CATCHWORODS BANKRUPTCY - preferences - meaning of "ordinary course of business" - choice between conflicting tests laid down by High Court - "good faith". Bankruptcy Act 1966, 38.122, 231 RE: THOMAS GEORGE CUMMINS and JILL IMELDA CUMMINS trading under the style or firm name of "NAM CONSTRUCTIONS" EX PARTE: ERNEST GEORGE HARRIS and WILSON JOSEPH WILDE (Trustees/Applicants) A.R.C. ENGINEERING PTY LTD (Respondent) PARTS X 4 AND 5 OF 1984 PINCUS J. BRISBANE 7_ OCTOBER 1985 IN THE FEDERAL COURT OF AUSTRALIA } GENERAL DIVISION ) PARTS ¥ 4 & 5 of 1984 BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) RE: THOMAS GEORGE CUMMINS and JILL IMELDA CUMMINS trading under the style or firm name of "NAM CONSTRUCTIONS" (Debtors) EX PARTE: ERNEST GEORGE HARRIS and WILSON JOSEPH WILDE (Trustees/Applicants) A.R.C. ENGINEERING PTY. LTD. (Respondent) - MINUTES OF ORDER JUDGE MAKING ORDER: PINCUS J. DATE OF ORDER: 7 OCTOBER 1985 WHERE MADE: BRISBANE THE COURT DECLARES THAT: 1. A payment made on or about 19 August 1983 by or on behalf of the debtors to or for the benefit of the respondent, A.R.C. Engineering Pty Ltd, a company duly incorporated in the State of Victoria and having its registered office in Queensland at Ellison Road, Geebung in the State of Queensland of the sum of $10,901.81 is void as against the applicants as trustees of the divisible property of the respective debtors ag being a payment having the effect of giving the respondent a preference, priority or advantage over other creditors. A payment made on or about 11 October 1983 by or on behalf of the debtors to or for the benefit of the respondent, A.R.C. Engineering Pty Ltd, aforesaid of the sum of $20,000.00 is void against the applicants as trustees of the divisible property of the respective debtors as being a payment having the effect of giving the respondent a preference, priority or advantage over other creditors. A payment made on or about 9 December 1983 by or on behalf of the debtors to or for the benefit of the respondent, A.R.C. Engineering Pty Ltd, aforesaid of the sum of $8,995.51 is void against the applicants as trustees of the divisible property of the respective debtors as being a payment having the effect of giving the respondent a preference, priority or advantage over other creditors. THE COURT ORDERS THAT: NOTE: 1. The respondent pay to the applicants the sums of $10,901.81, $20,000.00, and $8,995.51, within fourteen (14) days from the date of this order. The respondent pay the applicants' costs of and incidental to this application to be taxed if not agreed. Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) PARTS X 4 & 5 of 1984 BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) RE: THOMAS GEORGE CUMMINS and JILL IMELDA CUMMINS trading under the style or firm name of "NAM CONSTRUCTIONS" (Debtors) EX PARTE: ERNEST GEORGE HARRIS and WILSON JOSEPH WILDE (Trustees /Applicants) A.R.C. ENGINEERING PTY. LTD, (Respondent ) PINCUS J. 7 OCTOBER 1985 REASONS FOR JUDGMENT The trustees of the property of the debtors apply for declarations under s.122 of the Bankruptcy Act that certain payments made in 1983 are void against them. The trustees attained their positions by assignments made on 17 February 1984, pursuant to a resolution of creditors. Therefore, by virtue of §.231, 3.122 is applied to transactions taking place within six months before 17 February 1984; that date is equivalent to the date of presentation of the petition. The application identifies the impugned payments as follows:- DATE AMOUNT 19.8.83 $10,901.81 11.10.83 $20,000.00 9.12.83 $8,995.51 The dates given are all within the six-month period just mentioned, but an initial complication is that the first payment was made pursuant toa cheque which was drawn and physically handed to the respondent on or before 11 August 1983, outside the six-month period. That cheque was post-dated to 19 August 1983, on which date it was dishonoured; it was re-banked, and honoured, later. It may be that a transaction fulfilling the description of a conveyance or transfer of property or payment made took Place when the first cheque was physically handed to the respondent, on or before 11 August 1983. Whether or not that is so, another transaction took place when the cheque was honoured, the effect of which was that, with the prior authority of the debtors, the bank debited their account with the sum in question and the respondent was thereby paid. It follows that all three of the payments attacked were made within the six-month period mentioned above. The respondent began supplying the debtors with materials in 1980. On a number of occasions in 1981, there was an apparent difficulty in obtaining payment; the debtors' "credit facility" was withdrawn three times, two cheques were dishonoured and for about a month the respondent declined to supply any materials at all. These matters were relied on as showing that the ordinary course of the business for the particular debtors here in question included some rough passages. That is not the proper approach: in this context, an analysis of the ordinary course of business "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" - see Burns v. McFarlane (1940) 64 C.L.R. 108 at p.125 and Taylor v. White (1964) 110 C.L.R. 129 at pp.140, 152. In 1982 difficulties of a similar kind confronted the respondent in obtaining payment, but it is unnecessary to go into the details of that. Early in 1983 the debtors ordered rather small quantities of materials from the respondent, but in May it began to take substantial orders. By 31 July 1983 the sum due to the respondent for goods bought by the debtors was $56,361.66, of which $48,852.65 was "overdue" - i.e. had been due for more than 30 days. On that date the respondent told the debtors that no further credit would be granted until payment of the overdue sum was made. Before coming to the more immediately pertinent history relating to the three payments, it is desirable to make further reference to the statutory provisions in issue. If do not set out the terms of s.122(1), as they are familiar enough; I call to mind merely that two elements which must co-exist to make the transaction in question void against the trustee are, firstly, that it be effected by "a person who is unable to pay his debts as they become due from his own money" and, secondly, that it had the effect of giving the "creditor a preference, priority or advantage over other creditors". In the present case, it was proved that these criteria were satisfied; the real dispute was whether the respondent had discharged the burden placed on it by $.122(3) of proving its entitlement to be treated as a "purchaser, payee or encumbrancer in good faith and for valuable consideration and in the ordinary course of business" within the meaning of $.122(2)(a). The statute gives no definition of the notion of "ordinary course of business" and the uncertainty in the meaning of that expression has produced a difficulty in determining the fate of the first payment, discussed below. As to the question of "good faith", what I regard as a partial definition is given by s.122(4)(c):- "For the purposes of this section - (c) A creditor shall be deemed not tobe 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 ~ (1) that the debtor was unable to pay his debts as they became due from his own money; and (ii) that the effect of the conveyance, transfer, charge, payment or obligation would be to give him a preference, priority or advantage over other creditors." In 5. Richards and Co. v. Lloyd (1933) 49 C.L.R. 49 at p.60 Rich and Dixon JJ. said of 8.95(4) of the 1924 Act, the terms of which are much the same as 8.122(4)(c) of the present Act:- "But gub-section (4) should not be understood as detracting at ali from sub-section (3), or as intending to substitute some artificial criterion for the issue set by sub-section (2)(b)." Section 95(2)(b) of the 1924 Act is almost identical with s.122(2)(a) of the present Act. Their Honours' denial that the then counterpart of s.122(4)(c) should be understood as substituting an artificial criterion for the issue set by the then equivalent of s.122(2)(a) still leaves one free to treat the former provision as intended partially to define "good faith". Further, reference to the decided cases shows that rarely, if ever, do courts find it necessary to go past the partial definition in deciding the issue of good faith. In the result, the questions which have to be considered, with respect to each of the three payments the history of which is detailed below, are whether the respondent is deemed not to be a payee in good faith because of the provisions of 3.122(4)(c) and whether the payment was in the ordinary course of business. FIRST PAYMENT This was for a sum of $10,901.81, as mentioned above, and its history is briefly outlined there. The date of payment of the cheque does not precisely appear, but on 11 August 1983 the respondent wrote to the debtors acknowledging receipt of it and the second cheque, the former being post-dated to 19 August 1983 and the latter to 31 August 1983. That letter also advised that until reduction of the account no further materials would he supplied. On 17 August 1983 the debtors had an over-draft of $132,886.62; their limit at the time was $50,000. On 19 August the creditor banked the first cheque, for $10,901.81. It appears to have been presented for payment on 22 August and was dishonoured on 23 August. On 26 August Mr Grierson, whose responsibility it was to endeavour to collect payment of the sums due by the debtors to the respondent, telephoned the debtors' accountant regarding the dishonoured cheque and he did so again on 29 August, when the cheque was banked a second time. The respondent says it was honoured on that day, but the evidence on behalf of the applicants is that it was dishonoured on 31 August, again, but paid later in that day. The latter evidence accords with the bank statement and I accept it. Miss Wilson, for the respondent, argued that there were three circumstances against the respondent, in respect of the first cheque. They were that credit had been stopped, that the cheque was post-dated and was dishonoured when first presented and, lastly, that at the time the account of the debtors with the respondent was well in arrears. Mr Dutney, for the applicants, submitted that one should add to those circumstances, as a matter of significance, the fact that the first cheque was really part of a payment, split into two cheques and that the debtors were meeting their liability by instalments. He also argued that I should take into account the telephone call of 26 August, as suggesting anxiety on the part of Mr Grierson. The question whether this first payment, which is plainly the one as to which the case of the applicants is weakest, is recoverable depends upon the interpretation of the relevant statutory provisions, which is dealt with in some detail below. SECOND PAYMENT The second cheque, No. 236800, for $20,000, was received at the same time as the first. It was post-dated to 31 August 1983, and not 30 August 1983 as sworn to on behalf of the applicants. I derive the date from annexure "E" to the affidavit of Mr Harris filed on 20 March 1985. That cheque was presented on 31 August. It was dishonoured on 2 September. On 12 September the respondent obtained notice of dishonour and Mr Grierson rang the debtors' accountant Mr Close; the latter advised Mr Grierson to re-present the cheque as a "bill for collection" saying there would be funds to meet it in the first week in October. It is not clear whether that advice was taken, but I should think it was. On 13 September the respondent wrote to the debtors complaining of the dishonour of cheque 236800 and demanding that the overdue part of the account of the firm ($45,459.05) be paid within 14 days. Legal action was threatened. On 20 September 1983 cheque 236800 was re-presented and it was again dishonoured on 21 September. On the same day the debtors wrote to the respondent to say that the $20,000, being the amount of the cheque, would be paid on 4 September 1983 and that a further payment of $25,500 would be made on 31 October 1983. on 22 September 1983 Mr Grierson contacted the solicitors for the respondent with a view to taking legal proceedings. On the same day the respondent wrote to the debtors to say that the dates for payment proposed by the debtors were unacceptable and that, unless payment of $45,459.05 was received 10. by 28 September 1983, the account would be placed with solicitors; that was the game sum as mentioned in the letter of 13 September. On 23 September Mr Young of the Brisbane office of the respondent phoned Mr Grierson and told him that the bank had advised the respondent that payment on cheque 236800 had been stopped. A memorandum of the same date from the Brisbane credit manager to the State manager of the respondent advised that legal action be commenced. Mr Grierson sent four telexes about the matter on that day, 23 September, to branches of the respondent, advising those branches that the debtors' credit had been stopped and that legal action would begin on 28 September 1983 if monies were not received and cleared by that date. On 30 September the unsecured creditors of the debtors were owed $1,256,479,. Adding in their overdraft, the firm was indebted in an unsecured way in a sum of $1,312,273. On that day Mr Grierson telephoned the solicitors again, asking them to begin proceedings against the debtors. 11. On 4 October 1983 the respondent transferred the account of the debtors to the "legal action" ledger. Only a few of the respondent's debtors, at any one time, were in that ledger. On 10 October 1983 Mr Grierson rang the respondent's solicitors to be told that the debtors had promised a telegraphic transfer of $20,000 that day, a further $5,000 on 19 October 1983 and the balance of the June and July accounts by the end of October. However, the telegraphic transfer did not arrive. At 4 p.m. the matter passed, at least temporarily, from the hands of Mr Grierson to those of the manager of the branch, Mr Wadeson. He telephoned Mr Close and it was agreed that certain sums would be paid, concluding with a balance by 4 November. It was agreed that the sum of $20,000 would be collected at 11.45 a.m. the following day. That occurred, Mr Grierson attended personally to collect the cheque (No. 812156) for $20,000. The cheque was promptly presented for special clearance and cleared. There can be no serious dispute, with all respect to the able argument of Miss Wilson, that there were ample signals of insolvency before this payment was made, nor that the payment was not in the ordinary course of business. As to the latter, whatever meaning is given to the expression, the sequence of events culminating in the stoppage of payment on cheque 236800, 12. the broken promise of a telegraphic transfer and ultimate payment by cheque 812156 cannot possibly be said to be in the ordinary course of business. THIRD PAYMENT From the date of final payment of the second cheque, Mr Grierson, obviously, was extremely worried about the prospects of getting any more. By 31 October the unsecured creditors had risen toa total of $1,683,779. That was not known to the respondent, but the events of the past two months had given it the clearest warnings of serious financial trouble. On that day Mr Grierson rang Mr Close and got a promise of further payments. He phoned again, twice, on 3 November and obtained varying answers. On 4 November there were four telephone contacts between the debtors and the respondent about the money due, the last of which resulted in a promise of payment after 8 November. On that date Mr Grierson phoned Close twice, as he did again on the 9th. He phoned once on the 10th and three times on the 11th. Matters continued in this fashion; numerous attempts by Mr Grierson to press for payment were unsuccessful. On 22 November Mr Grierson instructed solicitors to commence proceedings. That occurred on 23 November and a District Court plaint was issued out of the Rockhampton registry of that Court claiming $29,977.32. On 30 November the respondent caused a notice of 13. claim of charge under the Sub-contractors Charges Act 1974-1979 (Q) to be given claiming an amount of $8,995.51. That statute, to put it briefly, in some circumstances enables a supplier of materials to attach monies due to the person to whom he has supplied. The notice of claim of charge, at last, brought some further payment, presumably made to achieve release of monies due to the debtors. On 12 December the solicitors for the respondent received a cheque for $8,995.51. They obtained a special clearance. According to the evidence for the applicants the cheque was cleared on 13 December and according to that of the respondent it was cleared on 14 December. It does not appear necessary to resolve that dispute since, again, it 1s clear that the payment was not in the ordinary course of business, nor is there any doubt that the debtors were at the time evincing signs of insolvency. On 5 January, some three weeks later, secured creditors appointed receivers and managers and on 23 January 1984 the debtors executed authorities to trustees to call a meeting of creditors. 14. ORDINARY COURSE OF BUSINESS I have already summarily stated my conclusion that neither the second nor the third cheque can pass this test; the view I hold of the meaning of "ordinary course of business" in this context is set out in more detail in what follows. But the main purpose of analysing this expression somewhat elaborately is to determine the fate of the first payment, a question on which my mind has fluctuated. It appears to me that the right of the applicants in respect of that payment depends rather on the construction of the words "ordinary course of business" than on an analysis of the facts, which are not in dispute in any significant respect. Once, successful challenge to a pre~bankruptcy payment depended on showing an intention to prefer; the test of "ordinary course of business" was thought relevant to the existence of that intention. Taylor J. said in Taylor v. White (1964) 110 C.L.R. 129 at p.151 that "... under the old law the fact that a payment was made to a creditor in the ordinary course of business for all practical purposes negatived any suggestion that it had been made with a view to preferring the creditor." But now that the trustee need not show an intention to prefer, what is the point of enquiring whether the payment was in the ordinary course? 15. To that question, two sorts of answers have been given. Firstly, it has been said that the phrase means what it always did. Some explanations of the old meaning are collected by Taylor J. in Taylor v. White (above) at pp.151-153. Important examples are "a fair transaction, and what a man might do without having any bankruptcy in view" and "... it is not with a view to give an undue preference, if a man makes a payment to a creditor in the ordinary course of business". Secondly, the expression has been said to mean "that the transaction must fall into 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" - per Rich J., Downs Distributing Co. Pty. Ltd. v. Associated _ Blue Star Stores Pty. Ltd. (in liquidation) (1948) 76 C.L.R. 463 at p.477. That the latter test differs markedly from the former is obvious enough and the difference was expressly recognised by Rich J., who introduced his discussion by saying: "It is, therefore, not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual normal character of the transaction." A perfectly fair transaction may be out of the ordinary run of affairs - and vice versa. If a judge "Ww 16. deciding a case of this kind is free to choose whichever of these tests he likes, the result may depend on considerations of an aleatory kind. I can see nothing unfair about the circumstances attending the first payment, in this case, and the payment was one which might have been made "without having any bankruptcy in view". On the other hand, it seems to me impossible to say that payment under a cheque which is not only post-dated, but dishonoured when first presented, falls "into place as part of the undistinguished common flow of business". It is unusual, I think, to issue a post-dated cheque for a debt which is immediately due and unusual for a cheque to be dishonoured; the combination of circumstances is doubly unusual. Of the decisions of the High Court dealing with the phrase, the most important is Taylor v. White (supra). It is not only the most recent, but also is that in which the construction of "ordinary course of business" fell most squarely for decision. Although I have taken account of the earlier decisions of the Court, the result of each of them appears to me equivocal, on this point. 17. Dixon C.d. on Taylor v. White at p.136 said that:- "The time-honoured phrase 'in the ordinary course of business' is meant to refer to transactions regularly taking place in a sustained course of activity or some usual process naturally passing without examination." That appears rather close to the test set out by Rich gd. in the Downs Distributing case (above). However, any Dixon C.J. by his reference, at the same place, to the bearing of suggestion that intended to depart from the older meaning is weakened the question on intention to prefer. His Honour quoted from Lord Mansfield:- The "There is a fundamental distinction between an act like this, and one done in the common course of business. The statutes have relation back only to the act of bankruptcy ... If, in a fair course of business, a man pays a creditor who comes' to be paid, notwithstanding the debtor's knowledge of his own affairs, or his intention to break; yet, being a fair transaction in the course of business, the payment is good; for the preference ig there got consequentially, not by design: it is not the object; but the preference is obtained, in consequence of the payment being made at that time." impression gained from this is that Dixon C.J. thought, perhaps, that the lack of ordinariness must be such as to suggest an intention to prefer. 18. Kitto J., at p.145, referring to the relevance of the test of "ordinary course of business" to the pre-existing law, pointed out that the 1924 Act placed the expression in a different context. However, the significance of that is, again, diminished by the circumstance that his Honour also expressly relied, apparently as relevant to the construction of the expression in the Australian Act, upon the passage from Lord Mansfield just referred to. The third judge, Taylor J., set out both tests at pp.151-153, noted that they are not the same, but did not expressly choose between them. The same may be said as to the reasons of Menzies J. at pp.159-160. It is my view that Taylor v. White and the decisions in the High Court to which it refers leave it open to single judges to use either the older interpretation, or the test espoused by Rich J. The latter appears currently often to be quoted: see for example K_& R Fabrications (Qld) Pty. Ltd. v. M. and B. Rigging Pty. Ltd. (1982) Qd. R. 585 at p.589 (Queensland Full Court), Re Mike Blectric (Aust) Pty. Ltd. (1983) 1A.C.L.C. 758 at p.763, Katoa Pty. Ltd. v. Dartnall (1984) 2 A.C.L.C. 42 at p.44, Re Captain Homemaker Pty, Ltd. (ibid) 586 at p.593, Re Lambert Homes Pty. Ltd. (ibid) 688 at p.691. 19. On the other hand, decisions are to be found which, relying upon the older tests, treat as "in the ordinary course of business" transactions which could not survive scrutiny under the test of Rich J. An example is the decision of Woodward J. in Re Brittain; ex parte Barnes (1984) 2 F.C.R. 35, where there were "late payments, two weeks of cheques marked 'present again', the collection of cheques by hand to keep the debtor to its promises and a reference to solicitors in the context of a telephone demand for payment ..." (pp.39-40). Whatever else may be said about circumstances of that sort, they hardly qualify as "part of the undistinguished common flow of business done ... calling for no remark ..." As to the result of Brittain's case, I should say that I agree, with respect, with the view of Spender J. expressed in another preference case relating to this same insolvency (Re Cummins; ex parte Harris and Wilde and Refrigeration Parts (Qld) Pty. Ltd., unreported, 3 July 1985):- "The reference to 'payments made in the ordinary course of business' implies that some payments occurring ina business context are not in the ordinary course of business. Recourse is frequently made to collection agencies in an attempt to secure the payment of long outstanding debts, yet the commonness of that course in my opinion does not mean that the payment of a debt secured after recourse to such a procedure is in the ordinary course of business." 20. More generally, the ordinariness of the course of business is not to be judged by reference to the ordinary standard of dealings with a debtor in desperate financial trouble; so to regard the matter would virtually deprive the notion of "ordinary course of business" of practical application, (I note, in passing, that the decision of Thomas J. in Re Lee Furniture Pty. Ltd (in lig.) 8 A.C.L.R. 251, referred to by Spender J., was reversed on appeal to the Full Court of the Supreme Court of Queensland, on 25 October 1983). A consideration which weakens the attraction of the Rich J. test is this: why should a creditor who happens to have had his debt discharged in some unusual way be at a disadvantage, as compared with a less co-operative creditor who has insisted on and got spot cash - both passing the "good faith" test? It seems somewhat arbitrary to make the former put the money back into the common pool; while rewarding the latter, perhaps, for simple intransigence. Notions of that sort provide an inducement to adhere to the broader tests laid down in the old cases. But in the end it has seemed to me desirable to apply the view of Rich d., for a number of reasons. 21. One is that to apply dicta such as those of Lord Mansfield quoted above appears strange, when the current statute makes irrelevant the existence of that very intention of which "ordinary course of business" was supposed by Lord Mansfield to be an index. Again, the view of Rich J. represents the more natural reading; particularly when one keeps in mind that intention to prefer is immaterial, and that there is a separate requirement of good faith, to construe "ordinary course of business" as importing a necessity of fairness seems too great a departure from the actual language used. Lastly, although use of the criterion of Rich J. may well invalidate more pre-bankruptcy transactions than use of the older tests, it appears to me to conduce to greater predictability of judicial decision. It follows that the first payment, like the others, was not in the ordinary course of business and the applicants must succeed. it is not necessary, for the purposes of determining the matter, to decide whether the first payment was taken in good faith. Consideration of that question would require attention to the refinements mentioned in certain of the dicta in Queensland Bacon Pty. Ltd. v. Rees (1966) 115 C.L.R. 266, but it seems unnecessary, in view of the conclusions already expressed, to go into that in detail. It is enough to state the view that, having regard to the results of the Queensland Bacon cases I would hold that the first payment was in good faith. 22. Subject to anything counsel may have to say as to form, I propose to make the orders sought in the application. 4 certify that this and the .2} preceding pages are a true copy of the reasons for judgrrent herein of His Honour Mr, Justice Pincus (Que, O'ReaY , Gite [we Associate Dated