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 and from the issue and service of a County Court summons, 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) EX PARTE: N.C. GREGORIADES 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 YIANCOS ARCADIOU) EX PARTE: N.C. GREGORIADES ORDER JUDGE MAKING ORDER: SWEENEY J. WHERE MADE: MELBOURNE DATE OF ORDER: 19 DECEMBER 1979 THE COURT DECLARES THAT: The payment of $2009.00 made by the bankrupt to the respondent on 7 December 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 $2009.00, together with his costs of and incidental to the application, including reserved costs, such costs to be taxed if not agreed. Liberty is reserved to either party to apply. 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 Applicant N.C. Gregoriades Respondent REASONS FOR JUDGMENT C.A. Sweeney J. 19 December, 1979 In this application, as amended by leave, Alex Neville Bird as trustee of the estate of Yiangos Arcadiou, a bankrupt, seeks the following declarations and orders: "(a) That payment made by the bankrupt to the Respondent N.C. Gregoriades being one payment of $2,009.00 made on or about the 7th day of December, 1976 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 the 20th September, 1976. (b) An order that the respondent pay to the applicant the sum of $2,009.00." The respondent in his notice of opposition, as amended by leave, relied on the following grounds: "he. That the payment made by the bankrupt to the Respondent on or about the 6th December, 1976, of the sum of $2,009 in respect of accountancy fees was received by him in good faith, for valuable consideration and in the ordinary course of his business and the said payment was received by the Respondent as a creditor. oe /2 2. That the said payment is protected by the provisions of s.123 of the Bankruptcy Act 1966, as amended, in that: (a) 1t was made before the date on which the bankrupt was made bankrupt; (b) the person with whom 1t took place other than the bankrupt did not have notice of the presentation of the petition of the bankrupt; (c) the transaction was in good faith and in the ordinary course of business. 3. The respondent denies that the act of bankruptcy alleged by the applicant in paragraph (a) of the application as amended took place." Counsel for the respondent, Mr Radford, conceded during the course of the hearing that the act of bankruptcy relied upon by the applicant had taken place. The applicant was thus able to establish that the bankruptcy of the bankrupt shall be deemed to have relation back to, and to have commenced at, the time of the commission of the admitted act of bankruptcy on 20 September 1976, which was committed within the period of six months immediately preceding 17 March 1977, the date on which his own petition was presented (see Bankruptcy Act 1966, s.115(2) (a)). Under s.123(2) the burden rests upon the respondent of proving the facts giving rise to the protection provided by that section against the operation of the doctrine of relation back. One of those facts was that the transaction was in the ordinary course of business (see sub-sec. (1) (g)). The respondent, in his affidavit, gave the following account of his dealings with the bankrupt: ~.-/3 "2, I first commenced to act as accountant for the bankrupt, Mr. Arcadiou, in March, 1975, at which time he consulted me with a view to seeking my assistance in the preparation of Income Tax Returns for the financial years 1969/70 to 1974/75. Prior to his consulting me I had known Mr. Arcadiou both in Cyprus, from which country we both originate, and in Victoria, but only on a superficial level and not as a personal friend. Although Mr. Arcadiou had a reputation in the Cypriot community as being a successful builder, I had no knowledge of his financial affairs. After the initial interview with Mr, Arcadiou, save for the preparation of a Statement of Assets and Liabilities, I was not myself directly responsible for the preparation of the Income Tax Returns, this task being delegated to a member of my accounting staff, Mr. Dimos Dimosthanous. The cash books were prepared by some of my secondary staff. Although I was not responsible for preparation of the Income Tax Returns, I personally checked them before they were given to Mr. Arcadiou for signature. From the time that I commenced to act for Mr. Arcadiou until his payment of my account in December, 1976, I believed him to be ina financially sound position. I was neither told nor heard by way of rumour that he was unable to pay his debts. My belief that Mr. Arcadiou was in a sound financial position was reinforced by two factors: firstly, his Income Tax Returns had consistently shown that he was trading profitably - Financial year ending June 1973 Net taxable profit $4,628.00 Net taxable income $4,236.00 June 1974 Net taxable profit $6,129.00 Net taxable income $5,569.00 June 1975 Net taxable profit $16,859.00 Net taxable income $19,364.00 and as at the 27th November, 1975, as a result of anformation supplied to me by Mr. Arcadiou, I believed that he was possessed of net assets in the sum of $399,159.00. Now produced and shown to me at the time of swearing this my affidavit and marked with the letter "A" is a copy of the Statement of Assets and Liabilities. I am unable to produce copies of Income Tax Returns for the five years ended June, 1970, to June, 1974, as the same were taken from me by representatives of the Applicant on the lst February, 1979. Now produced and shown to me at the time of swearing this my affidavit and marked wath the letter "B" 1s an acknowledgement by one of the Applicant's representatives of having taken from me the documents therein set forth. 6. Income Tax Returns for the financial years ended June, 1970, to June, 1974, were lodged in or about August, 1975, and an account was sent to Mr. Arcadiou wherein I sought payment of $1,285.00. Subsequently, the Income Tax Return for the year ended June, 1975, was lodged and the account together with the letter dated the 7th September, 1976, referred to in paragraph 4 of the Affidavit of Yiangos Arcadiou sworn the 19th March, 1979, was forwarded to him. As payment was not immediately forthcoming I telephoned Mr. Arcadiou on a number of occasions and inquired of him why he had not paid. He told me that he was very busy and had simply not found the time to sit down and write out a cheque. At no stage did he intimate that he was financially insecure. 7. Notwithstanding my telephone calls Mr. Arcadiou did not pay me, and accordingly I instructed my solicitors to issue legal proceedings to enforce payment. This was my normal practice in respect of debts outstanding for this length of time." An account for work done by the respondent in 1975 for the bankrupt, claiming the amount of $1285.00 was sent to him in January 1976. Further work was done for the applicant un 1976 and on 7 September 1976 a letter was written to him in which the respondent said: ofS "Enclosed herewith we forward our account for fees showing a total amount owing of $2009. Part of this amount (eg. $1285) was owing for OVER ONE YEAR now and, although we provided prompt and efficient service for your accounting needs we haven't had the satisfaction of receiving any payment from you. Although an unpleasant step to take we must give you notice that unless our account 1S promptly paid in full our solicitors will be instructed to take legal proceedings for recovery." The enclosed account, also dated 7 September 1976, read as follows: ""-Writing up of Cash Analysis Book and Bank Reconciliation. -Preparation of final accounts and lodgement of 1975 Income Tax Returns. $724.00 -Balance outstanding as 1285.00 at 4/9/76 —_—__— $2009.00" Despite this letter and earlicr written and telephoned reminders, no payment was received by the respondent until after the bankrupt had been served with a County Court summons issued by the respondent in respect of his account. The property divisible amongst the bankrupt's creditors by reason of the provisions of s.116 included the amount of $2009 paid by him to the respondent on 7 December 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. 6, In my opinion, following such cases as Re Bailey, ex parte Law and Austin (1952) 16 A.B.C. 80; Commins v. I. & R. Spies Investments Pty. Ltd., re Hoare (1972-1973 A.L.R. 1134), the respondent has clearly failed to show that the transaction was in the ordinary course of business. Indeed, I am satisfied on the evidence that it was not, as it clearly resulted from the efforts of the respondent's solicitors in writing a letter of demand and issuing and serving upon the bankrupt a County Court summons. It is not necessary to consider the question whether the respondent was a payee in good faith within the meaning of s.123, or the claim of the applicant based upon s.122. The Court declares that the payment of $2009.00 made by the bankrupt to the respondent on 7 December 1976 is void as against the applicant as trustee of the property of the Eunkrupt and orders that the respondent pay to the applicant the sum of $2009.00, together with his costs of and incidental to the application, including reserved costs, such costs to be taxed 1f not agreed. Liberty is reserved to either party to apply.