OF ORDER: WHERE MADE: DECLARE: ORDER: 14 November 1977 - Sydney DECLARATIONS AND ORDERS 7 That the payment to the debtor's No. 2 account of $61,871.32 was by reason of s. 122 of the Bankruptcy Act 1966 void to the extent of $58,864.98 as against the trustce cf the deed of assignment executed under Part X of the Act on 23 October 1974. that the amount of $1,069.08 standing to the exedit of the debtor's No. 2 account on and after 8 November 1974 was property of the debto @ivisible amongst his creditors. That the respondent bank pay to the trustee a sum equal to the total, namely $59,934.06, of the two said amounts of $58,864.98 and $1,069.08, and his costs of and incidental to the application. CATCHVIORDS BANKRUPTCY -"VOLDABLE PREFERENCLIS OF ACCOUNTS - WHETHER DEBTOR ABLE * MONEY - WHETHER BANK PAYLE IN COOD FAITH - BANKRUPTCY ACT | 1966 SEC, 122. aan" ~ BANK - COMBINATION TO PAY OUT OF Olik ne tee ' REASONS POR JUDGINNT Bryan Goorye Shaw executcd a deed of assignment under Part X of the Bankruptcy Act 1966 on 23 October 1974. 'The dare when the relevant resolution under s. 204(1)(b) was passed is not shown by evidence formally adduced before me on the hearing of this application, but it is shown by the ceésxtificate filed pursuant to Ss. 204 (7) to have also been 23 October. Mr. W. E. And is the trustee of the deed. His application to the Court for certain declarations is primarily based on s. 122 of the Act, which by s, 231 (2) , applies, in the events which have happened, in relation to the deed of assignment as if on 23 October 1974 a sequestration order had been made against Mr. Shaw on a creditor's petition presented that day,, and which avoids as against the trustee certain transactions as having the effect of giving a creditor a preference, priority or advantage over other creditors. The : creditor alleged to have been preferred is the Australia and Kew Zealand Banking Group Limited, thé banker for Mr. Shaw and for certain companies controlled by him. The companies concerned were called Talga Limited, Australian Memorial Parks Pty. Limited, ' Mekol Pty. Limited and Bidges pty. Limited. JY shall call them respectively Talga, Parks, Mekol and Bidges. Mr. Shaw and the companies banked with the respondent' branch at Martin Place and George Street, Sydney where on behalf of the bank the assistant manager, Mr. Stapleton, had the effective conduct of their affairs. On 1 October 1962 Mr. Shaw had given the bank a letter of set-off, which was still operative at all reJevant timed So far as it is material, it reads as follows:- whe 7 "fg hereby acknowledge the right of the Nan a .any time without notice to me to apply Lhe any part of any balance that now or at any time may stand to my credit in any account whole future to payment any balance that may be to my debit in any other account, and to close all or any of such accounts, and whether any book entrics shall or shall not have been made to treat such credit balance as having been so applied and to deal with my drawings thereon accordingly." On 8 July 1974 Mr. Shaw's account ~(\hich I shall call his No. 1 account) was overdrawn by $53,080.64. t or That account and the accounts of the companies as a whole were in an unsatisfactory state having regard to the arrangements with the y bank under which they were being operated. Mr. Stapleton therefor ; concluded that the accounts should be controlled. Accordingly a procedure was adopted which Mr. Stapleton described as follows in his affidavit of 29 July 1977: "Tt is a practice of the respondent in the course . Of controlling its customers' accounts to control the customer's activity by closing a then current . account and opening a nev account often stylcd the * No. 2 account which must then remain in credat. « In such circumstances, it is normal practice to seek regular reductions to the debtor account or other arrangements for clearance of the borrowing". So Mr. Shaw's No. 1 account was closed and a No. account was opened. Relevant movements on those accounts, as , shown by the relevant bank statements, 'can be summarised as follow e . . No. 1 Account 8 July: 21 Aug: Overdraft service fee 40.00 Dr 23 Sep: 27 Sep: Deposit 1,260.00 Cr 20 Nov: Deposit 4.98 Cr 22 Nov: No. 2 Account 8 July: 12 Sep: Deposit . 23 Sep: Debit 24 Sep: 25 Oct: 8 Nov: , - an vq 61,871.32 Cr 57,600.00 Dr Balance 53,080.64 53,120.64 53,120.64 51,860. 64 51,855.66 51,855.66 0.00 61,784. 32 3,981.97 1,077.97 1,068.72 " 069.08 non me Cr cr Cr Cr cr i eee Re = 3 The trustee's claims way be conveniently stated as follows. When the deposit of a cheque for $61,871.32; represent the proceeds of the sale of cattle, was made to the No. 2 account on 12 September, or at any rate on 13 September when the clieque was Cleared, the bank was entitled hy reason of the letter of set-off of 1 October 1962 and the genexal law (see 3 Hals., 4th edn, para. 87) to apply that amount or a sufficient part of it in discharge of Mr. Shaw's then existing liability to the bank. Therefore, it is said, the payment of the $61,871.32 was a preferential payment within the reach of s. 122 to the extout of that indebtedness, which is said to be $58,865.98 but was in fact, $58,864.98. mo , , , Alternatively it is said that, in the exercise of its right to combine the No. 1 and No. 2 accounts, or to set-off the debit in the No. 1 account against the credit in the No. 2 account, and thus be liable to the customer only for the balance, , the bank did in fact on 23 September debit $57,600 to the No. 2 account and transfer it to a suspense account to be used as a set-off against Mr. Shaw's liabilities to the bank (see anncxures ' "D" and "E" to the trustee's affidavit of 29 March 1977), and thus there was a preferential payment of $57,600. Next, the trustee says that on 21 August the debit balance in the No. 1 account was $53,120.64 and on 22 Novembcr it was $51,855.66. The amount of the reduction (said to be $1,265.98 but in fact being $1,264.98), represented by the two amounts shown above as credited to the No. 1 account, he therefore claims on the principle of Recs v. Rank of N.S.W. (1964), J11 C.L., 210. This claim is cumulative on, the claim for $57,600. Last, there is the final balance of $1,069.08 which stood to the erecdit of the No. 2 Account." The bank does not conte the trustee's claim that. that amount was either a preferential payment within s. 122 or property o& the debtor divisible anongst his creditors. . In this case, the matters for decision under s. 122 (1) are: (1) whether there was a payment made _(2) by a person who was unable to pay his debts as they became due from his own money (3) in favour of a creditor (4) having the effect of giving that creditor a preference, priority or advantage over other creditors (5) being a payment made within six months before 23 October 1974. . If each of those matters is answered in the affirmative, the further question will arise whether the bank is, as it claims he, nevertheless entitled to the protection of s. 122(2). It would he &O entitled if it could prove that it was a payee in good faith ana for valuable consideration and in the ordinary course of business: s. 122(2}, (3); but the trustee contends that the bank cannot get that protcction because the payment, whenever it was made, was made under such circumstances as to lead . to to the inference tha't the bank knew or had reason to suspect that . Mr. Shaw was unable to pay his debts as they became due from his own money and that the cffect of the payment would be to give the bank a preference, priority on advantage over other creditors. It was not disputed that a payment was made either of $61,871.32 or of $57,600, or that it was made within the relevant period of six months, or that it was made in favour of a exrcditor !- and had the effect of giving that creditor a preference, priority ' or advantage over other creditors. The remaining questions arisin: under s. 122(1) are when the payment was made, and whether at that ne . oe ton Spm aAma tat nr meee ee eee wee ee ee eee eee se a5 independently of the letter of 1 October 1962 the ' bank had a right, there being no agreement With its custoner to the contrary, which entitled it as soon as Mr. Shaw opened a second current account to combine the two accounts whenever it pleased and set off the debit in one account against the ercdit in the other. (See Halesowen Presswork & Assemblies Ltd. v. Westminster Bank Limited, (1971) 1 Q.B.1, 34 per Lord Denning M.R., whose statement of principle remains unaffected by the reversal t of the decision by the House of Lords, (1972) A.C. 785). The lett of 1 October 1962 confirmed the existence of that right. It also established that the cight could be exercised without notace to Mr. Shaw and that, whether or not any book entries had been made, the bank could treat a credit balance as having been applied to payment of a debit balance and deal with any drawing accordingly. It was not suggested that the bank's right to combine ' accounts did not apply to the No. 1 and No. 2 accounts because when the latter was opened the former was frozen: see In re EB. J. Morel (1934) Limited, (1962) Ch. 21, 23, 30~32; and it appears from a letter from Mr. Shaw of 24 'September 1274 and the bank's reply of 1 October 1974 that the arrangement was that the xight should apply 'to those two accounts. Counsel for the trustee submitted however that set-off, and therefore payment for the puxposes of s. 122(1), did not occur until on 23 September the Bank actually debited the No. 2 account ° with $57,600 and transferred that amount to a suspense account. (That later date simplificd his submission that Mr. Shaw was insolvent when the payment was made.) lle proposed this test: if on say 20 Septembor, when there was a credit balance of $61,581.97 in the No. 2 account, Mr. Shaw had drawn a cheque for $60,000 on that account, would the bank have been bound to honour it? Counsel' —G- i was a debit balance of some $53,000 in the Mo. 1 account, end * i] "The customer must be taken to know the state of cach accoune, an" if the balance on the whole is against him or does not equal th«. "cheques he draws, he has no right to expect those cheques to be cashed": Garnett v. M'Kewan (1872), L.R. 8 Exch. 10, 13 per Kelly C.B.) ir. Stapleton gave evidence the effect of which was that in the normal- course of events if a cheque is deposited to a customer's account, and credited to that account, on 12 Septerbc (as was the cheque for $61,871.32, which was drawn on the Wales House branch of the Bank of Nev South Wales) the credit entry is treated as provisional unti] the time for aishonour has eleps? $d f the cheque would be presented for payment on 13 September, and the paying bank would have 24 hours after presentment in which to @ishonour it. There is no evidence of departure in this case front the normal, and therefore the funds represented by the chegue for .- ' $61,871.32 became available to the respondent bank on 14 Soptembe. and on that' date Nr. Shav, by having paid the cheque for $61,871.3 into his No. 2 account on 12 September, accordingly put the bank in a position in which it could exercise its right to combine the accounts. In my opinion, on that date, and if not on that date then on 13 September; a payment of $61,871.32 was made within s. 122(1). . If I am wrong in that view, then I think the relevant payment was made on 23 September when the bank appropriated $57,600 from the No. 2 account to set off against Mr. Shaw's indebtedness. In doing so, in my opinion, it acted as his agent pursuant to the letter of 1 October, 1962. . I turn now to cons ider whether Mr. Shaw was at either of the relevant dates in September unable to pay his debts as they became duc from his own money. In my opinion he was in that wee state on both datas. At all xelevant times Mi. Shaw was a solicitor with an interest in each of two practices. Through the companies, each of which seems to have had an attendant group of companies, he also had interests in various commercial, pastoral, constructio and other enterprises. His affairs and those of the companies we were inextricably interwoven and he was heavily engaged in their financial arrangements as guarantor. The bank's standard form of guarantee states the extent of the guarantor's liSbility in a sing, sentence. That is not to say, however, that the bank can be accus: of boing unduly laconic: the sentence runs for 57 lines of prini and contains probably some 1,200 words. Patient analysis reveals embedded in it a provision that the guarantor of a customer guarantees the payment by the customer to the bank of all suis oving by the customer to the bank in respect of any guarentee given by the customer to the bank. lr. Shav had guaranteed the accounts of Mekol and Bidges with the bank and as a result was also guarantor of Parks and Talga. He had also given guarantecs to F.N.C.B.-Waltons Finance Limited and a' company called Cadea (No. 7) Pty. Limited. On 23 Joly 1974 Mr. Shaw's accountant submitted to the Bank a statement (Exhibit F) of Mr. Shaw's estimated assets and Viabilities as at 9 July 1974. It showed the following: ASSEPS: Interest in legal practices 46,662 ' Cattle 250,000 Shares in Legal Holdings Ltd. 69,706 Other 71,000 ' $437,368 ANZ Banking Group Ltd. . 53,081 Ornug to B.G. & E.J.. Shaw Farm Partnership 23,574 Owing to associated companics: Tisami Pty Ltd Group 14,320 Mekol Pty Ltd Group 153,310 Legal Holdings Pty Ltd 20,798 186,428 Other _18 ,800 " $283,883 NET ASSETS $153,485 The document also stated that no allowance had been made for contingent liabilitics as at 8 July 1974 in respect of * the following guarantees {a) To the ANZ Banking Group Ltd in respect of advances to . $ - the Mekol Group 324,000 - the Talga Croup 409 ,OS0 - Bidges 148 , 000 (b) Guarantees in respect of advances to Taiga Ltd by 11.B.C. International ', Ltd and Cadea (Ho. 7) Pty Ltd 5,000,009 : (c) Guarantces in respect of advances by TFNCB-WALTONS Finance Ltd to: (i) Wuninuna Pastoral Co. Pty Ltd 488,750 {ii) Cloontyclogher Pastoral Co. pty Ltd 446,250 (a) Other guarantecs 151,900 It was known by 14 August 1974 that Mr. Shaw's cattle valued at $250,000 and cattle belonging to Mekol valued at $50,000 would together realise on sale only $110,000, and therefore that Mr. Shaw's cattle were worth only about 5/6ths of that amount - i.e. less than $92,000 - so that that asset had decreased in value by $158,000. And on 12 September Cadea (No. 7) Pty Ltd served on Nr. Shaw a document requiring him to pay $5,000,¢ pursuant to his guarantee of advances to Talga. At that stage Mr. Shaw had available to him nothing like sufficient resources to, meet. his liabilities. In cross-exzamination he was asked whother I =e -9- before receiving that notice he was paying his debts. He ropleres, | "No, L was not. By the last fov days of August L vas in a voiy distressed condition, and I believed that-there was no way ouk of my financial problem". It also appears from an affidavit svorn on 1O August 1977 by the trustee that creditors have proved for debts amounting to at least about $23,000 which had been incurred a before 9 July 1974 -and were not included in the liabilities shown in Exhibit F as existing at that date. Furthermore, early in July 1974 there was submitted to the banl::a cash flow budget (Exhibit E), for the pexiod from 24 June to 31 December 1974, in respect of Ih. Shaw and the fart4 company Tisami Pty Ltd which he controlled and which held most of its assets on discretionary trusts. That document showed estimated receipts and outgoings for every month from June to December, both, inclusive, and the total for the seven months. It may be summarised by the following table:- . a $'000 Jun Jul Aug Sept Oct Nov Dec Tc ° RECEIPTS . , Repayments by Talga 8 26 42 " Mekol 250 : Sale of cattle . 40 309 Other ' _ 18 3 8 58 - 309 - 3 26 292 \ OUTGOINGS Repay FRCB-Walton 489 Other . 8 34 62 60 iL 30 17 Total 8 34 ~ 62 60 11 30 506 SURPLUS . -~ 24 247 - - - - DEFLCIT ie - 60 8 4 -Lo- - 7 As I have said, it was knewn hy 14 Angust that by che end of August the sale of cattle would bring not $349,060 but only $110,000. It followed that Lhe surplus accumulated at the end of August would be not $271,000 but only $32,000. According , to the budget September and October would bring in only $3,060. But during those months outgoings would be respectively $69,000 and $11,000. On 12 September Cadea (No. 7) Pty Lta appointed a receiver of Talga. Thexefore, taking a Longer view, it became improbable that the $76,000 due to be repaid by Talga in November ' and December would in fact be received, A letter from Mekol to : the Bank dated 3 July 1974 had made it clear that Mekol was heavil, dependent on the prosperity of Talga and was "in a position to sui: its requirements to 30th November at least, by calling upon Talga | \ for progressive repayments of amounts owing by that company". So it was also improbable that the $250,000 due to be repaid to 7 Mr. Shay and the Tisami Group in December by HMckol would be received. 'And in that month $489,000 would be payable to FNCB-Waltons Finance Ltd, which had lent that amount on mortgage to a company called Nuninuna Pastoral Co. Pty Ltd. That loan had been repayable on 17 Nay 1974, and was jointly and severaily t guaranteed by Mr. Shaw, Tisami and Talga. The lender had granted an extension of time for six months. At no time were the moneys available to Mr. Shaw sufficient to enable him to meet his liabilities. In my opinion, whether one considers the position as at 13 or 14 September 1974 or as at 23 September 1974, and whether one then takes a view of ~ the future extending for one month or for three, Mr. Shaw was , not able to pay his debts as they became due out of his own money. Yinally, in my opinion, the bank must bé aecemed, in accoxdance with s. 122 (4) (c), not. to be a payee in good faith, and therefore is not entitled to the protection of §.122(2). ~la-* can be no doubt that the bank lnew that the effect of the payment in guestiron would be to give it a preference over other creditors. Accordingly the bank is not protected by s. 122(2). It is necessary only to add that on 22 November 1974 the bank wrote to Mx. Andrew saying, as to, the balance of the No. 2 account (which then stood at $1,069.08), that it had exercised its right of set-off and had applied those funds against liabilities owing to it by Mr. Shaw. I @eclare (1) that the payment to the debtor's No. 2 account of $61,871.32 was by reason of s. 122 of the Ean. ur. Act 1966 void to the extent of $58,864.98 as against .the trustee of the deed of assignment executed under Part X of the Act on 23 October 1974; (2) that the amount of $1,069.08 standing to the credit of the debtor's No. 2 account on and after 8 November 1974 was property of the debtor divisible amongst his creditors; and I order that the respondent bank pay to the trustee of that decd a sun equal to the total, namely $59,934.06, of the two said amounts of $58,864.98 and $1,069.08, and his costs of and incidental to the application. The trustee has 'abandoned his application for an order for paywent of interest.