CATCHWORDS Bankruptcy Act 1966, s. 123 - payee having failed to prove that he was a payee in the ordinary course of business, payment having been received as a result of a letter of demand from the payee's solicitors, payee not protected against the doctrine of relation back. Accordingly, payment declared void as against the trustee of the estate of the bankrupt. RE: ALEX NEVILLE BIRD (as Trustee of the Estate of YIANGOS ARCADIOU, a Bankrupt ) EX PARTE: PAUL AZZOPARDI trading as Paul Azzopardi & Co. SWEENEY J. 19 DECEMBER 1979 IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION No. 68 of 1977 BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA RE: ALEX NEVILLE BIRD (as Trustee of the Estate of YIANGOS ARCADIOU, a bankrupt) EX PARTE: PAUL AZZOPARDI trading as Paul AzzOpardi & Co. ORDER JUDGE MAKING ORDER: SWEENEY J. WHERE MADE: MELBOURNE DATE OF ORDER: 19 DECEMBER, 1979 THE COURT DECLARES THAT: The payment of $4000.00 made by the bankrupt to the respondent on 29 September 1976 1s void as against the applicant as trustee of the property of the bankrupt and orders that the respondent pay to the applicant the sum of $4000.00, together with his costs of and incidental to the application, including reserved costs, such costs to be taxed if not agreed. Liberty to apply is reserved to either party, IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA No. 68 of 1977 Re: Alex Neville Bird (as Trustee of the estate of Yiangos Arcadiou, a bankrupt) Applicant Paul Azzopardi trading as Paul Azzopardi & Co. Respondent REASONS FOR JUDGMENT C.A. Sweeney J. 19 December, 1979 In this application, as amended by leave, the applicant seeks the following declarations and orders: "(a) That payment made by the bankrupt to the Respondent on the 29th September, 1976 for $4,000.00 is void as against the applicant as Trustee of the property of the bankrupt as being payment having the effect of giving the respondent a preference priority or advantage over creditors of the bankrupt or alternatively by virtue of the Bankruptcy of the Bankrupt having been deemed to have relation back to date the 20th September, 1976 on which date the bankrupt gave notice to some of his creditors namely Gubbatta Nominees Pty. Ltd trading as Highett Timber Co., Tasmanian Board Mills Ltd., trading as Country & Western, Guardian Investments Pty. Ltd., Beneficial Finance Corporation Ltd. and Alliance Acceptance Corporation Limited, that he has suspended or 1s about to suspend payment of his debts. (b) An order that the respondent pay to the applicant the sum of $4,000.00." The respondent based his notice of intention to oppose the application on the grounds: "1. That the payment made by the Bankrupt to the Respondent on or about the 29th September, 1976, of the sum of $4,000 in respect of work and labour performed by the Respondent for the said Bankrupt, was received by him in good faith, for valuable consideration and an the ordinary course of his business. 2. That the payment made by the Bankrupt to the Respondent on or about the 29th September, 1976, of the sum of $4,000 was a payment by the debtor to a creditor, was a transaction which took place before the date on which the debtor became bankrupt, and at the time it was so made the Respondent had no notice of the presentation of a petition against the debtor and the transaction was in good faith and in the ordinary course of business." During the course of the hearing the respondent conceded that the bankrupt committed the act of bankruptcy alleged to have taken place on 20 September, 1976, and that at the date of the payment 1n issue the bankrupt was unable to pay his debts as they became due from his own money. His counsel, Mr Murdoch, made it clear that his client's defence to the claim of preference based on s.122 was limited to the contentions raised in paragraph 1 of his notice and in respect of the claim of relation back based on s.123 he relied solely on paragraph 2. He conceded that, if the applicant succeeded in relation to the issues raised by these two paragraphs, he was entitled to the relief sought. The respondent filed an affidavit in which he gave his account of his dealings with the bankrupt, as follows: "1. I am the Respondent herein and together with my wife, Margaret Helen Azzopardi, am a joint proprietor of the firm Paul Azzopardi & Co., of 35 Station Avenue, St. Albans, in the said State. 2. I farst commenced doing foundation work for Arcadia Homes, Mr. Arcadiou's business, in early March, 1976, after Mr. Arcadiou had one day late in February, 1976, approached me on site to ask 1f I would perform sub- contract work for him. I had had neither personal nor any business contacts with Mr. Arcadiou prior to this time. «+-/3 The "Arcadia 3. Before doing any work for him I made some brief enquiries of some carpenters, who I ascertained had performed some contract work for him, as to whether he paid his sub-contractors promptly and was told that I should have no worries. Nevertheless, I asked Mr. Arcadiou within what time I would be paid for my work and he said within 14 days. I did various foundation jobs for Arcadia Homes from March, 1976, until May, 1976, and sent invoices and regular statements in respect thereof. Now produced and shown to me and marked "A" is a bundle of copy invoices forwarded to Arcadia Homes in respect of all the work done by me as aforesaid. Because I didn't receive prompt payment for my labours as I had been promised, I took the opportunity on a number of occasions, when I saw Mr. Arcadiou on a site on which I was working, to ask him to pay the outstanding accounts. He generally replied by telling me that he would send a cheque the following week. At one stage he said he would pay all outstanding moneys by the end of May, but he didn't, and in a statement sent in or about June, 1976, a demand was made for the payment of all outstanding moneys, failing which, it said, the matter would be referred to my solicitors. Now produced and shown to me and marked "B" is a copy of the said statement." statement read as follows: Homes 4 Glengala Road West Sunshine March 76 May 76 PLEASE NOTE INV 1040 1897.50 1049 2926.00 1050 259.00 1056 787.00 5869.50 1099 2908.00 8777.50 I have rang several times regarding this account and you haven't answered my calls, Paul also told me you were going to pay this account before the end of May. If this account is not paid within 7 days I will be forced to put it in the hands of our solicitor. Margaret Walsh for PAUL AZZOPARDI & CO." «./4 4. The respondent's narrative then resumed: "6. As no payment was forthcoming, I instructed my solicitors to take whatever action they saw fit in order to compel Arcadia Homes to pay the account. I am told by my solicitors and verily believe that on the 25th August, 1976, a letter of demand was forwarded to Arcadia Homes. Now produced and shown to me and marked "C" 1s the said letter." Omitting formal parts, the letter dated 25 August 1976 read as follows: "We act on behalf of Paul Azzopardi & Co., of 35 Station Avenue, St. Albans. We are advised by a representative of our client firm that your firm is indebted to our client in the amount of $8,777.50, being work and labour done and materials provided as set out below: 1. Invoice No. 1040 dated the 10th day of March 1976 in the amount of $1,897.50, being for foundation work undertaken on Lot 172 Kings Road, St. Albans. 2. Invoice No. 1049 dated the 18th day of March 1976 in the amount of $2,926.00, being for foundation work undertaken on Lots 63 to 72 Glenmoyne Street, Werribee. 3. Invoice No. 1050 dated the 18th day of March 1976 in the amount of $259.00, being tappings and sewerage provided for plumbing. 4. Invoice No. 1056 dated the 24th day of March 1976 in the amount of $787.00, being for foundation works completed at Lot 336 Wright Street, West Sunshine. 5. Invoice No. 1099 dated the 6th day of May 1976 in the amount of $2,908.00,being for foundation works completed at Lots 62, 67, 74 and 75 Gienmoyne Street, Werribee, and for blasting undertaken at Lot 172 Kings Road, St. Albans. Unless we receive your settlement offer with respect to the above outstanding sum in the amount of $8,777.50, within ten days (10) from the date hereof, we are strictly instructed to expedite the institution of proceedings in order to recover this amount." we /5 5. The respondent's affidavit continued: "7. 10. In or about early September, 1976, I met, on a building site on which I was working, a Mr. Lou Battista, a representative of the Housing Industry Association, and in the course of an ensulng conversation, detailed to him my complaints concerning Arcadia Homes' failure to pay my account. He told me that he would see what he could do for me. On or about the 30th September, 1976, I received a cheque in the sum of $4,000 from Mr. Arcadiou. The money was received by me in good faith and for valuable consideration and in the ordinary course of business. I neither knew, nor had any reason to suspect, that Mr. Arcadiou was unable to pay his debts as they became due from his own money. At no stage did Mr. Arcadiou in the abovementioned conversations indicate that he was in any financial difficulty; in fact, his demeanour suggested to me that he was a wealthy and successful businessman. I have been in business as a Foundation Contractor for some 16 years. In that time there have been many occasions when I have had to wait for substantial periods for payment for work which I have performed. I regarded the non-payment by Arcadia Homes as another instance of this type of occurrence without suspecting for a moment that Mr. Arcadiou was insolvent. Not only was I not told by Mr. Arcadiou or, by any person on his behalf, that he was in financial difficulty, but I heard no rumour or talk to that effect among people who I knew to have performed sub-contract work for Arcadia Homes." The respondent went on in paragraph 11 of his affidavit to say: "... having spoken to Mr. Battista as aforesaid I had no further contact with him until after I had been paid the cheque for $4,000. At no stage was I aware that the Housing Industry Association was acting on behalf of a group of Mr. Arcadiou's major creditors in relation to his financial affairs. Indeed, had I known of Mr. Arcadiou's financial difficulties, I would 6. have given instructions to my solicitors to commence proceedings against Mr. Arcadiou and Arcadia Homes long before February 16th, 1977, when proceedings were issued against Arcadia Homes out of the County Court claiming the balance of the moneys owing to me." The respondant carried out work for the bankrupt in March 1976 on four building sites to a total value of $5869.50. In early May he performed further work to a value of $2908.00. All this work was carried out on terms of payment within fourteen days and the bankrupt made and broke frequent promises to pay the overdue amounts. In or about June 1976 the respondantmade a written demand for the payment of the total amount due, which was $8777.50, stating that if the account was not paid within seven days, it would be placed in the hands of the applicant's solicitors. No payment was received and on 25 August 1976, his solicitors set out the amounts due and stated that "unless we receive your settlement offer with respect to the above outstanding sum in the amount of $8,777.50 within ten days (10) from the date hereof, we are strictly instructed to expedite the institution of proceedings in order to recover this amount". Payment was not received until 29 September 1976 and then only in an amount of $4000, leaving an unpaid balance of $4777.50. On 15 March 1977 the bankrupt's own petition was accepted by the Registrar and pursuant to the provisions of s.115 (2) his bankruptcy "shall be deemed to have relation back to, and to have commenced at, the time of the commission of " the act of bankruptcy which the respondent conceded that the bankrupt had committed on 20 September, 1976, which was within the period of six months immediately preceding the date on which the petition was presented. The property divisible amongst the bankrupt's creditors, by reason of the provisions of s.116, «2 -/7 included the amount of $4000.00 paid by him to the respondent on 29 September, 1976, unless the respondent discharges the burden placed upon him by s.123(2) of proving, amongst other things, that the transaction was in good faith and in the ordinary course of business. The meaning of the words "in the ordinary course of business" in s. 95 of the Bankruptcy Act 1924, the precursor of s. 122 of the present Act, has been considered in the High Court. In Robertson v. Grigg (1932) (47 C.L.R. 257, at p- 267), Gavan Duffy C.J. and Starke J. said:- "Therefore, the test under sec.95 of the ordinary course of business 1s not whether the act 1s usual or common in the business of the debtor or of the creditor, but whether it 1s 'a fair transaction, and what a man might do without having any bankruptcy in view'." In the same case, at p. 273, Evatt J. said;.- "'The ordinary course of business' is not, I think, to be related to any special business carried on by either debtor or creditor, but is concerned with the character of the impeached transaction itself." In Burns v. McFarlane (1940) (64 C.L.R. 108 at p. 125), Rich, Dixon and McTiernan JJ. said: "But the expression as used in the Bankruptcy Acts is a wide one .... Unlike the expression found in the bills-of-sale legislation, viz. "transfers of goods in the ordinary course of business of any trade or calling,' 1t does not require an investigation of the course pursued in any particular trade or vocation and it does not refer to what is normal or usual in the business of the debtor or that of the creditor." In Downs Distributing Co. Pty. Ltd. v Associated Blue Star Stores Pty. Ltd. (In Liquidation) (1948) (76 C.L.P. 463, at p. 480), Williams J. said: 226 8/ "It seems to me, therefore, that the expression refers to a transaction into which 1t would be usual for a creditor and debtor to enter as a Matter of business in the circumstances of the particular case uninfluenced by any belief on the part of the creditor that the debtor might be insolvent." In Re Bailey; ex parte Law v Austin (1952), 16 A.B.C. 80, Clyne J. expressed the opinion (at p. 85), with which I respectfully agree,that the words had the same meaning in s.96 of the 1924 Act, which dealt with the protection of certain payments against the doctrine of relation back, as does s.123 of the present Act. In my opinion the words 'in the ordinary course of business' in ss. 122 and 133 of the present Act have that same meaning. One of the two payments which were challenged in the case of Re Bailey was received by a creditor as a result of his solicitor's demands and it was held that it could not be regarded as having been received in the ordinary course of business. (See also Commins v I. & R. Spies Investments Pty. Ltd, re Hoare (1972-1973) A.L.R. 1134). I am satisfied that the payment here in question was received as a result of the letter of demand by the respondent's solicitors and that the respondent has failed to show that the payment was received in the ordinary course of business, within the meaning of s.123. It 1s not necessary to consider the question whether the respondent was a payee in good faith within the meaning of that section, or the claim of the applicant based upon s.122. The Court declares that the payment of $4000.00 made by the bankrupt to the respondent on 29 September 1976 is void as agaznst the applicant as trustee of the property of the bankrupt and orders that the respondent pay to the applicant the sum of $4000.00, together with his costs of and incidental to the application, including reserved costs, such costs to be taxed if not agreed. Liberty to apply is reserved to either party.