CATCHYORDS BANKRUPTCY - preference - validity of payment ordinary course of business - cheqves not inet ~ matter tc solicitors. Bankrurtcy Act 1966 s.122 - good faith - threat RE: M{CUAEL GUY BRITTALN and MARGARET MARY BRITTALN EX PARTE: JOUN CRAVEN BARNES (the trustee of the Bankrupt Estate BRITTAIN and MARGARKT MARY BRITTAIN ) and SIMON KOSSEL TNTERNATIONAL PTY. LTD. No. 398 of 1983 Woodward J. Melbourne 10 April 1984 to refer Barkrupts of MIVZASL Gul Applicent Raspondenc IN THE FEDERAL COURT OF AUSTRALTA GENERAL DIVISION No. 398 of 1983 BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA RE: MICHAEL GUY BRITTAIN and LARGARET MARY BRITTAIN Bankrupts EX PARTI: JOHN CRAVEN BARNES (the trustee of the Bankrupt Estate of MICHASL GUY BRITTAIN and MARGARET MARY BRITTAIN) Applicant and SIMON KESSEL INTERNATIONAL PTY. LTD. Respondent ORDER JUDGE MAKING ORDER : Woodward J. DATE OF ORDER : 10 April 1984 WHERE MADE : Melbourne THE COURT ORDERS THAT: The application be dismissed with costs. 1N THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE ) ) ) No. 398 of 1983 ) STATE OF VICTORIA ) RE: Bankrupts EX PARTE: JOHN CRAVEN BARNES (the trustee of the Bankrupt Estate of MICHAEL GUY BRITTAIN and MARGARET MARY BRITTAIN) Applicant and SIMON KESSEL INTERNATIOUAL PLY. LTD. Respondent JUDGE: Woodward J. DATE: 10 April 1984 REASONS FOR JUDGMENT This case raises difficult questions as to whether certain payments made by the bankrupts to the respondent amounted to a preference within the meaning of s.122 of the Bankcuptcy Act 1966. The application also raises questions of relation back, bat as the case has developed these have been effectively subsumed by the question of preference. Concessions have been made by both parties which cnable me to make the following findings: (a) The bankrupts, who ran a business known as Buccancor ' Menswear ("Buccaneer") committed an act of bankrupLey ou 3 November 1982. They were made bankrupt on their own petition, presented on 29 April 1983. (>) Between 19 November and 22 December 1982 they made four payments to the respondent, who was one of their wholesale suppliers, totalling $1300. At the tame tne, made those payments they were unable to pay their debts as they became due from their own monies. (c) The payments of $1300, although received for valuable consideration, are void as against the trustee in bankruptcy, either as a preference under s.122 of the Bankruptcy Act 1966 ('the Act') or because the bankruptcy is deemed, by s.115 of the Act to relate back ' to 3 November 1982, unless the respondent can satisly H the Court that the payments were made in good faith and in the ordinary course of business. As both counsel said, that is the only issue in this case. The evidence 1s in a fairly narrow compass and there has only been a noticeable conflict in that evidence on one comparatively minor matter. I make the followiny findinys of fact: The respondent delivered goods to Buccaneer between July and October 1981, which were paid for belatedly and in irregular instalments by May 1982. Further goods were supplied in May and September 1982 to a total value of $2490. No payments had been made by the end of October in spite of firm assurances given in August and early October. The retatLl clothing industry was going through a difficult time in the second half of 1982, because of the serious down=turn in the economy generally, and many stores, includin; Buccaneer, had financial problems because they could not sell their stock on hand. The officer of the respondent responsible for outstanding accounts, Mr. G.T. Bradley, caused accounts to be sent to Buccaneer at the end of July, September and November 1982. Stickers were attached, on his instructions, which read respectively July - "Qur terms are strictly nett 30 days. A cheque within 7 days please! Over due" September - "Final Notice Payment within 7 days or legal action will be taken." November - "A friendly reminder Your account is overdue." It was explained that the last sticker was more moderate in tone because $500 had been paid on 19 November and furtner payments were expected. This expectation arose because Mr. Bradley had told the first-named bankrupt, Mr. Brittain, who ran Buccaneer, that unless payments were made in reduction of tne account he would have to put the matter into the hands of the respondent's solicitors. Mr. Brittain had agreed to maxe regulor payments, though amounts were not specified. After the cheque for $500 on 19 November 1982, wnich was honoured without difficulty, the next three cheques presented ran into trouble. The first, datcd 2 December for $200, nad to he presented three times (2, 7 and 20 Dacember) before it was met; the second, of 6 December for $200, was presented on that day and again on 9 December and finally dishonoured in January 1983; tho third, dated 13 December, was presented then and again on 17 December when it was met. The last cheque, for $300, was given, presented and met on 22 December. The conflict in evidence, referred to earlier, was whether the first four cheques were posted to the respondent or collected by an employee. Tne last was certainly collected and then cashed at Buccaneer's bank. 1 am unable to decide the truth of the earlier payments, as to which there was, { believe, an honest difference of opinion and recollection between Mr. Brittain and Mr. Bradley. Bearing 1n mind the burden of proof cast on the respondent by s.122(3) of the Act, I think I should decide the case on the basis that seme at least of those four cheaqves were collected by an employee of the respondent. Mr. Bradley explained his state of mind at this time by saying, in substance, that he believed from his experience the previous year that Mr. Brittain was a slow payer who needed to be pressed. Buccaneer obviously had some liquidity problems. Mr. Bradley knew that Buccaneer held reasonable stocks, and believed that the Christmas selling period woutd alleviate its problems and enable it to make the necessary payments. He knew of no debts to any other traders and had no reason to think Buccaneec was insolvent. Bearing un mind the previous year's transactions, the honouring of the $500 cheque on 19 November and the 'Friendly reminder' sent at the end of that month, 1 have no difficulty in accepting Mr. Bradley's evidence up to that time. I am entirely satisfied that the payment of $500 on 19 November 19682 was received in good faith and in the ordinary course of business. The position becomes more complicated between 2 December i and 22 December. Thus on 2, 6, 7, 9 and 13 December three cheques for either $200 or $300 were presented or represented, marked BO Re pee ee pe re ew ee - 'present again' or 'refer to drawer', and were not met. dowever on 17 and 20 December two of them were met and a further cheque for $300 was met on 22 December. Mr. Bradley must have been concerned about this overdue account between 2 and 17 December and he coneecdes that he was - but no more concerned than about other accounts. Having heard his evidence on the matter, I accept his statement that he did not in fact suspect that Buccaneer was insolvent, although he knew ut was having financial difficulties. hat, of course, 158 not the end of the matter. For purposes of s.122(4)(c) of the Act, the respondent has to go further and satisfy me that, looked at objectively, the payments were not made under such circumstances as to lead to the inference that Mr. Bradley had reason to suspect that Buccaneer was unable to pay its debts as they became due from its proprietors' own monies. In approaching this issue I adopt, with respect, the words used by Barwick C.J. in Qucensland Bacon Pty. Ltd. v Rees (1966) 115 CLR 266 @ 219-2 "In the first place ......... the circumstances of the voided payment must be such as to lead to the inference that the creditor knew or had reason to suspect the fact of the debtor's insolvency. it is not enough that the circumstances are such as to lead to the inference that the creditor had reason to suspect Lhat the debtor miyht be insolvent. 'The words of the sup-section, to mv mind, are quite clear that it ais the fact of aclual insolvency which must be known or suspected. To be insolvent, the debtor iaust be unable, as distinct from beiny merely unwilling, to pay his debts as they fall due. It is one thing to suspect a man's solvency in the sense that one dovpts whether ne 1s solvent or insolvent. It is another thing to suspect that he is in fact insolvent." With regard to the facts of another application @eelt with in the same judgment, his fMlonour said, at p.296-7, "I have come to the conclusion that, with tne knowledge and belief of the extent of the stock in trade aud with no circumstance to suygest it was in any significant degree "dead" stock, the reasonable business man ought not to suspect actual insolvency, though the circumstances demonstrated a serious and perhaps a dangerous lack of liquidity." In the same case Kitto J. said, at p.302, "In wany situations, of course, the dishonour of a cheque, unless otherwise explained, carries a strong suggeslLion of insolvency; but in otners it may indicate, to those who are constantly dealiny with the drawer and know the general course he 1s pursuing in his business, no more than a policy of wringing the last ounce of credit out of everyone who van be fobbed off with promises." Later, in relation to yet another application dealt with in the same appeal, Kitto J. said at p.312, "As in the other three cases, there 1s great need to keep steadily in view what the precise inference 1s to wnich sub-s.(4) refers. lt is an anference which the Court draws from the circumstances known to the creditor at the time wnen he accepted tne payment. it 1s an inference that the creditor at that time had reason for an actual suspicion of a particular state of facts, that is to say a yround which a reasonable man in his position would have considered sufficient to raise 1n his mind a real susp1cion that the state of facts existed. I venture to repeat that the state of facts consists of two elements. The first ts an actual inability on the part of the payer to pay his debts as they became due, as distinguished From a reluctance to accommodate his wider purposes to the limitations of his resources. Tne 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 amonyst all the creditors in a due course of winding up." I do not suggest that the situations their Honours were considering in che passages cited were the same as the situation Lt have to consider, but those passages encourage me in the view [ had tentatively formed that, given Buccaneer's past record of payment, Mr. Bradley's knowledge of the firm's stock and the generally poor state of liquidity in the trade at that time, and his lack of knowledge of any other debts of the firm, fourteen days of cheques marked "present again" or "refer to @rawer" would not cause a reasonable person in his position to suspect that Buccaneer was in fact insolvent, althouyh doubts might well have arisen in such a person's mind. I believe, rather, that 1f he had asked himself the question, he would have concluded that if the firm had been put to the test, it could have paid every creditor in full. ln passing, If note that the view actually taken by Mr. Bradley ts illustrated by his causing leyal proceedinys to he taken against Buccaneer in February 1983 when he learned that another creditor had done so. Even then ne apparently had faitn in Buccaneer's solvency. For the reasons I have given, Lf am satisfied tnat tne respondent received all monies in question in good faith. Tne final question to be determined 1s whetner they were received in the ordinary course of business. The ordinary course of business does not mean the ideal course of business. Late payments, two weeks of cheques markcd "present ayain", the collection of cheques by hand to keep the debtor to its promises, and a reference to solicitors in tre context of a telephoned demand for payment, are not, in my viv, eLrther separately or taken together, outside the ordinary course of business when a trade 1s yoing throuyn a difficult period and stocks are hard to move. The question is of course one of degree and of general impression. I am supported in the view 1 take by tne words of Lord Mansfield, who said that it was a fair advantage and in the covrse of trade "1f a creditor threatens legal diligence, and there is no collusion". Lord Blackburn, in a similar vein, referred to the case of a man struggling on and making payments to keep nis business going. These statements were quoted in Robertson v Grigy (1932) 47 CLR 257 @ 267 and Taylor v White (1964) 110 CLR 129 ¥ 151-2. Although they reflect the carly law on tne subject, they should not be overlooked (Windeyer J. in Vaylor v white at p.161). - 10 - Queensland Bacon v Rees (apove) 28 authority for the proposition that dishonoured cheques are not necessarily fatal to a claim that a later payment is made in the ordinary course of business. And although a solicitor's demand may be outside that ordinary course (Re Bailey ex p. Law v Austin (1952) 16 ABC 8U @ 85; Re Bard ex p. Azzopardi (1979) 39 FLR 277), 1 do not believe that a threat to refer a matter to solicitors is outside it. As Kitto J. said in his dissenting judgment in Taylor v White (above) at p.146, "Jnere 1S many a company in tne community Known to pe having financial diffaculties. To hold that a creditor of such a company who knows that fact but knows nothing more cannot be a payee of his debt in the ordinary course of business would surely be out of the question". I find chat the payments made in December 19382, as well as that made in November, were 1n the ordinary course of business. Since the issues for decision have been resolved in favour of the respondent the application will be dismissed with costs. I certify that this and the 9 (nine) preceding pages are a true and accurate copy of the Reasons for Judgment nerein of The Hon. My. Justice Woodward YW (Ass ate) Dated: L9/April 1984