*__JHUDGMENT No. SS14 81. CATCHWORDS BANKRUPTCY - Preference - Goods supplied to clothing retailer - Price payable 90 days after delivery - Account in arrears - Allegation that agreement subsequently made that property in goods revert to supplier until payment effected - Possession of goods taken by supplier - Whether a transfer of property - Whether transfer void as against trustee under deeds of assignment. Bankruptcy Act 1966 (Cth), ss.122, 231 Re ANN BARBARA BENFORD and ORS, Debtors Ex parte ROSS STEWART NORGARD, Applicant BERKELEY APPAREL PTY LTD, Respondent WA 191 of 1984X Neaves J. 21 October 1987 Sydney FEDERAI Goupr on 7 SUSTR ALLA, ott FED G IVISTIO BANKRUPTCY DIS (e) STATE OF WESTERN AUSTRALIA OURT OF AUSTRALIA No. WA 191 of 1984xX weve wewvervrvwr Re: ANN BARBARA BENFORD, RONALD BENFORD and JAMES ELLIOTT SMALL Debtors Ex parte: R s T_NORGARD Applicant BERKELEY APPAREL PTY LTD Respondent MINUTE OF ORDER JUDGE MAKING ORDER : Neaves J. DATE OF ORDER : 21 October 1987 WHERE MADE : Sydney QURT - 1. Declares that a transfer of property from the Note: debtors, Ann Barbara Benford. Ronald Benford and James Elliott Small, to the respondent , Berkeley Apparel Pty Ltd, was effected on 26 November 1984 when the respondent took possession from the premises at which the business of Connoisseurs Suit Shop was being carried on of 230 suits and 144 sports coats. Declares that the transfer is void as against the applicant, Ross Stewart Norgaard, by virtue of the operation of 88.122 and 231 of the 1966 (Cth). Orders that the respondent pay to the applicant within 21 days from the date of this order the sum of $49,384.30. Orders that the respondent pay the applicant's costs of the application. Settlement and entry of orders is dealt with in rule 124 of the Bankruptcy Rules. IN THE FEDERAL COURT OF AUSTRALIA ) ) GENERAL DIVISION ) ») No. WA 191 of 1984X BANKRUPTCY DISTRICT OF THE STATE ) ) OF WESTERN AUSTRALIA ) Re: ANN _ BARBARA BENF'ORD, RONALD BENFORD and JAMES ELLIOTT SMALL Debtors Ex parte: ROSS STEWART NORGARD Applicant BERKELEY APPAREL PTY LID Respondent a Neaves J. 21 October 1987 | REASONS FOR JUDGMENT The applicant, Ross Stewart Norgard, is the trustee of deeds of assignment in accordance with Part X of the Bankruptcy Act 1966 (Cth) ("the Act") executed by the debtors, Ann Barbara Benford, Ronald Benford and James Elliott Small. The application is for a declaration that the transfer to the respondent, Berkeley Apparel Pty Ltd, on 26 November 1984 of certain property of the debtors is void as against the applicant by virtue of 33.122 and 231 of the Act and for consequential orders. Prior to the execution of the deeds of assiaqnment, the debtors carried on business in partnership as gentlemen's clothiers under the business name "Connoisseurs Suit Shop" at Shop 9, SG10 Atrium, 170 St George's Terrace, Perth, Western Australia. On 26 November 1984 each of the debtors signed an authoritv under s.188(1) of the Act authorising the applicant to call a meeting of the debtor's creditors and to take control of the debtor's property. Pursuant to those authorities meetings of the creditors of each of the debtors were held concurrently on 20 December 1984 at which it was resolved bv special resolution that the debtors be required to execute deeds of assianment under Part X of the Act. Such deeds were executed on 27 December 1984. So far as material, 5.122 of the Act provides that a transfer of property made by a person who is unable to pay his debts as they become due from his own money (in the section referred to as "the debtor"), in favour of a creditor, having the effect of aiving that creditor a preference, priority or advantage over other creditors, being a transfer made - (a) within 6 months before the presentation of a petition on which, or Dy virtue of the presentation of which, the debtor becomes a bankrupt; or (b) on or after the day on which the petition on which, or by virtue of presentation of which, the debtor becomes a bankrupt is presented and before the day on which the debtor becomes a bankrupt, is void as against the trustee in the bankruptcy. Section 231 of the Act provides that, subject to the section, the provisions of s.122 apply, subject to such modifications and 3. adaptations (if any) as are prescribed by the rules, to and in relation to a deed of assignment that has become binding on a debtor's creditors as if - (a) a creditor's petition had been presented against the debtor by whom the deed was executed on the day on which the special resolution requiring the execution of the deed was passed; (b) a sequestration order had been made against him on that petition on the day on which he executed the deed; and (c) the trustee of the deed were the trustee in his bankruptcy. No relevant modifications or adaptations have been prescribed by the rules. The transfer of property upon which the applicant relies is said to have occurred when the respondent, on 26 November 1984, took possession, from the premises at which the partnership business was being carried on, of 230 suits and 144 sports coats which had previously been supplied to the partnership by the respondent. The respondent claims that it was entitled to act as it did because, so it asserts, the property in the goods of which possession was taken was vested in it. The applicant disputes this claim asserting that the property in the goods was at the relevant date vested in the partnership. That is the issue for determination, the respondent conceding that, if the property in the goods was vested in the partnership, its conduct in taking possession amounted toa transaction otherwise than in the ordinarv course of business and one which resulted in it deriving a benefit denied to other creditors of the partnership. The respondent's claim that the property in the qoods was vested in it depends upon a conversation which it alleqes took place on the morning of Tuesday, 7 August 1984 between Mr Geoffrey Ian Cohen on its behalf and Mr Benford on behalf of the partnership. To put that conversation in its context it is necessary to say something of the business relations between the respondent and the partnership. For some considerable time prior to August 1984 the respondent had been a supplier to the partnership of business suits, dinner suits and sports coats. It was the practice for the partnership to place orders upon the respondent as and when goods were required. The goods were then made up by the respondent and despatched to the partnership from the respondent's business premises in Victoria. The qoods were accompanied by an invoice raised by the respondent containing a description of the goods and the price at which they were supplied. At the end of each month a statement was prepared by the respondent and forwarded to the partnership showing, in respect of each invoice raised during the month, the date and number of the invoice and the amount debited against the partnership as representing the price of the goods. The statement also recorded the partnership's indebtedness at the beginning and the end of the month, credit being given for any payments received during the month. Any adjustments that had been made to the running account during the month were also recorded. The terms of trade agreed between the respondent and the partnership required payment for goods delivered at the expiration of 90 days. A discount was allowed of 3 1/4% for payment within 7 days, 2 1/2% for payment within 30 days. The statements for the months of January 1984 to July 1984 inclusive record the following: 1984 = Invoice Price Payments of Goods Supplied $ $ January Nil Nil February 22,433.00 10,000.00 March 19,230.00 15,000.00 April 19,370.00 5,000.00 May 30,363.00 15,000.00 June 28,751.00 10,000.00 July 825.25 15,000.00 In the month of July 1984, a credit of $171.50 was shown as having been allowed to the partnership. The position as at the end of each of the above months, as disclosed by the monthly statements, was as follows: 1984 Total indebtedness Amount outstanding of partnership for 3 months or longer $ $ 31 January 51,772.72 Not shown 29 February 64,205.75 33,105.25 31 March 68,435.75 Nilx 30 April 82,805.75 Nil 31 May 98,168.75 20,538.25 30 June 116,919.75 38,435.75 31 July 102,600.50 42,634.25 * This result appears to have been brought about by reason of certain credit adjustments totalling $36,772.75 in the partnership''s account with the respondent. Those credit adjustments are, however, unexplained by the evidence. Mr Cohen, a director of the respondent, gave evidence that, in July 1984, his attention was drawn to the state of the partnership's account with the respondent as at 30 June 1984. He said he was concerned "that the payments had slipped". Mr Cohen had made arrangements to travel to Perth which he did on 5 August 1984. An appointment had been arranged for Mr Cohen to meet Mr Benford on the night of Tuesday, 7 August 1984. According to Mr Cohen, Mr Benford requested that a meeting take place at the shop premises on the morning of that day to discuss the state of the account. In his affidavit sworn 11 February 1987, Mr Cohen deposed to what he said was "a true account of what happened on the 7th day of August 1984". That account differed in some respects from what Mr Benford had deposed to in his affidavit sworn 5 December 1986. Mr Cohen was required to attend for cross-examination and was asked questions concerning the meeting. I did not find his evidence entirely satisfactory but its effect may, I think, be summarised by saying that he told Mr Benford that' the respondent was prepared to continue to supply goods to the partnership only if the partnership agreed to the following: (a) The property in all goods which had previously been supplied by the respondent to the partnership and were then held in stock by the partnership but in respect of which payment had not been made was to remain in the respondent until the goods had been paid for by the partnership. (b) The property in all goods supplied by the respondent to the partnership in the future was to remain in the respondent until the goods had been paid for by the partnership. (c) No goods would be supplied by the respondent to the partnership while the indebtedness of the partnership to the respondent exceeded $100,000. (d) Further goods would be supplied so long as the account balance did not exceed $100,000 but only where the price of the goods to be supplied did not exceed the amount by which the account balance was less than $100,000. {e) Personal quarantees were to be given by Mr Benford and Mr Small quaranteeing present and future indebtedness to the respondent. (f£) Payments received by the respondent from the partnership were to be credited against the invoices which had been outstanding for the longest period. According to Mr Cohen, Mr Benford agreed to the above following which there was a presentation of the range of goods the respondent would be able to supply during the ensuing six months, Mr Cohen, however, saying that this presentation did not take place until a second meeting on the evening of 7 August 1984. It may be noted, in passing, that, in requiring the personal guarantees from Mr Benford and Mr Small. the respondent was apparently under' the misapprehension that Connoisseurs Suit Shop was a business carried on by a company. Mr Benford, in his affidavit sworn 5 December 1986, said (par.l11) that at the meeting on 7 August 1984 between himself and Mr Cohen, Mr Cohen "placed a ceiling of $100,000.00 value on goods which would be supplied by the Respondent to our shop". He further said (par.11) that Mr Cohen also required that he and Mr Small sign a guarantee document which they did. Paragraph 14 of the affidavit was in the following terms: "At the meeting of the 7th August 1984, there was no suggestion that we should take goods on consignment and the term consignment was never used in the course of the meeting." In a later affidavit, sworn 25 February 1987, Mr Benford deposed as follows: "4. At no stage did I agree that all stock which I and my other partners acquired from the Respondent would belong to the Respondent. 5. At the meeting the only discussion was the repayment of the debt which I and my co-partners owed to the Respondent. There was no mention by Mr Cohen that in future stock would be supplied only on the strict basis it would be the Respondent's property until paid for. There was definitely no talk of stock on consignment. 6. So far as I and mv co-partners are concerned, the manner of delivery of stock and payment was to remain the same as before. except that a ceiling of $100,000.00 would be placed on the value of stock supplied, we had to make every attempt to reduce the very large outstanding balance of our account with the Respondent, and the Respondent required us to sign a form of guarantee." Mr Cohen, in cross-examination, agreed that the phrase "on consignment" was not used at any time during the conversation. Surprisingly, Mr Benford was not cross-examined concerning the differences between his version of what was said at the meeting on 7 August 1984 and that given by Mr Cohen. To assist in determining whether an agreement in the terms alleged by Mr Cohen was reached at the meeting on 7 August 1984, it is appropriate to look at the subsequent business dealings between the parties. It is to be noted that, although steps were taken promptly to have personal guarantees executed under seal by Mr Benford and Mr Small, nothing was done to record in writing any other elements of the agreement. In particular, the alleged agreement concerning the re-vesting in the respondent of the property in so much of the stock held by the partnership as had not been paid for was not reduced to writing and no action was taken to determine whether the agreement applied to all the 10. stock on hand on 7 August 1984 which had been supplied by the respondent and. if not, to identify the stock to which it did apply. In other words, no attempt was made to identify the stock on hand on 7 August 1984 for which payment had already been made. It is also of significance that there was no change after 7 August 1984 in the procedures by which goods were ordered, invoiced and despatched or in the accounting records maintained by the respondent in relation to the partnership. Invoices issued after that date were in the same form as before and bore no notation to the effect that the goods were delivered subject to the property therein remaining with the respondent until payment was effected. The running account between the respondent and the partnership continued to be maintained in the same way as before 7 August 1984 and monthly statements in the same format continued to be forwarded. Those for the months of August, September, October and December 1984 are in evidence. No statement for the month of November 1984 has been produced. The statements for the months of August, September and October 1984 contain debit entries to the partnership's running account with the respondent in respect of goods. From other evidence before the Court it is possible to identify the goods to which those entries relate and to determine whether the goods were despatched to the partnership by the respondent. The following table summarises the evidence - ll. Date Invoice Amount of Description of Whether Date of No. Debit Goods Despatched Receipt $ 1. 8.84 8716 150.00 1 suit Yes 6. 8.84 1. 8.84 8718 155.00 Not known Yes Not known 30. 8.84 13646 13240.00 80 suits No - 30. 8.84 13647 12440.00 80 suits Yes Not known 30. 8.84 13654 2210.00 20 sports coats Yes 3. 9.84 ll. 9.84 8736 301.00 2 dinner suits Yes 14, 9.84 27. 9.84 8755 155.00 1 dinner suit Yes Not known 11.10.84 13809 2210.00 20 sports coats No - 15.10.84 13820 2910.00 20 suits No - 16.10.84 13819 5598.00 36 suits Yes Not known 16.10.84 13822 6901.00 43 suits No a 23.10.84 13864 2910.00 20 suits Yes 11.11.84 Although, as mentioned, the statement for the month of November 1984 is not in evidence, some details of transactions in that month are available. Invoice 14075 dated 7 November 1984 was raised in the sum of $2,236.50 for 21 sports coats. Those aqoods were despatched by the respondent to the partnership and received on 12 November 1984. It also appears that invoice 14078 was raised during November 1984 in the sum of $884.00 for 8 sports coats but those goods were not despatched to the partnership. The evidence also shows that on 26 November 1984 credit was given for the amounts debited against the partnership in respect of invoices 13646, 13809, 13820, 13822 and 14078. The statement for December 1984 gave credit in the sum of $49,384.30 in respect of the 230 suits and 144 sports coats of which possession was taken on 26 November 1984. That statement showed the total indebtedness of the Partnership to the respondent at 31 December 1984 of $68,674.30. 12. During the period from 7 August 1984 to 26 November 1984 only one effective payment of $10,000 was made by the partnership, that being by a cheque for that amount received by the respondent on 24 September 1984. Cheques dated 19 October 1984 and 5 November 1984 each for $10,000 were also forwarded to the respondent. Payment on the first cheque was stopped. The second cheque, when presented, was endorsed "Present again". Tt was not, in fact, again presented. It thus appears that between 7 August 1984 and 26 November 1984 the respondent despatched to the partnership 136 suits, 3 dinner suits and 41 sports coats, the invoice prices of which totalled $25,850.50. During the same period only $10,000 was received by way of payment for goods supplied. Thus the indebtedness of the partnership to the respondent was allowed to rise beyond the amount at which it stood on 7 August 1984 and well above the "ceiling" of $100,000. The respondent's conduct of its business dealings with the partnership after 7 August 1984, except so far as concerns the obtaining of the personal guarantees from Mr Benford and Mr Small, is hardly consistent with any of the terms of the agreement alleged by Mr Cohen to have been made between the parties. But, however that may be, nothing in the history of the dealings between the parties after 7 August 1984 provides any support for the contention that an 13. agreement was reached that the respondent was to retain the property in goods already held in stock by the partnership and those subsequently delivered. If any agreement in the terms alleged by Mr Cohen was made, the consequence would have been that the partnership would have ceased to be the owner of the stock for which payment had not been made and would have become a bailee thereof for the respondent on terms that, unless the stock was sold, it was to be returned to the respondent. So understood, the respondent would have been entitled to the goods instead of their price and would have been bound to credit to the partnership account an amount representing the total of the invoice prices which had been debited against the partnership when the goods were delivered to it. But nothing was done by the respondent to alter the situation that the partnership remained a debtor to it for the price of the qoods already delivered. On the contrary, the respondent continued to insist that the total of the invoice prices remained payable and by letter dated 22 October 1984 requested a schedule of payments showing how the respondent was to receive the amount then outstanding. An agreement in the terms alleged by Mr Cohen would also have had the consequence that, if the partnership sold any of the goods before they had been paid for (as, presumably, the arrangement permitted it to do). such sale would have been on account of the respondent and the partnership would have been bound to account to the respondent for the proceeds. The respondent at no stage required the partnership so to account. 14. Having considered all the relevant material, I find that no such agreement as that alleged was in fact made either in respect of the stock on hand on 7 August 1984 or in respect of qoods delivered after that date. It follows that. when the respondent took possession of the goods on 26 November 1984, it was taking possession of goods which belonged to the partnership. In my opinion, the evidence before the Court clearly establishes that on 26 November 1984 the partnership was unable to pay its debts as they became due from its own money. In the light of those findings and the concessions made by the respondent and recorded earlier in these reasons, Iam satisfied that a transfer of property was effected on 26 November 1984 when the respondent took possession from the premises at which the partnership business was carried on of 230 suits and 144 sports coats and that that transfer had the effect of giving to the respondent, a creditor of the partnership, a preference, priority or advantage over the other creditors of the partnership. It, therefore, amounted to a transfer of property which, by virtue of the operation of ss.122 and 231 of the Act, is void as against the applicant. I have already referred to the circumstance that, in the statement of account furnished to the partnership for 15. the month of December 1984, the respondent gave credit for the goods of which possession was taken in the sum of $49,384.30. This is the only evidence available as to the value of those goods. The respondent did not place before the Court any material to suggest that that sum did not represent the true value of the goods at the date on which possession was taken. I, therefore, declare that the transfer of the property referred to above is void as against the applicant. I order that the respondent pay to the applicant within 21 davs from the date of this order the sum of $49,384.30. I further order that the respondent pay the applicant's costs of the application. I certify that this and the preceding 14 pages are a true copy of the Reasons for Judgment herein of the Honourable Mr Justice Neaves. Associate Dated: 21 October 1987 Miss F.C.E. Davis and Mr K. 0O'Toole Solicitors for the applicant : McPhee and Meyer Counsel for the applicant Counsel for the respondent : Mr J.C. Curthoys and Mr M.R. Hall Cohen, Woolf & Opat Solicitors for the respondent 26 May 1987, 29 September 1987 o Dates of hearing