A sunenent no, 681, 85° . orseoeraeeececenen oeceeaceseno CATCHWORDS Bankruptcy - preference ~ s.122(1) of the Bankruptcy Act 1966 - amendment of s.122 in Act No. 12 of 1980 - application of s.122 to payment of joint debt by one joint debtor who later becomes bankrupt - effect of s.122(4)(c) - onus of proof. Bankruptcy Act 1966 - ss.122(1), (2), (4)(c) and 153(4) Partnership Act 1958 s.13 MICHAEL ROBERT COOKE Ex Parte the Official Trustee in Bankruptcy (as trustee of the estate of Michael Robert Cooke, a bankrupt) v. MILLER BROS. MELBOURNE TANKWORKS PTY. LTD. NO. 181 of 1978 Smithers J. 18 February 198% Melbourne. "~ IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION PANKRUPTCY DISTRICT OF THE NO. 181 OF 1978 wee eS STATE OF VICTORIA IN THE MATTER of the Bankruptcy Act 1966 RE: MICHAEL ROBERT COOKE Ex Parte the Official Trustee in Bankruptcy (as . trustee of the estate of Michael Robert Cooke, a bankrupt ) (Applicant) AND: MILLER BROS. MELBOURNE TANKWORKS (Respondent) Judge Making Order: Smithers J. Date of Order: 18 February 1985 Where Made: Melbourne. ORDER THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant pay the respondent's costs of and incidental to this application. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE NO. 181 OF 1978 ) ) ) ) ) ) ) STATE OF VICTORIA IN THE MATTER of the Bankruptcy Act 1966 RE: MICHAEL ROBERT COOKE Ex Parte the Official Trustee in Bankruptcy (as trustee of the estate of Michael Robert Cooke, a bankrupt ) (Applicant) AND: MILLER BROS, MELBOURNE, TANKWOPKS pry. LTD. (Respondent) Coram: Smithers J. Date: 18 February 1985 REASONS FOR JUDGMENT This is an application by the trustee of the bankrupt estate of Michael Robert Cooke (the trustee) for declarations: 1. that the payment of the sum of $15,000 made on 18 November 1977 by the bankrupt to Miller Bros. Melbourne Tankworks Pty. Ltd. (the respondent) is void as against the trustee as being a payment having the effect of giving the respondent a preference, priority or advantage over other creditors within the meaning of s.122 of the Bankruptcy Act 1966 (the Act} and orders that: (a) the respondent pay to the trustee the sum of $15,000; (b) the respondent pay to the trustee his taxed costs of and incidental to the application; (c) such further or other orders as the Court see fit. A claim by the trustee for relief pursuant to s.115 of the Act was not pursued at trial. The facts shortly are that Michael Cooke had been a Partner in a real estate firm in Ballarat in Victoria known as Cooke & Co. (the firm). The other partner was his father David Cooke. The firm had been established since 1866 and it is undisputed that it had a good reputation in the community. Gorden Albert Peters (Mr. Peters) was an alternate director of the respondent and was the husband of one of the directors. He had worked for the firm from 1970 until 11 June 1977 and between 1971 and 1977 the respondent lent various amounts totalling $60,000 to the firm. At the time Mr. Peters left the firm it was stated that the respondent was owed approximately $52,000. 3. On 11 June 1977 the respondent sent a letter to the firm addressed to Michael Cooke, inter alia, requesting payment of the sum of $21,000 by 8 August 1977. No money was received by that date and at that stage the firm stopped making interest payments on the amounts owing by it to the respondent. It appears that Mr. Peters often made telephonic requests of Cooke for the $21,000 and on 26 October 1977 Cooke gave to Mr. Peters $4,000.10 comprising $1,350 1n cash and a cheque for $2,650.10 drawn by the Hotham Permanent Building Society. Cooke stated that he would pay the remainder in a few days. Further pressure was exerted upon Cooke and on 18 November 1977 he gave Mr. Peters a cheque for $15,000 drawn on the trust account of the firm of Linton R. Lethlean & Co. a firm of solicitors in Ballarat. On 3 May 1978 Cooke's estate was sequestrated upon the presentation of his own petition. It is the case for the trustee that within the meaning of s.122(1) of the Act the payment of $15,000 was a payment made by the bankrupt within six months of the presentation of the petition on which he was made bankrupt, that it was made in favour of a creditor of his when the he was unable to pay his debts as they became due from his own money and that the effect of the payment was to give to that creditor a preference over other creditors. As such it was void as against the trustee. 4. It was, inter alia, the case for the respondent that the payment was not, within the meaning of s.122(1), a payment made by a person designated therein. It was put that, as at 18 November 1977, section 122(1) did not apply to a payment made by a firm or a partner of a firm of which only one partner subsequently became bankrupt, or to a payment made, by whomsoever, to discharge a debt of a firm a partner of which was made bankrupt within six months, or to a payment made by a debtor out of moneys of the debtor and another person. And it was the submission of the respondent that the payment made on 18 November 1977 was a payment which falls into one or more of those specified categories. The respondent further contended that if the payment was within the scope of s.122(1) the provisions thereof did not affect the rights of the respondent because it was a payee in good faith and for valuable consideration in the ordinary course of business within the meaning of s.122(2) of the Act. The scope of s.122(1) as it stood on 18 November 1977 Mr. Sharp, for the respondent, argued that before the enactment of s.57 of the Bankruptcy Amendment Act 1980, s.122(1) of the Act did not apply to any payment of the kind specified in s.57(1)(b) of that Act. It was provided in s.57(1) of the Act of 1980 that s.122 of the Act should be amended as follows, namely, 57. (1) Section 122 of the Principal Act is amended - (a)... (b) (c) (d} Ce) (f) by inserting after sub-section (1) the following sub-section: "(1A) Sub-section (1) applies in relation to a conveyance or transfer of property, a charge on property or a payment made, or an obligation incurred, by the debtor in favour of a creditor - (a) whether or not the liability of the debtor to the creditor is his separate liability or is a liability with another person or other persons jointly; and (b) whether or not —- (1) the property conveyed, trans- ferred or charged is his own property or is the property of the debtor and of other persons or other persons; (ii) the payment is made out of his own moneys or out of moneys of the debtor and another person or other persons; or (ili) the obligation is incurred by the debtor on his ow account only or on account of himself and another person or other persons, as the case requires."; fn It was also provided by s.57(2) that, "(2) Notwithstanding the amendments of 5.122 of the Principal Act made by sub-section (1) of this section, the provisions of that section of the Principal Act continue to apply, after the commencement of this section, in relation toa bankrupt, and the estate of a bankrupt who became a bankrupt before the commencement of this section as if those amendments had not been made." Mr. Sharp submitted that s.57(1) was designed by Parliament to alter the law by extending the application of s.122(1) to payments of the kinds specified in s.57(1)(b) to which it did not formerly apply. He relied, of course on the mere passage of the Act. No doubt s.122(1) must be interpreted as expressing that which is conveyed by the natural meaning of its terms considered in the context of the section. But that does not, I think, mean that the passage of s5.57(1)(b) may not be considered in relation to its interpretation. That it may he so considered gains some support from the observations of Dixon J, as he then was, 1n Grain Elevators Board (Victoria) Vv. President, Councillors and Ratepayers of the Shire of Dunmunkle (1946) 73 CLR 70. In that case a question arose as to the effect of a statute of 1942, exempting the land of the Board used exclusively for receiving, storing or forwarding wheat, from liability as rateable property under any Act. It had been contended by the Board that a statute of 1934 by which it was created had constituted the Board an agency of the Crown and thereby conferred upon it an unlimited exemption from liability to be rated. Rejecting this contention partly by reference to the provisions of the 1942 Act Dixon J., as he then was, said at p.86:- "Although the provision was passed too late to apply to the present case, I think that it may be considered on the question of interpretation. It would be a strange result if we were to interpret the prior legislation as giving a wider exemption than that conferred by the provision so that the express exemption it makes would prove unnecessary 7. and the qualifications it places upon that exemption would be futile." To my mind it would be strange that Parliament should so misunderstand the meaning and scope of s.122(1) as it stood before the amendment of 1980 that it would by that amendment enact something which it regarded as a clear and major alteration of the law if the law according to that section already was that which it enacted in the amendment. The notion that in 1980 Parliament was concerned only to declare the effect of s.122(1) before the amendment was made is excluded by the provisions of s.57(2) to "the effect that the provisions of s.122 as they operated before the amendment should continue to apply in relation to a bankrupt, and the estate of a bankrupt, who became bankrupt before the commencement of s.57 as if the amendments in s.57 had not been made. It seems clear that Parliament considered that it was altering the law in respect of payments by persons to creditors where such persons became bankrupt after the passing of the amendment. And it may be mentioned that the explanatory paper relating to the proposal to enact s.57 referred to it as "a proposal to alter the law". Interpretation of 5.122 without reference to 5.57 of Act No. 12 of 1980 Mr. Sharp, for the respondent, contended that prior to the amending Act of 1980 s.122(1) did not apply to a payment of a liability of the debtor jointly with another person who was not made bankrupt, or to a payment made out of moneys of the debtor and another person who does not become bankrupt. He said that on the proper construction of s.122(1) the only payments which it rendered void as against the trustee were payments made by a person who becomes bankrupt within the prescribed period out of his own money of a debt owed by him separately, see s.122(1)(a) and (b). It would appear that if the reference 1n s.122(1) toa payment by a person 1s a reference to a payment by two or more persons then ina case where the payment 1s made by two or more persons, for instance partners, neither of the conditions (a) or (b) of the sub-section would be satisfied with respect to the payment unless all the partners became bankrupt. If the payment be made by two or more persons, only one of whom becomes bankrupt and the section 1s interpreted in the plural it would only apply where each of the persons making the payment was unable to pay his debts as they become due out of his own moneys. The section is not concerned with payments made by persons who do not become bankrupt within the prescribed time or at all. It assumes that the payment is in respect of a debt of the person or persons who become bankrupt. When only one of a number of Joint debtors becomes bankrupt and a payment has been made by him the payment is not strictly in respect of a debt of that person but in respect of a debt jointly owed. To describe a payment made by a person in respect of a debt jointly owed by the person who paid 1t and another, as a payment by a person of a debt of his to a creditor of his 1s to fail adequately to describe the payment. The payment, because of the nature of a joint debt, is inevitably made on behalf of the joint debtors. In this case the debt that was paid was a partnership debt. Section 13 of the Partnership Act 1958 (Victoria) provides:- "13. Every partner ina firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he isa partner, and after his death his estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied but subject to the prior payment of his separate debts." In Kendall _ v. Hamilton (1878-79) 4 AC 504 two partners, having been sued, had judgment entered against them and been made bankrupt on a partnership debt. The creditor sought to sue a subsequently discovered third partner, there having been only a small dividend on the bankruptcy. It was held that the action was not maintainable. At pp.516 and 517 Earl Cairns L.C. said, "There is no doubt that in many cases and text-books we find the expression that a partnership debt is in Equity joint and several. This, however, is only a compendious expression, which must be interpreted with reference to what were the functions of the Court of Equity as to partnership debts. The only interposition of a Court of Equity with regard to partnership debts, took place in the administration of the assets, either of the partnership or of a deceased member of the partnership. ... If, therefore, a Court of Equity was administering the assets of a deceased partner, it would, in order to clear his estate, ascertain his liabilities to the partnership and for this purpose would ascertain the debts due from the co-partnership at his death. From this 10. the transition was easy to giving the creditors of the partnership a direct right, and not merely an indirect right, through the surviving partners, to come for payment against the assets of the deceased partner; and from this again the transition was easy to the expression which said that partnership debts, in the eye of a Court of Equity, were joint and several - not thereby meaning that a Court of Equity altered or changed a legal contract, but merely that the Court, in order, before distributing assets, to administer all the equities existing with regard to them, would qo behind the legal doctrine that a partnership debt survived as a claim against the surviving partners only, and would give the creditor the benefit of the equity which the surviving partners might have insisted on." And at pp.539 and 540 Lord Selborne said:-- "My conclusion is that in the present case there is no equity upon which the Appellants can be entitled to be relieved from the legal effect of the judgment obtained by them against Wilson, McLay, & Co., if, (as the equitable argument assumes, } that judgment had the effect of extinguishing, in the lifetime of all the partners, the legal liability of the Respondent as a partner for the debts previously due from the partnership of which he was a member. There is no question here of jus accrescendi; the question relates simply to the constitution of the Appellants' debt. Before the action it was a joint debt; but by the result of the action (if the decision in King v. Hoare 13M. & W. 494 is right; and is applicable to this case), 1t became the separate debt of Wilson, McLay, & Co. only. If the joint debt, for which alone the Respondent was ever liable, was merged and extinguished at Law by this judgment (on which the Respondent is clearly not liable, either at Law or in Equity), it seems to me to be impossible that Equity should, on that ground, raise or imply against him, out of the original contract, a separate liability to the Appellants from which he is free at Law, whatever may be the rights, by way of of contribution, indemnity, or otherwise, which Wilson, McLay, & Co. may possess against him in respect of this judgment." The effect of the judgment in Kendall v. Hamilton has been modified in England and Victoria. But on the nature of il. a partnership debt what 15 said therein 1s still apposite in the current problem. It would seem that if one joint debtor be pursued to judgment and execution in respect of his liability for a dert jointly owed it is always the joint debt that is the subject of the pursuit. Once it is seen that the payment was made in respect of a liability resting on the payer jointly with another or others, considerations arise which complicate the notion of that payment being a preference either against creditors of the payer's separate estate "or creditors of the payer and the person or persons jointly liable with him. The payment is non preferential as against the separate creditors unless it appears that the payment had the effect of reducing the separate estate. And that, 1t would only do, 1f on dissolution of the partnership and a taking of accounts, there was adeficrency of assets to reimburse the bankrupt the amount of the payment. So far as creditors of the joint debtors are concerned there will be a preference against them only if the assets of the partnership together with the unlimited liability of each partner are not adequate to pay those creditors. In the case of a payment by a partner, who becomes bankrupt the payment will have improved his credit position in the firm so that on the accounts being taken the balance in his favour may include the amount of the payment. The nature of the transmissible interest of a partner in the partnership assets is explained by the observations of Mason J. in United Builders Pty. Ltd. v. Mutual Acceptance Ltd. (1980) effect partne 12. of amortgage by a partner of his interest in rship:- "The vital question is: What rights passed to Mutual by virtue of the charge over United's right, title and interest in the partnership? The answer to this question is that, according to the long established principle, a mortgage or charge over a partner's share or interests in the partnership does not vest any interest in the assets of the partnership against the other partners. What the mortgage or charge does is to confer an entitlement on the holder on dissolution of the partnership in relation to. the partner's share of the partnership assets. Section 34 of The Partnership Act specifically provides that a mortgageee 1S on dissolution entitled to receive the mortgagor's share of the assets and that, for the purpose of ascertaining that share, he 15 entitled to an account from the other partners as from the date of dissolution,. This principle does not in my opinion deny the existence of a partner's beneficial interest in each of the partnership assets, but this interest is of a special and non-specitic kind (Canny Gabriel Castle Jackson Advertising Pty. Ltd. v. Volume Scales (Finance) Pty. Ltd. (1974) 131 CLR 321 at pp.327-328; Federal Commissioner of Taxation v. Everett (1980) 143 CLR 440, at pp.446-447., In Helmore v. Smith (1887) 35 Ch.D. 436 it was recoqnized that a sheriff under a writ of fi. fa. could sell a partner's chattel interest in the partnership. But, as Lindley L.J. pointed out the purchaser "has to find out what he has really had assigned to him, and that he can only do by a partnership account" (1887) 35 CH.D. at pp.447-448. This in itself will virtually ensure a dissolution of partnership. It 1s significant that The Partnership Act now provides that a writ of execution shall not issue against any partnership property except ona judgment against the firm (s.26(1)) and that the court may by order charge a partner's interest and his share of profits with payment of a judgment debt and by subsequent order appoint a receiver of that partner's share of profits and of any other money which may be coming to him from the partnership (s.26(2))." 144 CLR 673 at p.687 and 688 which concerned the a It is to be noted that the payment struck at by s.122(1) 13. is rendered void as against the trustee. It 1s not void as against any other person. The payment being made before bankruptcy and being a payment of a joint debt operates at law as a discharge of all the joint debtors. If, by virtue of s,.122 the payee were required to repay the sum to the trustee the discharge of the joint debtors which was effectuated by the payment would not be affected. The discharge of the joint debtors' liability would persist notwithstanding the bankruptcy and the repayment to the trustee. Thus the payee would be deprived of his right of action against the other joint debtors. While the consequence of a preferential payment might reasonably be imposed upon a payee who upon repayment to the Trustee would be entitled to prove in the bankruptcy, there would be an element of hardship in the loss of his rights to recover the debt from the other joint debtors, In the absence ef express provision, and particularly having regard to the express provision in s.153(4) of the Act that the discharge of the bankrupt does not release from any liability a person who was a partner of the bankrupt or jointly bound with him, one would not expect such a situation to be created. It is to be noted that although s.122(5) preserves to a creditor who makes a repayment pursuant fo s§.122 a right to prove in the bankruptcy, there is no corresponding preservation of his rights against those jointly liable with the bankrupt in respect of the debt. Presumably it was thought that the section was not applicable to the payment in respect of a debt jointly owed by several. 14. Counsel for the trustee has referred me to the views expressed in the report of the Committee appointed by the Attorney-General of the Commonwealth to review the Bankruptcy law of the Commonwealth under the chairmanship of Mr. Justice Clyne dated 14 December 1962. While recognizing that it was reasonable to regard, as an injustice, the loss suffered by a creditor who loses his rights against a surety of his debtor, where he 1s required to repay the trustee under what 1s now s.122 of the Act, the amount received by him from his debtor, the Committee considered that no provision should be made by the legislature to remedy that situation. In coming to that conclusion the Committee had regard to the difficulties that would arise in restoring all the parties to their former position many months after the payment in question had been made. It also took into account that it was open to a creditor who took a security to stipulate that the surety would remain liable 1f payment of the debt was set aside as a preference. However, I do not gain assistance from the Committee's conclusion. Where what is involved 18 a payment of a guaranteed debt the debt which is paid 1s essentially the debt of the bankrupt or bankrupts concerned and of him or them alone. A partner's liability for a partnership debt is of a different order. It is the debt of all the partners as much as it is the debt of a partner who might subsequently become bankrupt. In addition, unlike the case of a surety it would be unusual in the extreme that a person doing business with a firm would stipulate for an acknowledgement by the partners 15. that they should remain liable for the debt if payment thereof was set aside under 5.122 of the Act on the bankruptcy of one of them. If the liability of one of several joint debtors who becomes bankrupt were a liability giving rise to the operation of s.122 in respect of the joint debt, problems similar to those considered by the Committee in relation to the liability of a surety would exist and one might have expected that the Committee would have discussed them. The absence of any such discussion would indicate that it was not felt that the problem existed in relation to the liability of a joint debtor. And of course it did not exist if the section did not operate in respect of a joint debt where only one of the joint debtors is made bankrupt. If the money used to pay the debt in question is money not only of the person who becomes bankrupt but of him and another jointly and the payee is required to repay the amount received by him to the trustee, then, there has been an appropriation for the benefit of the creditors generally of an interest in property of a third person not connected with the financial relationship relevant to any question of preference between the creditors of the bankrupt and who had no intention of benefiting anybody other than the payee. In the absence of express statement one would not infer that the legislature intended such a result. In this connection it may be observed that the object of s.122, certainly as it stood before Act No. 12 of 1980, is to preserve for the creditors 16. generally the assets of the person who becomes bankrupt. If it had operated to incorporate into the estate of the bankrupt a property interest of a third person the section would have gone beyond this object. Having regard to the foregoing I am led to the conclusion that, as at 18 November 1977, s.122(1) was not applicable to a payment of a joint debt by joint debtors who did not all become bankrupt or by a joint debtor who alone of the joint debtors subsequently became bankrupt, or to a payment made with money jointly owned by the payer and another who is not made bankrupt. The payment as related to a liability of a firm It 1s necessary in the light of the above conclusion to enquire whether when Michael Cooke handed the cheque for $15,000 to Mr. Peters he did so in his personal capacity or in his capacity as a partner of the firm. Clearly it wasa payment of the firm's debt and thus pro tanto released both partners from liability. The payment made was in respect of money lent to the firm by the respondent. The total amount lent by the respondent to the firm was $60,000. It was comprised of six separate loans as follows: 1.10.72 §5,500 3.10.72 8,500 -.10.72 6,000 9.3.74 25,000 2.4.76 10,000 6.9.76 5,000 Total: 60,000 17. There were repayments of capital as follows:- 7.11.73 9,000 8.6.74 1,000 1.6.76 5,000 8.12.76 1,000 6.10.77 4,000 18.11.77 15,000 Total: 35,000 In respect of the repayment of 7 November 1973, 1 June 1976 and 8 December 1976 there are in evidence covering letters from the firm advising the respondent of such repayments by the firm. The only loan in respect of which the instrument of loan is in evidence is that relating to the sum of £25,000 lent on 9 March 1974 and the parties to that were the firm as borrower and the respondent as lender. Interest on all the loans had always been paid by the firm and I am satisfied that all the loans were made to the firm. It was in the course of the business of the firm to receive deposits of money on loan from persons generally. That the loans were made by the respondent followed from the circumstance that Mr. Peters was from 1970 until dune 1977 an employee of the firmin a clerical capacity and that Mr. Peters was an alternate director of the respondent representing his wife and that the respondent had moneys to invest. After Mr. Peters ceased to be employed in the firm, a good relationship between him and his wife and the Cookes continued. But by the cessation of employment the closeness of the connection was reduced. Mr. Peters became involved in the respondent's Ballarat boutique 18. business managed by his wife. Structural alterations to the shop were undertaken and a bank overdraft in the region of $20,000 was incurred in relation to these alterations. To meet this the respondent made a reguest by letter to the firm on the day Mr. Peters left to repay $21,000 of the outstanding loans by 8 August 1977. In the same letter the respondent indicated that it was willing for the balance to be repaid over the next twelve months. The actual terms of the letter which was addressed to Michael Cooke, Cooke & Co., Ballarat, are of significance. They were as follows:- " At ameeting of the Board of Directors held today, I was instructed to write to you to request the sum of $21,000 (advanced to you previously) by August 8, 1977. I was further instructed to request the balance of funds within twelve months of that date, preferably in three payments, November, 1977, April, 1978 and August, 1978. As you are aware the company is committed to Building extensions which are already under way, hence our request. Should you wish to repay the balance prior to the above dates the Board will be happy to accede to such a request. I take this opportunity to thank you for the assistance you have rendered the company to our mutual benefit over the past 3/4 years and trust that a continuing relationship will continue to exist so that business investments are presented for the Board's future consideration." It was mot unnatural that, Mr. Peters' business association with the firm having come to an end, the desire to leave funds with it should cease. But other than for a request for the amount of money needed to discharge their overdraft there was no immediate requirement for repayment. On 6 October 1977 $4,000 was repaid. About that time, but unknown to the respondent, creditors of Michael Cooke and of the firm had 19. taken action against him and against the firm. The majority of the debts due in legal proceedings pending at the time were debts of the firm. It was within Michael Cooke's authority as a partner to pay those debts. To meet the claims so made and the respondent's claim Michael Cooke decided to obtain money on loan by the use of the credit of himself and his wife. The loan was obtained through Messrs Linton Lethlean & Co. and was made to Mr. & Mrs. Cooke jointly. Mrs. Cooke authorised the solicitor in whose trust account the moneys jointly borrowed by Mr. and Mrs. Cooke was placed in their joint names to make the payments of the firm's debts. When Michael Cooke paid the cheque for §15,000 to Mr. Peters on 18 November 1977, the intention to be ascribed to him was that he was discharging the firm's debt. The payment by Cooke was thus either a loan to the partnership, which is a difficult concept, or a payment made by him as a partner with the consequence ef discharging the debt of the firm and of creating a credit in his capital account in the partnership. He certainly had no authority as a partner to make his co-partner liable to him as ona loan to the partnership. It would be within his authority as a partner to pay a firm's debt and to gain thereby a credit in the partnership accounts. It would therefore seem that the proper inference is that he paid the money in discharge of the firm's debt in his capacity as a partner. The Source of the money used to make the payment The source of the money which was paid by the bankrupt to Mr. Peters on18 November 1977 was money in the trust 20. account of Messrs Linton Lethlean & Co., solicitors. It stood in their trust account in the name of Michael Cooke and Mrs. Cooke, his wife. The inference from the evidence is that the money in the trust account was borrowed by Mr. and Mrs. Cooke from a client of the solicitors on the security of assets, some being assets of Mr. Cooke and some of Mrs. Cooke. Mrs. Cooke attended the office of Messrs Linton Lethlean & Co. at her husband's request. The purpose of her visit to the solicitor was not explained by him to her. On her arrival Mr. Paulson, the solicitor's clerk handling the transaction informed Mrs. Cooke that her husband's creditors were pressing for payment and it was desirable that she join in the borrowing of money to be used by him in discharging those debts. It was indicated either expressly or by implication that the relevant creditors were those of Michael Cooke personally and of the firm. Mrs. Cooke said she was willing to do what was necessary. Mr. Paulson presented her with the relevant document which she signed. It provided that Mr. and Mrs. Cooke borrowed $100,000 from the Jlender as joint borrowers both being liable to repay the money. The joint aspect of the transaction was reflected in the trust account of the solicitors. It was reflected also in that the cheque for $15,000 paid to the respondent on 18 November 1977 was drawn on that trust account, no doubt on the instructions of Michael Cooke. The implication from the short conversation between Mr. Paulson and Mrs. Cooke was that Messrs Linton Lethiean & Co. were to have her authority to draw on the money borrowed as requested by Michael Cooke for payment of his liabilities including his own private debts and the debts of 21. the firm. It was said for the trustee that the money borrowed by Mr. & Mrs. Cooke jointly was the subject of a separate transaction of loan from Mrs. Cooke to Michael Cooke. It was said that by this transaction the money borrowed became his money and her interest therein was transformed into a liability of Michael Cooke to her in respect of money lent by her to him. Having seen Mrs. Cooke and heard her evidence I am satisfied that there is no basis for this. Clearly enough if Michael Cooke had put sucha proposition to his wife she would have concurred therein but it was just never put. Michael Cooke swore "an an affidavit that Mrs. Cooke "had agreed to advance and lend to me her share of the moneys". Mrs. Cooke said that she was asked by her husband to go to the solicitor's office. But she said that before she arrived at the solicitor's office nothing was said to her as to the purpose of the visit or the nature of what was likely to occur at it. She only ascertained that she was to join in a loan, and what its purpose was, from Mr. Paulson. There was clearly no conversation between her and her husband in which she lent to him her share of the money borrowed. Mrs. Cooke, said at the end of the evidence, in a hopeless sort of way, "I lent it to him - gave it to him". I have no doubt that this was not a statement that she actually entered into either of such transactions. It was cri de coeur reflecting her attitude of willingness to have done whatever she might have been asked to do. 22. In the light of what actually occurred statements in the affidavits to the effect that there was a transaction of loan between Mr. and Mrs. Cooke have to be treated rather as representing the concept of the draughtsman of the affidavits. The result is that when Michael Cooke paid the cheque for $15,000 to Mr. Peters he paid to it with money belonging jointly to himself and Mrs. Cooke. In the light of all the foregoing it is my view that on the proper interpretation of s.122(1) as it stood the payment was not one to which that section applied. Section 122(1) if applicable: - The Debtor's financial position If, however, s.122(1) should be regarded as applicable to the payment in question it is necessary to consider whether the debtor at the time of the payment was unable to pay his debts as they became due out of his own money, and whether the payment gave a preference to the respondent over other creditors. The onus of proof in these respects is on the trustee. There is evidence that in May 1978 Michael Cooke's' total liabilities far exceeded his assets. Michael Cooke said that in November 1977 when he borrowed the money to pay those creditors, some being his and some being debts of the firm then pressing for payment, there were other creditors to whom money was due and that whether he could survive financially 23. depended on those creditors refraining from action for some unspecified but material time. Those creditors did not so refrain with the result that ina few months bankruptcy was inevitable. Mr. Sharp did not argue that on the evidence the Court should not be satisfied that as at 18 November 1977 Michael Cooke was unable to pay his debts as they became due. In the circumstances, I think, I should be so. satisfied. Similarly having regard to the evidence of Mr. Watson I think I should be satisfied that, infact, the payment of the $15,000 did give a preference to the respondent. Section 122(4)(c) - On whom does the onus of proof lie? The respondent submitted that even if the payment were one which was otherwise void against the trustee s.122(1) did not apply to it because the respondent was a payee in good faith, for valuable consideration and in the ordinary course of business: see s.122(2). The trustee pointed out, however, that by virtue of s.122(4)(c) the respondent 1s deemed not to be a payee in good faith if the payment was made under such circumstances as to lead to the inference that the respondent knew or had reason to suspect that the debtor was unable to pay his debts as they became due from his own money and the respondent knew or had reason to suspect that the effect of the payment would be to give the respondent a preference over other creditors. There was of course valuable consideration for the payment. But whether the respondent may be regarded asa 24, payee in good faith depends in the first instance on the provisions of s.122(4)(c). If the conditions of sub-section 4(c) are fulfilled then the respondent is deemed not to be a payee in good faith and cannot escape the avoidance of the payment in favour of the trustee although by the operation of §.122(2) it might otherwise do so. A question has arisen as to which party bears the onus of proof that the circumstances under which the payment under challenge was made were such as to lead to the specified inferences. To my mand s.122(4)(c) is intended to operate in a situation where the payee might be able to prove to the satisfaction of the Court that subjectively he received the payment in good faith but nevertheless the circumstances disclose that that subjective state of mind must have been the result of naivete or inattention to relevant factors. If the circumstances, objectively looked at, would lead the Court to draw the inferences specified in s.122(4)(c)(1) and (ii), then, whatever the subjective state of the payee he must not be regarded as having received the payment in good faith. To ascertain the intention of the legislature as to the party upon whom the onus of proof lies it is helpful to consider the observations of the High Court in Vines v. Djordjevitch (1955) 91 CLR 512 at 519 as follows:- "'There is a technical distinction between a proviso and an exception, which is well understood. All the cases say, that if there be an exception in the enacting clause, it must be negatived: but if there be a separate proviso, it need not' - per Abbott J. in Steel v. Smith (1817) 1B & Ald 94 at p.99 £106 ER 35, at p.371. The distinction has perhaps come to be applied ina less technical manner, and now depends not so much upon form as upon substantial considerations. In the end, of course, it 1s a matter of the intention that ought, in the case of a particular enactment, to be ascribed to the legislature and therefore the manner in which the legislature has expressed its will must remain of importance. Hut whether the form is that of a proviso or of an exception, the intrinsic character of the Provision that the proviso makes and its real effect cannot be put out of consideration in determining where the burden of proof lies. When an enactment is stating the grounds of some liability that 1t is imposing or the conditions Giving rise to some right that it is creating, it is possible that in defining the elements forming the title to the right or the basis of the liability the Provision may rely upon qualifications exceptions or provisos and it may employ negative as well as positive expressions. Yet it may be sufficiently clear that the whole amounts toa statement of the complete factual situation which must be found to exist before anybody obtains aright or incurs a liability under the provision. In other words it may embody the principle which the legislature seeks to apply generally. On the other hand it may be the purpose of the enactment to lay down some principle of liability which it means to apply generally and then to provide for some special grounds of excuse, justification or exculpation depending upon new or additional facts. In the same way where conditions of general application giving rise toa right are laid down, additional facts of a special nature may be made a ground for defeating or excluding the right. For such a purpose the use of a proviso is natural. But in whatever form the enactment is cast, if it expresses an exculpation, justification, excuse, ground of defeasance or exclusion which assumes the existence of the general or primary grounds from which the liability or right arises but denies the right or liability 1n a particular case by reason of additional or special facts, then it is evident that such an enactment supplies considerations of substance for placing the burden of proof on the party seeking to rely upon the additional or special matter." To my mind s.122(4)(c) "assumes the existence of the general or primary ground from which the right", namely, immunity from s.122(1), "arises, but denies that right ina particular case by reason of additional or special facts". 26. And the conditional form of words used in s§.122(4)(c) would seem to be in harmony with this approach. Applying this to the present case the onus is cast on the trustee to prove that although the respondent might have received the payment in good faith the circumstances of the payment fell within sub-section 4(c). This departs from the view expressed by Sweeney J. and from views expressed in some of the cases referred to by him in Re: Bird as Trustee of the Estate of Arcadiou ex parte Casabene (1979) 39 FLR 281. His Honour recognized that the view adopted by him was contrary to the conclusion of Barwick C.J. in ueensiand _ Bacon Pty Ltd. v. Rees (1966) 115 CLR. But of course that conclusion was in conflict with the observations of the learned Chief Justice in Rees v_ Bank of N.S.W. (1964) 111 CLR 210 at 216-217. The observations of Rich and Dixon JJ. in S. Rachards & Co. Ltd. v. Lioyd (1933) 49 CLR at p.60, of Rich, Dixon and McTiernan JJ in Burns v. McFarlane (1940) 64 CLR at p.60, and of Gibbs Jd. (as he then was) at first instance in Queensland Bacon Pty Ltd. v. Rees (Supra) at p.280 are in point. Nevertheless nothing was said by Kitto or Menzies JJ. who sat with the Chief Justice in Queensland Bacon Pty. Ltd. v. Rees to indicate any reservation as to what was there said by the Chief Judge. In 1983 the question came before Fisher J. in es Domenico Castellucci Ex Parte: Kevin Michael Pipkin and Michael Gamma_and Rosa Gamma 11 March 1983 in No. S.A. 648 of 1981. He referred to the observations of Gibbs C.J. in Re Weiss (1970) ALR 654 which were not before Sweeney J. when he 27. decided 1n Re Bird (supra). His Honour concluded that the onus of proof lay on the party alleging that the circumstances of the payment fall within sub-section 4({c) of Honour said at p. 9:- The provisions of s.122(4) of the Act 8.12 do 2. His not impose any onus on the respondents. The effect of - in re Co. Ltd. the subsection 1s, as stated by Gibbs J Weiss, Ex parte White v. John Vicars & [19707 ALR 654 at 665 ',..that, if the Court is positively satisfied that the circumstances of the payment justify the inference by it that the creditors knew or had reason _to suspect the Court is precluded from finding good faith (Queensland insolvency and the preference, the Bacon Pty. Ltd. v. Rees at p. 287).' The passage quoted above from the reasons of Gibbs d. (as he then was) in Re: Weiss (supra) was introduced by the words "This sub-section casts no onus on the creditor". In the light of the foregoing I am conclusion that I should accept the view that proof under s.122(4)(c) lies upon the trustee. Circumstances of the payment For the consideration arising under this led the ta the onus of heading it 1s useful to have regard again to the reasons of Fisher J. in Re: Castellucci (supra) at pp.10 and 11, namely:- Gibbs J. went on to indicate, by reference to certain extracts from the reasoning in that case, other Matters which are required to be established. He said on the same page of re Weiss 28. To satisfy the subsection, 'it 1s not enough that the circumstances are such as to lead to the inference that the creditor had reason to suspect that the debtor might be insolvent. The words of the subsection, to my mind, are quite clear that it is the fact of actual insolvency which must be known or suspected. To be insolvent, the debtor must be unable as distinct from being merely unwilling, to pay his debts as they fall due. It is ane thing to suspect a man's solvency in the sense that one doubts whether he is solvent or insolvent. It 15 another thing to suspect that he 1s in fact insolvent. It is of the latter suspicion that s.94(4), in my opinion speaks' (Queensland Bacon Pty. Ltd. v. Rees, supra at pp.291-2, per Barwick, C.J.) 'The notion which "reason to suspect" expresses in subsection (4), 1s, I think, of something which 1n all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the subsection describes - a mistrust of the payer's ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors' (p.303, per Kitto, J).' The words which I have emphasised in the last Mentioned extract from the reasons of Kitto J, namely "a reasonable person in the position of the payee", support my view that I am required to take into account the knowledge and circumstances of the respondents in deciding whether I should draw the inference that they had reason to suspect. I also draw attention to the distinction made between doubting whether a person is solvent and suspecting that he 1s infact insolvent. Mr. Gamma was the only respondent to give evidence and it was not suggested that the respondents' case was defective by reason of the absence of Mrs. Gamma, who, her husband said, had only been included as a mortgageee to cover the eventuality of his death." The shareholders of the respondent were Mrs. Peters and her sister Mrs. Barry. Mr. Peters and Mr. Barry were alternate directors for their respective wives and Mr. Barry was also the company secretary. He was a qualified accountant 29. working aS an employee in a firm of accountants. The relationship between Mr. Peters and his wife with the bankrupt had developed over the years to one of genuine friendship. As indicated above the active business of the firm had been handled by the bankrupt during Mr. Peters' association with the firm. Mr. David Cooke attended the office regularly and attended mostly to the clerical and administrative side of the business. He was always, in a sense, "there", and was regarded by Mr. Peters as aman of integrity and of undoubted financial resources. It was reasonably understood by Mr. Peters and Mr. Barry that the firm was the owner of the building in which the business was carried on and that the firm or Mr. David Cooke had substantial interests in other real estate. The firm had been in business in Ballarat for over one hundred years and it enjoyed a high reputation for integrity and financial strength. Included in its business operations was the acceptance of money from private persons on interest bearing deposit for fixed or indefinite terms. Mr. Peters was unaware of the mode of investment of those moneys by the firm. He believed that some of the moneys were invested in the Berklee group of companies. That group was financially sound and Michael Cooke was understood to have a substantial investment in that group. Throughout his employment with the firm Mr. and Mrs. Peters remained on good terms with Michael Cooke and his wife. The association of Mr. and Mrs. Barry with either of the Cookes was peripheral. 30. Mr. Braun for the trustee contended that it was apparent that the circumstances of the payment of 18 November 1977 were such as to lead tao the inference, not that the respondent knew, but that it had reason to suspect each of the specified matters referred to in s5.122(4)(c). He relied in particular on the failure of the firm to pay ainterest due on the respondent's loans to it from the end of July 1977, the payment of $4,000 only on 6 October 1977, the form in which that payment was made, namely a Hotham Building Society cheque and $1,350 cash, the form in which the 15,000 was paid on 18 November 1977, namely a cheque drawn on a= selicitor's trust account, and the fact that payment of that amount still left outstanding §2,000 of the $21,000 of which the respondent had required payment. He stressed that between June 1977 and November 1977 Mr. Peters had repeatedly pressed Michael Cooke to pay the $21,000 and the bankrupt had repeatedly stated inability to do so until some unspecified, although not remote, time later. He pointed out that Mr. Barry had made a special trip to Ballarat to urge Michael Cooke to make prompt payment of the amount requested. The question whether at the time of the payment on 18 November 1977 the respondent had reason to suspect that "the debtor" was unable to pay his debts as they became due and that the effect of the payment was to give it a preference over other creditors must be decided by reference to the whole of the circumstances known to the respondent on 18 November 1977. The relevant mind of the respondent would be the minds 31. of Mr. Peters and Mr. Barry. I think the critical mind was that of Mr. Peters. Because of the personal relationship between Mr. Peters and Michael Cooke and the fact that the money which had been lent to the firm to which Mr. Peters was the closer, Mr. Barry was inclined to leave, primarily to Mr. Peters, the matter of the recovery of the moneys lent. I think that at the relevant time he would reasonably leave to Mr. Peters the assessment of the ultimate financial soundness of the firm. Mr, Peters had knowledge of the firm's business practices and in the years gone by he had obviously had confidence in its solvency and financial skills. He had permitted the respondent, with money ultimately beneficially belonging to his wife and sister, to lend money in substantial amounts to the firm. Nothing is shown in the evidence to indicate when his belief on this matter was shaken. I consider that on 18 November 1977 he firmly believed that the firm was solvent and that Mr. David Cooke had the financial resources to meet its liabilities should there be unsettled debts. The question has been asked, "Why when Michael Cooke was slow in paying the money required by the respondent the matter was not taken up with Mr. David Cooke?" The answer seems to be, as well as I can interpret it, that one did not bother Mr. David Cooke on the ordinary business of the firm. And going on past practices, the payments due were, in the relevant sense, part of the ordinary business. This aspect has a double bearing because if Mr. Peters or Mr. Barry had thought that the firm was really in financial difficulty they 32. would certainly have approached Mr. David Cooke personally and firmly and called up the balance of the debt due to the respondent. It is clear that in June 1977 the respondent had no doubts as to the financial stability of the firm. Its letter of June 1977 1s proof of this. It completely disposes of the notion that in June 1977, at any rate, the respondent was apprehensive, to any degree, about the solvency of the firm. It was put to me that the proposal in this letter represented a subtle approach to salvage something, at least, from the wreck of a crippled ship. I reject this. To my mind 1t quite mistakes the situation, apart from attributing a degree of subtlety in Mr. Peters and Mr. Barry of which neither was capable. And on this point I believe them both. I do not overlook the fact that Mr. Barry expressed some reservations as to the reliability of Michael Cooke. But I do not think they had a bearing upon the question of the solvency of the firm. Accordingly, on 18 November 1977 one circumstance was that Mr. Peters and Mr. Barry both believed that the firm was solvent. There was, therefore, no reason for them to suspect that the payment would give them a preference over other creditors of the firm or separate creditors of Michael Cooke. Mr. Braun urged that when Michael Cooke made the payment of $4,000 in October by handing to Mr. Peters a Hotham Building Society cheque together with $1,350 in cash it must have been clear that Michael Cooke was paying with money which 33. would normally pass through the firm's bank account. He said that the inference to be drawn was that if it had gone into the bank account it would have ceased to be available to pay to the respondent. Mr. Braun also submitted that payment of the §15,000 in November 1977 by a cheque drawn on the trust account of the solicitors Messrs Linton Lethlean & Co. gave rise to the same sort of inference. To my mind the inference said to arise from the October payment was certainly open. But I think the situation is somewhat different in relation to the trust account chequc paid in November. The cheque was drawn in Mr. Teters' favour on an account to which presumably, the firm had access and all proper records would be available. There would be nothing surprising about the firm having some of its moneys in a solicitor's trust account. It is to be noted that all the matters relied on by Mr. Braun concern inferences which might be drawn as to the state of finances of the firm. The person with respect to whom the inferences referred to in s.122(4)(c) relate is undoubtedly Michael Cooke. He is the only bankrupt. In respect of the issues arising under s5.122(4)(c) it has to be remembered that the attention of the respondent was at all times on the firm rather than on Michael Cooke. In relation to the issues arising under s.122(4)(c) I refer to the observations of Kitto J. in Queensland Bacon Pty. Ltd. v. Rees (supra) at p.312:- 34, "As in the other three cases, there is great need to keep steadily in view what the precise inference is 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 is 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 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. The second is that the effect of the payment, i.e. its ultimate, substantial effect, would be that the payee would be ina 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". I refer also to what was said by Kitto J. in that case at p.303:- "In the first place, the precise force of the word "suspect" needs to be noticed. A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension oer mistrust, amounting to "a slight opinion, but without sufficient evidence", as Chambers's Dictionary expresses it. Consequently, a reason to suspect that a fact exists 1s more than a reason to consider or look into the possibility of its existence. The notion which "reason to suspect" expresses in sub-s.(4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the sub-section describes - a mistrust of the payer's ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors." 35. Again in Re Smith Ex parte Official Receiver (1929) 1 ABC 186 at 188 it was said: "In considering a man's financial position so as to ascertain whether he 1s so financially embarrassed as to be regarded as a person unable to pay his debts as the same becomes due, one has to look at all the surrounding circumstances of the case, the mature of his trade or business, the manner or method of payment of debts in that trade or business, the time when the proceeds of such trade or business will be forthcoming, the manner or method of obtaining credit, and the nature of the assets, and perhaps several other matters": Looking first at the affairs of the firm the first question is whether a reasonable man of business in the shoes of the respondent would have suspected as at 18 November 1977 that 1t was unable to pay its debts as they became due. It would have been necessary for him to have taken into account the distinction between actual inability to pay and a reluctance on the part of the payer to accommodate his wider purposes to the limitations of his resources", by which I understand, a reluctance to dispose of assets existing in some particular or permanent form to meet immediate demands. And the issue 1s to be decided by reference to the mind of a reasonable man with all the knowledge which the person whose mind is in guestion had of the firm, the nature of its business and its history. Whether the reasonable man should be considered as having any of the beliefs of the payee which would be relevant to the assessment of the specified matters he should, no doubt, be taken to have had before him the facts which may have given rise to such beliefs. If the formation of those beliefs on those facts was reasonable, the reasonable 36. man may be regarded as likely to have come to the same conclusion. Those conclusions will, if relevant to the generation of suspicion or otherwise, be taken into consideration by the Court on the issue whether the circumstances led to the inferences referred to in $.122(4)(c). In this case the reasonable man would have noted the matters relied on by Mr. Braun. He would also be treated as knowing that 1t was part of the business of the firm to borrow money on deposit repayable in all probability, as was the case of the loans from the respondent, on short notice. He would not have had information as to the precise purposes to which those loans were put by the firm. It would not be improbable that they would have been invested in transactions from which they could not be readily extracted or so extracted only at a4 loss. He might have known that some of the money was invested in shares in the Berklee Group of companies which were subject to controls on selling and which Michael Cooke was having difficulty in realising at a price regarded by him as fair and reasonable. Being in the shoes of the payee he would have had the experience of Mr. Peters as an employee of the firm during his employment by it. If during that employment he acquired information expressly or impliedly from the partners or otherwise as to the financial reputation of the firm, its resources and the resources of the partners, the reasonable man would have that information. He would not believe it because Mr. Peters believed it, but in so far as the assessment of that information by reasonable standards would 37. lead to conclusions or belief, the reasonable man would have regard to those conclusions and that belief. He would not ignore the long standing reputation of the firm. And when questions of suspicion of solvency are involved the influence of reputation 1s inevitably of significance. It 1s common knowledge that the reputation of the recently failed Trustees Executors & Agency Co. Ltd. was such as to prevent suspicion arising when suspicion of impending disaster would otherwise have been more than justified. The information which Mr. Peters had acquired from his experience and dealings with the firm reasonably led him to conclude that its financial viability was beyond question and that Mr. David Cooke was a man of considerable personal resources. That this was the position at least up to June 1977 1s undoubted. It was such as to induce him to make the loans referred to above without security and also to propose repayment cf the balance due to the respondent over another twelve months. Apart from the express or implied statement by Mr. David Cooke as to the ownership of real estate the whole tenor of the firm's conduct proceeded on an implied assertion that its stability and integrity were beyond question. In the light of history that was distinctly credible. So far as tangible evidence of resources of the firm or Mr. David Cooke were concerned Mr. Peters had seen the titles to various properties which he was told by Mr. David Cooke were unencumbered. The question as to what extent a reasonable man in Mr. Peters' shoes would have had regard to the firm's long standing reputation for stability and 38. integrity, the nature of its business, and would have accepted the assertions of financial stability and formed the same views as he did, and whether against that background he would have suspected the existence of the matters specified in s.122(4)(c) ain respect of the firm, is a matter for decision. But even if the reasonable man had regard to the umplied assertions by the firm that it and Mr. David Cooke were more than good for their commitments he would have had to make an assessment of the question whether the non-payment of interest from July 1977 the delay in payment of capital and the mode of payment of the §4,000 an October constituted reason, in November 1977, to suspect their validity. Having regard to all the circumstances I am not satisfied that the reasonable man in the shoes of the respondent would have so suspected. He would have known that the firm's business might well have involved borrowing short term and investing long term. Reluctance on the part of Michael Cooke to realise on investments might well lead to periods of liquidity difficulties. Michael Cooke in dealing with people with whom he had essentially friendly relations might, if liquidity were tight, choose to keep them waiting. There were reasons to wonder whether the liquidity problems might be fundamentally serious but not to have "an actual feeling of apprehension amounting to slight opinion but without sufficient evidence". The circumstances were consistent with the situation that Michael Cooke as _ the relevant partner would not rather than that the firm could not, make the effort to pay. Of course at this stage it would 39, seem that, in November 1977, the firm actually was mortally wounded, but that would not have been known to the reasonable man in the shoes of the respondent. I do not believe that Michael Cooke ever told Mr. Peters that he or the firm were being sued by various persons. But it may be that the correct view is that as at 18 November 1977 the reasonable man in the shoes of the respondent would have had reason to suspect that the firm was unable to pay its debts as they fell duc. If so, one must turn to the question whether there was reason for him to suspect that the payment would give a preference to the respondent over other creditors. It must be that the creditors referred to in s.122(4)(c) are the creditors of the person who actually becomes bankrupt. Where that person is a member of a firm separate estate and joint estate, separate debts and joint debts are inevitably involved. It is a principle of administration in bankruptcy that where such estates and debts are involved the joint estate 1s appropriated to meet first the joint debts, and the separate estate is with limited exceptions appropriated to meet first the separate debts. Thus the separate creditors will only suffer by reason of a payment if that payment reduced a possible surplus in the joint estate which might have ultimately gone to the separate creditors. Where the money used to make the payment in question came from the separate funds of the partner who was made bankrupt, as opposed to the funds of the firm, such a deficiency may result 40. from the payment. But where the payment is made from the funds of the firm that will not occur. The debt in respect of which the payment in question 1s this case was made was already a liability against those funds. On a taking of accounts whether paid or unpaid it reduced the amount of any possible surplus of joint assets which the members of the firm might have received on taking of accounts. When Mr. Peters received the cheque for $15,000 on 18 November 1977 he received it in discharge of the liability of the firm. Presumably as far as the respondent was concerned it was paid from the assets of the firm. It could have come from those assets, it could have constituted an infusion of capital into the firm by either partner or it could have come from a third party. But there was no reason to favour one of these possibilities as against the notion that it came from the assets of the firm. Michael Cooke had asserted that the debt, the firm's debt, would shortly be paid and here was a payment. There was no reason to doubt that some investment of the firm had been realised or some other adjustment made in the firm's affairs. The reasonable man would know no more than Mr. Peters as to the source of the money. Treating it naturally, as a payment by the firm, out of assets of the firm there would be no reason to suspect that the payment would have the effect of giving the respondent a preference against any of the separate creditors of either of the partners. And the reasonable man in the shoes of the respondent would have had no reason to so suspect. If at be relevant to consider the possibility of 41. suspicion that the payment would give the respondent a preference against other creditors of the firm, it would have been necessary for the reasonable man to take into account that to meet the claims of the creditors of the firm there would be recourse, not only to the assets of the firm, but to the unlimited personal liability of each partner. In the climate of November 1977 that consideration would have been material. So far as the matters relied upon by Mr. Braun had relevance to the question whether the inferences specified in s.122(4)(c) arose with respect to the separate finances of either of the partners, they did so only through the possible effect of those matters on their separate estates. It was only in that way that the payment had significance in relation to the separate estate of Michael Cooke. In the result therefore, I am not satisfied that the circumstances of the payment in question were such as to lead to the inference that there was reason to suspect that the firm or either of the partners was unable to pay its or their debts as they became due or that the effect of the payment would give to the respondent a preference over other creditors either of the firm or either of the partners. Credibility At the hearing I formed a favourable opinion of the credibility of Mr. Peters. He was in the witness box for a 42. long period and subject to lenathy observation. It was said that on the question of the firm having been a slow payer he contradicted evidence given by him at the hearing before the Registrar in Bankruptcy. In that evidence he said in substance that the firm had, for practical purposes, paid clients on due dates, but sometimes delayed for quite short periods. In his evidence at this hearing the thrust of his evidence was that Michael Cooke repeatedly delayed in making payments to clients of the firm. If the evidence before me was correct it did not accord with what was said before the Registrar. It is said that the contradictions might have been due to the circumstance that 1t 1s in his interests at this stage to emphasise the propensity of the firm to delay its payments and that accordingly his credibility on this matter is seriously impaired. There is force in this, and I have taken it into account. I have to decide whether, amongst all other considerations, I should regard the matter as throwing a dark shadow over either the whole of his evidence, or his assertion at the hearing that the firm did on occasion fail to pay their clients on the due dates moneys due to them. I do not so regard it. The demeanour of Mr. Peters throughout was, in my judgment, quite satisfactory. I observed that when challenged to state with particularity instances of late payments to clients, he responded without hesitation and indeed with spontaneity. I am of the belief that Michael Cooke did from time to time keep clients waiting for their moneys. Looking at the question with hindsight this 1s probable. I think he e 43. had the personality which enabled him to put people off without shaking their basic confidence. Mr. Barry was not an impressive witness. Nevertherless I do not doubt that as at November 1977 he had confidence in the financial viability of the firm. Certainly the terms of his letter of June 1977 in which only $21,000 was sought and the respondent suggested that the balance be paid over twelve months indicates his belief at that time that the firm was in no danger of collapsing. Even if thereafter, there was reason for him to wonder about the firm's soundness, I do not think he had reason to suspect that a payment of $15,000 on 18 November 1977 would give a preference to the respondent. Mr. David Cooke As to the actual state of finances of Mr. David Cooke no direct evidence was placed before the Court in these proceedings. The trustee appears to have assumed that he was without funds, but there is really no evidence on the point. There 1S no evidence as to whether any person including the respondent has sued Mr. Cooke and what the result has been. I make no assumption on the pcint. Good faith and ordinary course of business The question arises therefore whether the respondent has satisfied me that it, the payment of the $15,000 on 18 November 1977 was a payment in good faith and in the ordinary 44. course of business. On the matter of good faith I refer to the foregoing observations. As to the ordinary course of business it is my opinion that the respondent was a payee in the ordinary course of business. It is in the ordinary course of business for a creditor to be paid a debt due to him. The payment was in respect of such a debt. It was said that it would not be in the ordinary course of business for the firm to pay by a cheque drawn ona solicitor's trust account. I think this proceeds from a misconception of the concept of the ordinary course of business. It was not, for instance, a case where a debt payable in future had been bréught forward out of the ordinary course of business. It was for the debtor to decide in which manner, cash or cheque, payment of a debt due for payment would be paid. Accordingly I am satisfied that the respondent was a payee of the $15,000 received on 18 November 1977 in good faith and for valuable consideration and in the ordinary course of business. Accordingly the application should be dismissed with costs. or = ee i iH Tc 7 Atne 43 } i ~teryver > ] { weyooras Go OL iS tue bee cele Snot nen Phin Peete | Agsoctate rte nee.