/ CATCHWORDS Bankruptcy Act 1966 - held, under s.122, a payee seeking to show that he was a payee in good faith bore the onus of negativing the inference referred to in sub-sec. (4) (c); held, onus discharged in respect of first payment challenged but not discharged in respect of second payment; meaning of words "unable to pay his debts as they became due from his own money" considered. Held in respect of first payment, payee had also discharged the burden of proving that it was a payee in good faith within the meaning of s.123 and accordingly held that that payment was protected against the doctrine of relation back; first payment declared void as against the trustee of the bankrupt's estate. RE: ALEX NEVILLE BIRD (as Trustce of the Estate of YIANGOS ARCADIOU, a bankrupt) EX PARTE: M. & G. CASABENE & SONS 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: M. & G. CASABENE & SONS ORDER JUDGE MAKING ORDER: SWEENEY J. WHERE MADE: MELBOURNE DATE OF ORDER: 19 DECEMBER 1979 THE COURT DECLARES THAT: The payment made by the bankrupt to the respondent of $2,500.00 on 4 February 1977 1s void as against the applicant and orders that the respondent pay to the applicant the sum of $2,500.00. It is ordered that the applicant pay one third of the costs of the respondent of and incidental to the application, including reserved costs, such costs to be taxed if not agreed. The costs so paid to the respondent and the taxed costs of the applicant of and incidental to the application may be recovered by the applicant from the estate of the bankrupt. Otherwise, the application is dismissed. Liberty 1s reserved to either party to apply. IN THE FEDERAL COURT OF AUSTRALIA No. 68 of 1977 GENERAL DIVISION Re : ALEX NEVILLE BIRD (as Trustee of the Estate of YIANGOS ARCADIOU, a bankrupt Applicant and M. & G. CASABENE & SONS 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 Y1rangos Arcadiou, a bankrupt, seeks the following directions and orders: "(a) That payment made by the bankrupt to the Respondent on the 7th October, 1976 for $4,000.00 and on the 4th February, 1977, for $2,500.00 are 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 day of September, 1976. (b) An order that the respondent pay to the applicant the sum of $6,500.00." In his Notice of Intention to oppose the application, the respondent's grounds were stated as follows : 1. That payments were made by the said YIANGOS ARCADIOU as a debtor to the Respondent as a creditor on the 7th October, 1976 for $4,000.00 and on the 4th February, 1977 for $2,500.00. --f2 2. (a) the transactions encompassing the above payments took place before the date on which the said YIANGOS ARCADIOU became a bankrupt; (b) the Respondent did not, at the time of the said transactions, have notice of the presentation of a petition against the said YIANGOS ARCADIOU; {c) the said transactions were in good faith and in the ordinary course of business. That the Respondent has not been given any preference priority or advantage over creditors of the bankrupt; That the aboye payments to the Respondent are such as to be protected against the doctrine of 'relation back'," At the hearing, the respondent was given leave to amend this notice, so as to make it plain that, while it conceded that the applicant had otherwise established the facts necessary to show that it was entitled to the relief sought under both s.122 and s.123 of the Bankruptcy Act 1966, it contended that: (a) (b) in relation to the claim based on s.122, 1t was a payee in good faith and for valuable consideration and in the ordinary course of business, and in relation to the claim based on s.123, each of the payments made to it was a payment by a debtor to a creditor and each transaction took place on or before the date on which the debtor became a bankrupt; the person, other than the debtor, with whom 1t took place, namely the respondent, did not at the time of the transaction haye notice of the presentation of a petition against the debtor,and the transaction was un good faith and in the ordinary course of business. .-/3 3. Section 122(2) (a) provides: "Nothing in this section affects - the rights of a purchaser, payee or encumbrancer in good faith and for valuable consideration and in the ordinary course of business." Under sub-s. (3) the burden of proving the matters referred to in sub-s.(2)(a) l1es upon the person claiming to have the benefit of that sub-section. Sub~section (4) (c) provides that for the purposes of s.122: "a creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the conveyance, transfer, charge, payment or obligation was executed, made or incurred under such circumstances as to lead to the inference that the creditor knew, or had reason to suspect - (i) that the debtor was unable to pay his debts as they became due from his own money; and (il) that the effect of the conveyance, transfer, charge, payment or obligation would be to give him a preference, priority or advantage over other creditors." The manner in which sub~secs.(2) (3) and (4) should be construed has been considered in a number of cases. In S. Richards & Company Limited v. Lloyd & Another (1933) 49 C.L.R. 49, dealing with the predecessors of the sub- sections, namely s.95(2) and (4) of the Bankxurteou Act 1924, Rich and Dixon JJ. said at p. 60: "Tt was next said that the appellant had taken the assignment in good faith and for valuable consideration and in the ordinary course of business, and so obtained the protection of sub-sec.2(b) of sec.95. Upon this issue the burden of proof was upon the appellant and we think 1t 1s impossible to say that the evidence requires the conclusion that good faith was established. The debtor was unable to pay his large and long-standing debt to the appellant, and, of course, this the appellant's manager knew only too well. The sole difficulty arises from sub-sec.4, which may be thought to be expressed as 1f, before good faith 1s negatived, facts should affirmatively appear justifying the positive inference that the .-/4 creditor suspected that the debtor could not pay his debts as they became due and that the effect of the transaction would be to give the creditor a preference. But sub-sec. 4 should not be understood as detracting at all from sub-sec. 3, or as intending to substitute some artificial criterion for the issue set by sub-sec.2(b). In terms it is a prohibition. It denies the possibility of good faith 1f its conditions are satisfied. It says nothing about onus." In Burns v. McFarlane (1940) 64 C.L.R. 108 at p. 124 Rich, Dixon and McTiernan JJ. said: "To displace the operation of sub-sec. 4 of sec. 95 it was enough for the respondent to establish either that the circumstances under which the payment was made were not such as to lead to an inference that he knew or had reason to suspect that Woon was then unable to pay his debts as they became due or that the circumstances were not such as to lead to an inference that he knew or had reason to suspect that the effect of the payments would be to give him a preference or a priority or an advantage over other creditors." In Rees v. Bank of New South Wales (1964) 111 C.L.R. 210 Barwick C.J, at p. 217 said: "His Honour makes no reference in his reasons for judgment to the imperative provisions of sub-s.(4) of s.95 of the Banktuptcy Act (Cth), But for that sub-section, I would not disturb his Honour's finding of bona fides 1n the bank in connexion with the transactions in question. But in my opinion the inference that the bank at least had reason to suspect that the company throughout the period of the payments was unable to pay its debts and that the effect of the payments, as they were to be applied by the bank, would be to give the bank a preference, priority or advantage over the other creditors 1s inevitable. That the bank bears the onus of negativing such an inference makes the result of this appeal even more certain." 22 25/ Queensland Bacon Pty. Ltd. v. Rees (1965-1966) 115 C.L.R. 266 had been heard at first instance by the Supreme Court of Queensland, where Gibbs J. held that certain payments made by a company which was later wound up were not made in good faith within the meaning of the Bankruptcy Act 1924, s.95(2)(b), having regard to the provisions of s.95(4), (see p.280). At p. 286 Barwick C.J. said: "I now turn to the second matter common to all appeals, namely, the question whether, if he is to escape avoidance of the preference, s.95(4) casts any onus upon the preferred creditor to negative the existence of any circumstances from which the court could infer that he knew or ought to have suspected his debtor's insolvency. Although his Honour made no express finding in that respect in all the cases, it would seem from his reasons for judgment that, the terms and consequences of s.95(4) apart, he would have been prepared to find that the appellants received the payments which he found to be preferences in good faith. But in each case he found that the creditor had not satisfied him that the circumstances of the receipt of the payment did not justify the iunference that the creditor knew or had reason to suspect that his debtor was then insolvent and that the effect of the payment would be to give him a preference, priority or advantage over other creditors. His Honour does not express his conclusion in this respect in precisely the same terms in each case but his view is substantially the same in each. His expression of it in the application against Queensland Bacon indicates that view. He there said: "The burden of proof that the payments impeached were not made under such circumstances as to lead to the inference that the respondent had reason to suspect the matters mentioned in s.95(4) of the Bankruptcy Act is cast upon the respondent by s,.95(2)". And again: "However I need not consider that aspect of the matter" - i.e. the extent of the creditor's conclusions from the facts it knew about the company and its dealings - "if I find that the respondent has not discharged the onus of proving that the payment was not made under such circumstanccs as to lead to the inference that the respondent had reason to suspect that the company was unable to pay its debts as they became due", 22 67 6. In my respectful opinion, his Honour was in error in reading s.95 as casting such an onus on the creditor. No doubt s.95(3) casts upon the creditor who has received a preference the onus of bringing himself within one of the paragraphs of s.95(2). The existence of knowledge or suspicion of insolvency negatives good faith: and the knowledge of circumstances from which ordinary men of business would conclude that the debtor 1s unable to meet his liabilities is knowledge of insolvency: bank uf Austratasica v. Halk (1), Natconak Bank of Austrakasia ve. Morres (2)3 Tomkens v. Sagkerty (3). The proof of the circumstances under which the payment was made would seem to be an indispensable step in an attempt to prove that the creditor in receiving it was acting in good faith within the meaning of s.95(2). But, though s.95(4) relates to good faith, it does not extend the onus cast by sub-s.(3) so to require the creditor to negative the existence of circumstances from which the described inference could be drawn by the court. It was pointed out in S. Richards & Co. Ltd. v. LZoyd (4) that section 95(4) 1s in terms a prohibition, addressed to the court, denying the possibility of a finding of good faith if its conditions are satisfied. "It says nothing about onus" (5). The condition it raises is that the court is positively satisfied that the circumstances of the payment justify the inference by it that the creditor knew or had reason to suspect the insolvency and the preference. To treat this as imposing an onus on the creditor to negative the existence of any such circumstances is, in my respectful opinion, to misread the sub-section. If the court, otherwise satisfied of good faith, has no material or insufficient material from which 1t can draw the inference mentioned in s.95(4), the creditors' exculpation under s.95(2), if otherwise made out, will be complete; or if, in such circumstances, the court is in doubt as to whether or not the inference should be drawn, the preference should not be avoided." Section 122 is one of the provisions of the Act, under which antecedent transactions may be avoided, which are based upon the cardinal principle of administration in bankruptcy, namely, equality between the creditors, which could be simply frustrated in the absence of such provisions. Lee 7/ eee 7. A creditor, who has received a payment in respect of which a party seeking to avoid it has proved the facts set out in sub-sec. (1) may escape such an order if he proves that he 1s a payee in good faith and for valuable consideration and in the ordinary course of business (see sub-secs. (2) and (4)). In the course of deciding whether he has done so, the court must, of course, give a meaning to the expression "payee in good faith". It 1s not left at large in doing so, but must bear in mind the provisions of sub-sec. (4). That sub-section does not purport to offer an exhaustive definition of the expression "purchaser, payee or encumbrancer in good faith". There may well be facts relevant to the issue of whether a person answers that description, which arise apart from the specific terms of sub-sec. (4) (c). In respect of such facts, the burden of proof plainly rests upon the payee. In my opinion, sub-sec. (4) (c) does not displace or qualify the application of that burden of proof in respect of the matters to which it refers. The burden of proof cast upon the payee remains upon him in all matters relevant to the issue of his being a payee in good faith and, if he is to succeed, his proof must be such as to negative the inference set out in sub-sec. (4) (c). The question whether a person 18 a payee in good faith and for valuable consideration and in the ordinary course of business within the meaning of s.122(2) (a) involves the consideration of matters which are often found in practice to be especially within the knowledge of such a person, and sub-sec.(3) plainly imposes the burden of proving the matters referred to in sub-sec. (2) (a) upon him. The circumstances under which a payment is made to a creditor which fall for consideration in the decision of the questions set out in sub-sec. (4) (c) are expressed to be critical to a finding that a creditor is a payee in good faith, and they are also often especially within his knowledge. 8. The view of the section which I have earlier expressed is, in my opinion, to be preferred to a construction of it under which a creditor would bear the burden of proving that he is a payee in good faith, but would not be called upon to negative the matters which, in effect, disqualify him from being so regarded. The view which I have taken of the construction of s.122 is, I believe, consistent with the general course of the authorities cited above. (See S. Richards & Company Limited v. Lloyd & Another (1933) 49 C.L.R. 49 at p.60 per Rich & Dixon JJ; Burns v. McFarlane (1940) 64 C.L.R. 108 at p.124 per Rich, Dixon and McTiernan JJ; Rees v. Bank of New South Wales (1964) 111 C.L.R. 210 at p.217 per Barwick C.J.; Queensland Bacon Pty. Ltd. v. Rees (1965-1966) 115 C.L.R. 266 at p. 280 per Gibbs J. in the Supreme Court of Queensland exercising federal jurisdiction). The view expressed by Barwick C.J. in Queensland Bacon Pty. Ltd. v. Rees at p.286 appears, with respect, to be inconsistent with these authorities The question arises whether the respondent has discharged the burden of proving that the payment received in October 1976 was made under such circumstances as to lead to the inference that 1t knew or had reason to suspect that the bankrupt 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 him an advantage over other creditors, within the meaning of s.122(4) (c). The meaning to be given to the words "unable to pay his debts as they became due from his own money" has been laid down in Hymix Concrete Pty. Ltd. v Garritty (1977) 13 A.L.R. 321. At pp 327-8 Jacobs J. said: 9. "The question remains, nowever, whether the circumstances lead to the inference that the appellant, through Mr O'Neil, had reason to suspect that the company was unable to pay its debts as they became: duc out of its own money. Much depends upon the connotation of these last words. If they fall to be applied according to their literal terms then quite clearly the circumstances not only lead to but compel the inference that the appellant had reason to suspect. The company had large debts and no ready money with which to pay them. However, if the words meant that the total of liabilities excended the total of assets, the figures pluced before Mr O'Neil both in the Dun and Bradstreet report and in the 31 March balance sheet showed a surplus of assets. But the words "unable to pay its debts as they become duc from its own money" should not be applied in either of these ways. There is an intermediate application of them which has long been established. I shall not set out once again the passayes in the judgments of the court in Bank of Austialas-a v Hage (1907) 4 CLK 1514, per Griffith CJ at 1528 and per Isaucs J at 1543. They are set out in the judgment ot Taylor J ain Revs v Bank of New South Waces (1964) 111 CLR 210 at 229-30; 11965] ALR 139 at 149-50. TI shall set out some passayes from the_judament of Barwick CJ (111 CLR at 218-9; [1965] 7LR at 141-2) which I think are particularly apposite to the present case:- The respondent's counsel submitted that, because the bank held the beliefs, which the primary judge accepted it aiu hold, as to the extent of the company's trading stock and of the causes of its current ciubarrassments, it could not be said cither to know or to have reason to suspect tne cuapany's insolvency - its inability to nect its debts as they became due. But this subm'ss210n springs from a basic misconception and 18 not borne out by the judgments of this Court to which my brother Taylor refers. It 1: quite true that a trader, to remain solvent, does nol need to have ready cash by him to cover nis commitments as they fall for payment, ana that tn determining whether he can pay nis debts as they become due regard must bo had to his realizable assets. The extent to which their existence will prevent a conelusion of ansolvency will depend on a number of surroundiu'y c-rcunmstances, one of whicn rust be the vralure o1 the assets and in the case of a trade:, the nature of his business. Here the company's business was the sale of foodstuffs through a number of retail outlets. The asset whose value was said to negative a conclusion of inselseuvyv, or at any rate to 10. obviate the suspicion of it, was its trading stock of foodstuffs. In the ordinary course of the company's business this asset was not available to be realized except by means of retail sales through its various shops ... The stock-an-trade was clearly not an asset which was available to be realized to meet current debts except in the ordinary course of the company's business, a course which had proved itself inadcyuate ... "The bank in this case knew that the company was overtrading, tnat its only source of money to meet its current trading debts was the takings of its snops, that the whole of the takings were being deposited to the overdrawn account, and that the company's trading debts were not being currently mét. However acceptable the motive of the bank in endeavouring to keep the company afloat, by proving its beliet that the company had an excess of trading stock over those debts of which the bank was aware, 1t cannot escape the conclusion that, at the least, it had reason to believe that the company was ansolvent. Clearly that stock, in the company's circunstances, was not within the category of realizable assets to which Isaacs J refers in Bank vg Austracascu vi Hate (1907) 4 CLk 1514 at 1543; 14 ALR 51." Words used in later cuses, apparently more favourabic to a crediter, must be read in the light of the enunciations to which I have referred and should be taken as no more than an application of the well established principle to particular circumstances: Queenstand Baeen Pty Ltd v Rees (1966) 115 CLR 266; 1966 ALR 855; Sanded2 vo Pitt + (1966) 115 CLP 666. A temporary lack of liquidity must be distinguished from ar cndemic shortage of working capital whereby lLiquidaty can only be restored by a suceessrul outcome of business ventures in which the uervisting working capital has been deployed." Barwick C.J. and Gibbs J. concurred in the judgment of Jacobs J. The test so approved an tne Hymix Concrete Pty. Ltd. case is expressed in the words of Grirfith C.J. (1907 4 CLR at p 1528): was; ll. "The question is not whether the debtor would be able, if time were given him, to pay his debts out of his assets, but whether he 1S presently able to do so with moneys actually available. The most favourable construction that can be put on the words 'his own moneys' is that they include any moneys of which the debtor can obtain immediate command by sale or pledge of his assets." The test as formulated by Isaacs J. (at p. 1543) "The Act requires the debtor to be able to pay his debts as they become due. This does not mean that he is always bound to keep by him in cash a sum sufficient to meet all his outstanding indebtness however distant the date of payment may be. If at the time he makes the assignment, the debtor's position is such that he has property either in the form of assets in possession or of debts, which if realized would produce sufficient money to pay all his andebtedness, and if that property is in such a position as to title and otherwise that it could be realized in time to meet the indebtedness as the claims mature, with money thus belonging to the debtor, he cannot be said to be unable to pay his debts as they become due from his own moneys. In other words, if the debtor can, by sale or mortgage of property which he owns at the time of the assignment, change the form of the property into cash wholly or partly but sufficient for the purpose of paying his debts as they become due, that requirement of the section is satisfied." Section 123 protects certain transactions against the operation of the doctrine of relation back if, as is provided in sub-sec. (1): "(e) the transaction took place on or before the date on which the debtor became a bankrupt; (f) the person, other than the debtor, with whom it took place, did not, at the time of the transaction, have notice of the presentation of a petition against the debtor; and (g) the transaction was in good faith and in the ordinary course of business". ++ e12/ 12. Sub-section (2) places the burden of proving those matters upon the person who relies on the validity of the transaction. Sub~section (3) provides: "For the purposes of sub-section (1) of this section, a transaction shall not be deemed not to have been in good faith and in the ordinary course of business by reason only that, at the time of the transaction, the person, other than the debtor, with whom it took place had notice of the commission of an act of bankruptcy by the debtor". In support of its opposition to the application, the respondent relied upon an affidavit by Michele Casabene, a partner in that firm, the other members of which were his wife and his son Salvatore. Mr Casabene's account of the firm's dealings with the bankrupt was as follows: "3. THAT the Respondent herein is a small business active mainly in drainage and sewerage works and I usually work on its various projects myself. For several years the Respondent firm has had only two permanent employees, RODNEY FRITH and ERROL RIXON, who are still working for the Respondent firm. JI worked on all the projects mentioned in this my Affidavit and to the best of my recollection both RODNEY FRITH and ERROL RIXON also worked on all these projects. 4. THAT at the tame of carrying out the projects mentioned in this my Affidavit, the Respondent firm had adequate business, and was only anterested in work which could be performed so as to yield a profit. 5. THAT the Respondent firm keeps very simple records based on a system of invoices, the original of which is sent out to the customer, and the carbon copy of which is retained in the invoice book and marked off as paid. 6. THAT I am the person who writes out the invoices, which is a job I usually perform approximately once per month for the projects carried out in the immediately preceding monthly period. In particular, all the invoices mentioned in this my Affidavit have been made and subsequently annotated by me. -.-10/ 7. 13. THAT I first met YIANGOS ARCADIOU (the bankrupt) in approximately April of 1976. I do not recollect the precise circumstances of our first meeting, and am not sure whether he contacted me first, or whether I got in touch with him as a person who had land in Werribee (where the Respondent firm does most of its work) which needed draining. However, I do recollect that we discussed drainage at our first meeting, and that I informed YIANGOS ARCADIOU that the Respondent firm would install sewerage at $4.00 per foot and storm water drains at $1.00 per foot, with additional charges for such extras as boundary traps and digging for power lines. Terms would be strictly 30 days for settlement of accounts. THAT I have long experience in the drainage business and consider that the charges quoted in paragraph 7 of this my Affidavit are fair and reasonable. THAT shortly after my first meeting with YIANGOS ARCADIOU he got in contact with me 10. ll. and requested drainage work which he specified to be performed on Lots 84 and 85 of Nangiloc Court, Werribee. THAT the work on the said Lots 84 and 85 was performed by myself and the employees of the Respondent firm in May of 1976. It 1s my recollection that YIANGOS ARCADIOU was frequently present on the sites whenever we were working at his request. THAT on the 3rd day of June, 1976 I prepared 12. 13. invoice No. 395 to cover the prices work done on Lot 85, and shortly thereafter had the original invoice delivered to YIANGOS ARCADIOU. Produced and shown to me at the time of swearing this my Affidavit and marked with the letter "B" 1s a copy of invoice No. 395. THAT on the 3rd day of June, 1976 I prepared invoice No. 396 to cover the precise work done on Lot 84, and shortly thereafter had the original invoice delivered to YIANGOS ARCADIOU. Produced and shown to me at the time of swearing this my Affidavit and marked with the letter "C" is a copy of invoice No. 396. THAT payment of invoices 395 and 396 was not received by the 30th day of June, 1976 so on that date I prepared and shortly thereafter had delivered to YIANGOS ARCADIOU invoice No. 407 as an "account rendered". Produced and shown to me at the time of swearing this my Affidavit and marked with the letter "D" is a copy of invoice No. 407. oere/ 14 14. 15. 16. 17. 18. 19. 14. THAT payment of invoices 395 and 396 had still not been received by the 30th day of July, 1976 so on that date I prepared and shortly thereafter had delivered to YIANGOS ARCADIOU invoice No. 436 as an "account rendered". Produced and shown to me at the time of swearing this my Affidavit and marked with the letter "E" 1s a copy of invoice No. 436. THAT in approximately August of 1976, in spite of having received no payment at all to that time, I accepted instructions from YIANGOS ARCADIOU to the Respondent firm to perforn drainage work which he specified on Lots 79, 80, 81, 82 and 83 of Nangiloc Crescent, Werribee. THAT the works on the said Lots 79, 80, 81, 82 and 83 was performed by myself and the employees of the Respondent firm in approximately August of 1976. THAT on the 8th day of September, 1976 I prepared invoices Nos. 473, 474, 475, 476 and 477 to cover the precise work done on Lots 83, 82, 81, 80 and 79 respectively, and shortly thereafter had the original invoices delivered to YIANGOS ARCADIOU. Produced and shown to me at the time of swearing this my Affidavit and marked with the letter "F" is a copy of invoice No. 473, with the Letter "Gc" is a copy of invoice No. 474, with the letter "H" is a copy of invoice No. 475, with the letter "I" 1s a copy of invoice No. 476 and with the letter "J" as a copy of invoice No. 477. THAT on the 8th day of September, 1976 I also prepared invoice No. 478 as an "account rendered" covering invoices Nos. 395 and 396, and shortly thereafter had the original delivered to YIANGOS ARCADIOU. Produced and shown to me at the time of swearing this my Affidavit and marked with the letter "K" 1s a copy of invoice No. 478. THAT by approximately September, 1976 I was seriously concerned by the failure of YIANGOS ARCADIOU to pay any part of the money that he owed to the Respondent firm. I frequently told YIANGOS ARCADIOU that immediate payment of a substantial part of the amount outstanding was required; I mentioned this when I saw him on work sites, I telephoned him at his home number about this, and I went to his home, 4 Glengala Road, West Sunshine, to demand immediate payment, on more than one occasion. I told YIANGOS ARCADIOU that the Respondent firm would do no more work for him until such time as a substantial payment had been received. 2/15 20. THAT the Respondent firm received a cheque in the amount of $4,000.00 from YIANGOS ARCADIOU on or about the 7th day of October, 1976 (not the 7th day of December, 1976 as stated in the Application in this matter). 21. THAT at about the same time as the cheque in the amount of $4,000.00 was receiyed from YIANGOS ARCADIOU, I received an urgent request from PHILIP ARCADIOU, the son of YIANGOS ARCADIOU, to perform drainage work on his own property at Lot 69 Glenmoyne Square, Werribee; he told me that he was in a hurry to have the work done because his wife was in the final stages of pregnancy, and that the work was to be charged to him. Accordingly, the work was performed immediately and an invoice sent to Y. Arcadiou's address (which was where Philip Arcadiou was residing at that time) by invoice No. 513 dated the 12th day of October, 1976. Produced and shown to me at the time of swearing this my Affidavit and marked with the letter "L" 1s a copy of invoice No. 513. 22. THAT I subsequently discovered that the work covered by invoice No. 513 was the sole responsibility of PHILIP ARCADIOU; I no longer consider that YIANGOS ARCADIOU is responsible to the Respondent firm for the amount of invoice No. 513. 23. THAT in October of 1976, I accepted instructions from YIANGOS ARCADIOU to the Respondent firm to perform drainage work which he specified on Lots 60, 61 and 104 Nangiloc Crescent Werribee. 24. THAT the work on the said Lots 60, 61 and 104 was performed by myself and the employees of the Respondent firm in October of 1976. 25. THAT ON THE 30th day of October, 1976 I prepared invoices Nos. 526, 527 and 528 to cover the precise work done on Lots 60, 61 and 104 respectively and shortly thereafter had the original invoices delivered to YIANGOS ARCADIOU. Produced and shown to me at the time of swearing this my Affidavit and marked with the letter "M" 1s a copy of invoice No. 526, with the letter "N" is a copy of invoice No. 527, and with the letter "Oo" 1s a copy of invoice No. 528. 2/16 16. 26. THAT on the 26th day of November, 1976 I prepared invoice No. 543 as an "account rendered" covering the balance outstanding after taking into account the payment of $4,000.00 from YIANGOS ARCADIOU, and all subsequent invoices. This invoice was delivered to YIANGOS ARCADIOU shortly after I prepared it. I am now aware that this invoice contains an over-charge of $46.00 in the "Balance" figure of $1,384.00 and that 1t was inappropriate to charge invoice No. 513 to this "account rendered", Produced and shown to me at the time of swearing this my Affidavit and marked with the letter "Pp" is a copy of invoice No. 543. 27. THAT by December 1976 YIANGOS ARCADIOU was once again seriously in arrears with his payments to the Respondent firm, and I made similar efforts to get him to pay as I had Made in September, 1976 and whach I outlined in paragraph 19 of this my Affidavit, This time I had determined not to let the Respondent firm work for him again because of the difficulties in obtaining payment, and his failure to keep to the 30 day settlement rule which was a term of our agrevment, but I do not believe that I told him of this, because I felt that such information might make his payments even slower. 28. THAT the Respondent firm received a cheque in the amount of $2,500.00 from YIANGOS ARCADIOU on or about the 4th day of February, 1977. This cheque was delivered to my home at 26 Powell Drive, Hoppers Crossing, but I do not know who delivered it because I was at work at the time when it arrived. 29. THAT I refer to the copy of invoice No. 543 attached to this my Affidavit and marked with the letter "P" and say that after the 4th day of February, 1977 I continued efforts to obtain payment from YIANGOS ARCADIOU of what at that tame I thought to be a balance due to the Respondent firm of $2,355.00. 30. THAT on a date which I cannot exactly recollect but which I believe to be late in March 1977 I received a notice of a meeting of the creditors of YIANGOS ARCADIOU, to be held at an address in Queen Street, Melbourne. I attended the meeting, and recollect that ALEX NEVILLE BIRD was appointed Trustee in the course of the meeting; while I have no accurate recollection of the date of this meeting, I gather from the Applicant's documents in this matter that 1t was on 6th April, 1977. «2/17 17, 31. THAT up to the time when I received the notice referred to in paragraph 30 of this my Affidavit, I was not aware that YIANGOS ARCADIOU was unable to pay his debts; I merely considered that he was very slow in paying his debts. I continued my efforts to obtain payment of the amount I considered to be due to the Respondent firm from YIANGOS ARCADIOU up to the time when I received the said notice. 32. THAT I have read the Affidavit of ALEX NEVILLE BIRD sworn on the 23rd day of May, 1979 which 1s intended to be used at the hearing of the Application of the said ALEX NEVILLE BIRD, and say that paragraph 15 of the document marked with the letter "A" attached to the said Affidavit is almost illegible in my copy. Insofar as the said paragraph appears to refer to a meeting which took place on the 20th day of September, 1976 I say that I received no notice of that meeting and had no knowledge of it until more recently than March, 1977. I also refer to the document marked with the letter "B" attached to the said Affidavit, which 1s a schedule showing the extent to which the amounts due to the trade creditors of YIANGOS ARCADIOU were overdue as at the 15th day of September, 1976 and say that I am unable to find the Respondent's name in that schedule. 33. THAT if I had any idea that YIANGOS ARCADIOU was in a precarious financial position at any time, I would not have permitted the Respondent firm to continue to work for him, since the Respondent firm had no lack of good work opportunities throughout 1976." The details of all the work done for the bankrupt were set out in Exhibit R to Mr Casabene's affidavit, which read as follows: "SCHEDULE OF ACCOUNTS RENDERED AND ACCOUNTS SENT IN ERROR Invoice Date of Work Address Document No. Invoice Performed of Work Amount Comment D 407 30.6.76 May 1976 Lots 84 & 85 $1,384.00 Account Rendered E 436 30.7.76 May 1976 Lots 84& 85 $1,384.00 Account Rendered K 478 8.9.76 May 1976 Lots 84& 85 $1,384.00 Account Rendered L 513 12.10.76 October Glenmoyne $1,210.00 Philip 1976 Square Arcadiou P 543 26.11.76 August, Various $4,855.00* October 1976 * Amount over-stated by $1,256.00. See paragraph 26 of Michele Casabene's Affidavit." . + 18/ 18. Under cross-examination, Mr Casabene agreed that by September 1976 he was seriously concerned by the failure of the bankrupt to pay any part of the money he owed, but he said: "I know he will pay me". He wanted the bankrupt to pay him the whole amount due but on 7 October 1976 he received a payment of $4,000, leaving a balance of $1,338.00. He sometimes waited a couple of hours to catch the bankrupt on a building site to repeat his request for payment and kept pressure on him "all the time". The bankrupt would reply: "Don't worry - money is coming". Other contractors told Mr Casabene in 1976 that the bankrupt was slow to pay but that he would pay, although he always paid in arrears and kept people waiting a long time before paying. On Christmas Eve 1976 he went to the bankrupt's home "to knock on the door for the balance of the money because he promised to pay me before Christmas so I can pay my men". The bankrupt replied: "Don't worry, no worries, I will give you the money. The money 1s coming, I am sorry you have been let down". Mr Casabene thought that the bankrupt was the first person in 17 years of business against whom he had taken such a step. When asked whether he believed the excuses given to him on Christmas Eve, he replied that he believed and did not believe. The respondent received the October payment of $4,000.00 from the bankrupt at about the same time as he was urgently requested by his son Philip to perform drainage work on the latter's property at Werribee. At that time the total amount owed by the bankrupt to the respondent was $5,338.00, being $1,384.00 in respect of work performed in May 1976 and $3,954.00 for work done in August 1976. The bankrupt had been informed before the work commenced that the respondent's terms would be "strictly 30 days for settlement of accounts". Invoices for the work done in May were prepared on 3 June 1976 and shortly there- «--19/ 19. after were delivered to the bankrupt. Accounts rendered were also sent. Invoices in respect of the August work were delivered to the bankrupt shortly after 8 September, which was the date they bore, together with a further account rendered for the May work. Despite the repeated urgings of Mr Casabene, and more than one call at the bankrupt's home, no payment was received until about 7 October. "In approximately August of 1976 in spite of having received no payment at all to that time" Mr Casabene accepted instructions from the bankrupt to carry out further work, for which invoices were made out on 8 September 1976 totalling $3,954.00. The nature of the test to be applied in construing the words "the creditor had reason to suspect" was considered by Latham C.J. in Downs Distributing Co. Pty. Ltd. (1948) 76 C.L.R. 463 at p. 475, as follows: "It was argued that the words 'the creditor had reason to suspect' meant that the creditor had in his mind some knowledge or belief which to him amounted to reason to suspect; in other words, that the test was a subjective test. In my opinion there 1s no reason for interpreting the words of the section in this way, and there 1s every reason for interpreting them as referring to an objective test. The sub-section refers to 'such circumstances as to lead to' one or other of two inferences; either first, that the creditor knew certain facts; or secondly, that the creditor had reason to suspect the existence of certain facts. The provision as to the creditor 'knowihg' adopts a subjective criterion - applied by inference made by the court. The other provision as to the circumstances leading to an inference that the creditor had 'reason to suspect' relates in my opinion to what may, by way of comparison, be described as an objective test. It is intended to deal with circumstances such that an inference can fairly be drawn by a court that there was reason to suspect, whether or not in fact the 2+ -20/ 2Q. mind of the creditor consciously adverted to the significance with respect to the financial position of the debtor of the matters mentioned in the sub-section. In my opinion a transaction falls within sub-s. (4), so that a creditor is excluded from the category of a creditor dealing in good faith under sub-s.(2)(b), if, whatever the creditor may think or believe with respect to the circumstances of a transaction, those circumstances are such as to lead to an inference by the court that there was reason to suspect according to the standards of an ordinary reasonable man that the debtor was unable to pay his debts as they became due, and that the effect of the transaction would be to give the creditor a preference over other creditors." At p. 480 Williams J. Said: "His Honour found that the circumstances were such as to lead to the inference that the managing director of the defendant had reason to suspect these matters. It was contended for the appellant that in drawing such an inference the Court should have regard to the mentality of the particular creditor. But, in my opinion, the circumstances to which the sub-section refers are such circumstances as would lead a reasonable business man to suspect these matters." In Queensland Bacon Pty. Ltd. v Rees (1965-1966) 115 C.L.R. 266 at p. 296 Barwick C.J. said: "The question of what inference should be drawn from all these circumstances 1s a question for the court. But the inference being sought is the inference which a reasonable business man in the situation ought to draw. It must be remembered that trading of the kind with which these applications are concerned is, as of present times, predominantly carried on by means of extensive credit and that overdraft accommodation supplements that credit to furnish the circulating capital. Consequently, liquidity can be lost overnight upon a reduction of overdraft limits. Whether this spells insolvency «ee 21/ 21, must be determined, 1t seems to me, by the speed with which assets of a readily realizable kind can be turned into cash. That time will be relative at least to the nature or extent of the indebtedness. Although in the full knowledge of all the facts the company was insolvent, his Honour found that the circumstances did not lead to the conclusion that the appellant knew of that insolvency. The question remains what 1s the proper inference which the court thinks a reasonable and prudent business man should draw from those circumstances." Kitto J. at p. 312 observed: "As in the other three cases, there is great need to keep steadily in view what the precise inference 1s to which sub-s.(4) refers. It is an inference which the Court draws from the circumstances known to the creditor at the time when he accepted the payment. It is an inference that the creditor at that time had reason for an actual suspicion of a particular state of facts, that 1s to say a ground which a reasonable man in his position would have considered sufficient to raise in his mind a real suspicion that the state of facts existed. I venture to repeat that the state of facts consists of two elements. The first is an actual anability on the part of the payer to pay his debts as they became due, as distinguished from a reluctance to accommodate his wider purposes to the limitations of his resources. The second is that the effect of the payment, i.e. its ultimate, substantial effect, would be that the payee would be in a better position vis-a- vis the other creditors than he would have been if the company's assets had been converted and distributed amongst all the creditors in a due course of winding up." Applying the test which the authorities require, I am satisfied that had the respondent been paid in late August or early September 1976, it would have been a payee in good faith and that it would have negatived the inference that it knew or had reason to suspect that the bankrupt 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 062 22/ 22. it a preference, priority or advantage over other creditors. It is true that "about September 1976" Mr Casabene told the bankrupt that the respondent would do no more work for him "until such time as a substantial payment had been received", but I am inclined to the view that this circum- stance is not fatal to the respondent's case. It 1s a nice question, but, on balance, I am satisfied that the respondent has discharged the burden of proving, in respect of the payment of $4,000.00 made on 7 October 1976, that 1t was a payee in good faith and that it has negatived the inference referred to in s.122(4)(c). The work for which that payment was made had been carried out in May 1976, so that payment was overdue but not to a serious extent. There being no challenge to the fact that the payment to the respondent was for valuable consideration, 1t remains to be seen whether it has made out the additional requirement that the payment was made in the ordinary course of business. The tests to be applied have been laid down in Downs Distributing Co. Pty. Ltd. v Associated Blue Star Stores Pty. Ltd. (in liquidation) (1948) 76 C.L.R. 463 where at p. 476 Rich J. cited the observation in Burns v McFarlane (1940) 64 C.L.R. 108, at 125: "that the expression 'ordinary course of business' does not require 'an anvestigation 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' and went on to say: 'It 1s an additional requirement and is cumulative upon good faith and valuable consideration. It 1s therefore, not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual or normal character of the transaction. The provision does not require that the transaction shall be in the course of any particular trade, vocation or business. It speaks of the course of business in general. But it does suppose that according to the ordinary and common flow of transactions in affairs of business there 1s a course, an ordinary course. It means that the transaction must fall into 22 23/ 23, place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation.' In Robertson v. Gtagg (1932) 47 CLR 257, at 273; 1933 ALR 40, at 46, Evatt J said: 'The ordinary course of business 1s 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 my opinion, the respondent has established that the October payment was made in the ordinary course of business, as that expression has been construed. The debate upon the effect of s.123 upon the October payment was narrowed by concessions made in the course of argument. Mr Irlicht conceded that the respondent had established that the transaction in question took place before the date on which the debtor became a bankrupt (see s.123(1)(e) and that the respondent did not, at the time of the transaction, have notice of the presentation of a petition against the debtor (see s.123(1)(f£)). It was Mr Irlicht's contention that the respondent had failed to show that the transaction was in good faith and in the ordinary course of business (see s.123(1)(g)). In my opinion, the respondent has discharged the burden of proving that the transaction met the requirements of s.123(1)(g) for the reasons which I have earlier set out in relation to s.122, bearing in mind, of course, that s.123 does not contain any provision such as that found in s.122(4)(c). As the respondent has succeeded in its defence to both bases upon which the application in respect of the October payment of $4,000.00 was founded, the application fails in relation to it. --24/ 24. I turn now to consider the payment of $2,500 made by the bankrupt to the respondent on 4 February 1977. By that date, Mr Casabene had made many demands upon the bankrupt for payment, including a call to his home on Christmas Eve which he made "to abuse him as to why he let me down, did not pay me the money to pay my men". At that date, the amount owed to the respondent was long overdue in circumstances which in my opinion, would have caused a reasonable business man in the position of the respondent to have reason to suspect the matters specified in s.122(4) (c) (i) and {ii). It 1s not merely a case, in my opinion, in which the respondent has failed to negative the inference that it had reason to susSpect those matters, but rather one in which the evidence establishes affirmatively that the inference should be drawn. In the result, the respondent has succeeded in ats defence in respect of the October 1976 payment of $4,000.00 and failed in relation to the February 1977 payment of $2,500.00. The appropriate order for costs appears to be that the applicant pay one third of the costs of the respondent of and incidental to the application, such costs to be taxed if not agreed. The Court declares that the payment made by the bankrupt to the respondent of $2,500.00 on 4 February 1977 1s void as against the applicant and orders that the respondent pay to the applicant the sum of $2,500.00. It 1s ordered that the applicant pay one third of the costs of the respondent of and incidental to the application, including reserved costs, such costs to be taxed 1f not agreed. The costs so paid to the respondent and the taxed costs of the applicant of and incidental to the application may be recovered by the applicant from the estate of the bankrupt. Otherwise, the application is dismissed. Liberty is reserved to either party to apply.