JUDGMENT No. 31. 1LBSK NOT FOR DISTRIBUTION IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) BANKRUPTCY DISTRICT OF THE ) ) ) STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY No. W339 of 1986 RE: ROBERT JOHN POLLACK EX PARTE: THE TRUSTEE OF THE ESTATE CORAM: GUMMOW J. DATE: 25 FEBRUARY 1988 PLACE: SYDNEY REASONS FOR JUDGMENT This is an application by the trustee of the estate of the bankrupt for a declaration that the sum of $54,015.55, representing payments made by the bankrupt to the respondent, Mr. Perry, are void against the applicant by reason of the operation of s.122 of the Bankruptcy Act 1966 ("the Act"). A sequestration order was made against the bankrupt on 7 April 1986 on the petition of the Deputy Commissioner of Taxation. The Petition had been presented on 20 December 1985, and had been served on the bankrupt on 5 February 1986. The six month period for the purposes of sub-s. 122 (1) (a) of the Act thus commenced on 20 June 1985. On 24 February 1986, the bankrupt had signed an authority under s.188 of the Act and a meeting of his creditors had been held on 20 March 1986. In his affidavit Verifying the 2. Statement of Affairs sworn 20 March 1986, the bankrupt had deposed to unsecured creditors of $193,741.05, secured creditors of $41,431.39 and had asserted an equity in real estate of $10,784.31 and other property valued at $6,596.44. The Petition relied upon an act of bankruptcy committed on 6 August 1986 by non-compliance with a Bankruptcy Notice served on 23 July 1985. The Bankruptcy Notice was based on a judgment for $86,368.85 recovered by the Deputy Commissioner of Taxation in the District Court of New South Wales on 25 March 1985. The respondent to the present application carried on business, from about 1979, under the style "Woodville Security & Investigation Services" or "Woodville Security". The business involved the provision of security services such as patrols, alarms and guards, and was conducted in the Parramatta-Liverpool area of Sydney. In March 1985, the respondent had approximately 60 clients. He first met the bankrupt in about 1976. At that time the bankrupt was the controller of a company conducting business under the style "Winston Watching & Security". By 1985, the bankrupt was carrying on, under the name "ITV Security", a business generally similar in character to that of the respondent. In February 1985, the respondent initiated discussions with the bankrupt for the purchase by the bankrupt of the "client listings" of the respondent's business. The main value of such a business is in client goodwill. The bankrupt hoped that if he purchased the respondent's business, he would, through the operations of the expanded enterprise, be able to trade his way out of what even at that stage were considerable 3, financial problems. It will be recalled that the Deputy Commissioner was to recover judgment in March 1985 for a large sum. The bankrupt did not tell the respondent of his difficulties or his motivation. The result of the discussions between the parties was an oral agreement for the purchase of the business. It was agreed that the respondent would assist in the bankrupt's business and that he was to have a car allowance, a fuel allowance and wages computed on the basis of approximately $100 for each security shift patrolled by the respondent. For his part, the bankrupt looked to the respondent to assist the attachment of the client goodwill to the bankrupt's business in substitution for the previous business of the respondent. There was disagreement in the evidence between the bankrupt and the respondent as to the amount of the purchase price. The bankrupt gave evidence that the price was $60,000, but the respondent gave evidence that the price was arrived at by taking six months' takings of the business being sold and that this produced a figure of $75,000. The bankrupt gave evidence that he in fact had made payments on account of the purchase price in excess of $60,000 (but less than $75,000) and that, as to the excess, this was the result of error on his part as he had not realised that he had in fact already paid the agreed price. I find this inherently improbable and, in the circumstances of the parties as revealed by the evidence, I reject the bankrupt's evidence that the purchase price was $60,000 and accept the figure of $75,000 put forward by the respondent. An initial payment of $5,000 was made by cheque on 8 P vt 4. March 1985. The oral agreement provided for the balance to be paid periodically out of the receipts from the business. By 15 November 1985, twenty four such payments had been made, commencing with a payment of $2,000 on May 31. All payments were made by cheque and were in sums of $500, $1,000, $1,500, $2,000 or $3,000. The bankrupt's evidence was that he had lacked the "cash flow" from his business to make any payments between 8 March and 31 May. Commencing on 21 June 1985, payments also were made on account of wages and expenses of the respondent. By 29 November 1985, thirteen such payments had been made, again all by cheque. A cheque for $1500 dated 29 November 1985, for part payment on account of the business was, dishonoured. The respondent then spoke to the bankrupt. The bankrupt said he was having trouble with the Taxation Department, that he had thought that he would be in a position to get out of the trouble he was in, and that now he would do the best he could to ensure that the client listings were paid for. This is the account given of the conversation by the respondent at an examination pursuant to s.81 of the Act conducted on 31 March 1987. The present application by the trustee was filed on 16 July 1987. The account given by the respondent at the hearing before the Court on 14 December 1987 was at variance with the account given before the Deputy Registrar on 31 March 1987. I have no hesitation in accepting the accuracy of the first account and the effort by the respondent to depart from it on 14 December 1987 was, to my mind, wholly unconvincing. The bankrupt's position was that he still hoped to 5. build up his business and "trade out" of his financial difficulties or to sell off at a good price the business so built up and use the proceeds to deal with his creditors. The bankrupt needed the continuing presence and assistance of the respondent to assist in the further assurance to him of the custom of the clients in the list he had purchased. The bankrupt was and remained anxious lest the respondent depart and commence dealing on his own behalf with his old clients. That gave the respondent a special influence over the bankrupt in their dealings. The respondent had understood the agreement with the bankrupt to be that the balance of the purchase price would be paid over a six months period. However, by 29 November, less than $50,000 had been paid. The respondent made a few enquiries over the period before the presentation of the dishonoured cheque and had been satisfied by the bankrupt's assurances that the business was picking up. The bankrupt alleged in an affidavit that after service of the Bankruptcy Notice on 23 July 1986, he had told the respondent that "If I make these payments to you and go bankrupt, they will take it off you" and the respondent had replied "If I haven't got it, they can't take it off me!". In oral evidence, the bankrupt was unable to fix the date of this conversation. The respondent denied it ever took place. I find such a conversation may well have occurred, but not at this stage and probably not until December 1985 after the events arising from the dishonouring of the cheque dated 29 November 1985. Shortly after the incident of the dishonoured cheque, the respondent turned up for work one night at the industrial 6. unit at Byron Road, Guildford at which the business was conducted, to find that the unit was closed and that "nobody knew what was going on". He then found out that the trading location for the business had been changed to Wentworthville completely without warning. Also, there had been in the period before the move, to the knowledge of the respondent, failures to pay the full amounts of wages due to other employees. There were about ten such employees. The respondent described the reaction to this difficulty as being that: "the wages were an ongoing problem - but well, we sort of stayed with him and hung it out as best we could." The dishonoured cheque for $1500 was replaced by another cheque for the same amount of 4 December 1985. Other payments followed, both on account of wages and on account of part-payment for the purchase of the business. It will be recalled that the Bankruptcy Notice had been served on the bankrupt on 23 July 1985. It claimed an amount of $87,838.30. There was, at that time, as the bankrupt stated in his evidence on 31 March, no way that he could pay that sum unless he sold his business. At this time, the bankrupt had owed approximately a further $20,000 to ordinary creditors. At least by this time, that is to say 23 July 1985, the bankrupt was, and I so find, unable to pay his debts as they became due from his own money within the meaning of s.122 of the Act. That situation continued thereafter. I find that the payment of $1,500 made on 4 December 1985 was a payment by the bankrupt, being then a person unable to pay his debts as they became due from his own money, in favour of a creditor which had the effect of giving that 7. creditor a preference, priority or advantage over other creditors, This was the next payment on account of the purchase made after the dishonouring of the November 29 cheque. I find that the payment is not taken outside s.122 by sub-s. (2) and that the payee, the respondent, did not take rights in good faith and for valuable consideration and in the ordinary course of business. In particular, within the meaning of sub-para. (4) (c), the respondent was not a payee in good faith; the payment was made under such circumstances as to lead to the inference that the respondent knew that the bankrupt was unable to pay his debts as they became due from his own money and that the effect of the payment would be to give the respondent a preference, priority or advantage over other creditors. I have referred to the state of affairs as 1t appeared to the respondent by early December 1985. Counsel for the trustee submitted that taken together, the dishonouring of the November 29 cheque, the subsequent conversation between the bankrupt and the respondent, the continuing difficulty with payment of other employees of the business and the unannounced closing of the premises at this time, supplied material from which it would properly be concluded by the Court both that the respondent knew that the bankrupt was unable to pay his debts as they became due from his own moneys, (within the meaning of s.122 and the well known authorities, including Queensland Bacon Pty. Ltd. v Rees (1966) 115 CLR 266 at 291-2), and that the effect of payment to the respondent would be to give the respondent a preference, priority or advantage over other creditors. I accept that submission. 8. Counsel for the trustee sought a finding that this state of affairs arose at an earlier time, viz. at least after service of the Bankruptcy Notice on 23 July, so that payments of purchase price after that date were void against them. But I am not satisfied that, before the time I have indicated, the requirements of s. 122 were met in respect of payments made to the respondent on account of the purchase of the business. In particular, although there had been difficulty with payments of wages and the payments on account of the business had been somewhat sporadic and uneven in quantum, nevertheless the respondent had accepted assurances by the bankrupt that difficulties were the product of temporary financial embarrassment with cash flow. Whilst, as I have found, the bankrupt was indeed at least from 23 July 1985 unable to pay his debts as they became due from his own money, nevertheless payments made to the respondent on account of the purchase price in the succeeding months until the end of November would, in my opinion, have attracted the protective provisions of sub-s. (2). The question then arises as to payments made after the 4 December 1985 up to the making of the sequestration order. Payments were made as follows: DATE CHEQUE NO. AMOUNT 12 December 1985 213946 $ 1,500.00 19 December 1985 213968 $ 1,500.00 15 January 1986 368912 $ 2,000.00 13 February 1986 368973 $ 1,500.00 28 February 1986 368998 $ 1,500.00 I find that all of these payments are also void against the trustee. I should also note that in this period cheque No. ve 9. 368904 (14 January) for $2,000 was dishonoured, as was a cheque for $500, No. 368936 (28 January). In early March 1986, the respondent received notice of a meeting of creditors. Previously, when he had rendered an invoice for wages, the invoice had specified a sum for a vehicle allowance and fuel, and also the number of shifts worked by the respondent with a sum for payment in respect of those shifts. On 7 March, an invoice was rendered specifying an amount for vehicle allowance and fuel allowance, together with sums for "casual shifts" and "services rendered x 5". However, for the first time an item was added, "surveillance", and the sum shown was $1,002.56. The total for this invoice was $2,085.56. On 7 March, by cheque No. 153406, the sum of $1,002.56 was paid by the respondent to the bankrupt. This description of "surveillance" appears also in invoices for sums of $1,009.46, $1,003.53 and $1,503.72 paid by cheques Nos. 153416, 153430 and 153445 on 14 March, 21 March and 4 April respectively. The last cheque, No. 153445 was dishonoured. The question therefore remains as to the nature of the sums of $1,002.56, $1009.46 and $1,003.53 paid respectively on 7 March, 14 March and 21 March 1986. As I have mentioned, in respect of the first of these payments (that for $1,002.56) the description on the invoice issued by Woodville Security & Investigation Services was "surveillance". In respect of the other two invoices in question, those of 14 March 1986 and 21 March 1986, the description was "industrial surveillance". The bankrupt's evidence is that at the time of each of these payments, the respondent was making continual demands on the bankrupt, but the bankrupt said he could not make payments aa 10. in the then circumstances. The bankrupt's evidence is that at the demand of the respondent, he made each of these three payments in odd amounts, so as to make 1t appear that they were payments for services rendered although they were properly payments on account of the purchase price. The respondent denied that an attempt was made in this way to disguise the nature of these three payments. I prefer the evidence of the bankrupt. The explanation of the respondent as to the nature of the work allegedly performed to raise the claims made in these invoices in the terms in which they were made, was, in my opinion, quite unconvincing. It follows that the payments made by these three cheques, 153406, 153416 and 153430 on 7 March, 14 March and 21 March respectively, are also void against the trustee. There remain two payments which the trustee claims are void against him. The first 18 a payment of $2,500 which was undated in the schedules to the affidavits prepared by the trustee. It now appears that the sum of $2,500 was paid to "Woodville Security", by cheque dated 15 April 1986, drawn by St. George Building Society Limited on Australian & New Zealand Banking Group Limited. It will be recalled that the Sequestration Order in respect of the estate of the bankrupt was made on 7 April 1986, more than a week before the date of this cheque. The bankrupt's evidence is that the cheque represents moneys given to him, the procedure being that a family friend, Mrs. Bullivant, arranged for the cheques to be drawn on the building society. This transaction is outside the operation of s.122 of the Act, the provision on which the trustee relies on the present application to the Court. I 11. also accept that a further sum of $500 was, after the making of the Sequestration Order, given to the bankrupt by Mrs. Bullivant, the procedure being that she arranged for a Commonwealth Bank cheque for that sum to be drawn in favour of the respondent. I find that that payment 1s also outside the operation of s.122 of the Act. In the result, I find that the following payments are void against the trustee: DATE CHEQUE NO. AMOUNT 3 December 1985 213931 $ 1,500.00 12 December 1985 213946 $ 1,500.00 19 December 1985 213968 $ 1,500.00 15 January 1986 368912 $ 2,000.00 13 February 1986 368973 §$ 1,500.00 28 February 1986 368998 $ 1,500.00 7 March 1986 153406 $ 1,002.56 14 March 1986 153416 $ 1,009.46 21 March 1986 153430 $ 1,003.53 TOTAL: $12,515.55 I will hear the parties as to the formal orders and costs. I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment of his Honour Mr. Justice Gummow. Associate: Marsan' . Date: 25 February 1988 Counsel for the Applicant: Mr. M. Aldridge instructed by Messrs. Roxburgh & Co. Counsel for the Respondent : Mr. R. Lyons instructed by Messrs. Coleman & Greig Date of hearing: 14 December 1987 Date of Judgment: 25 February 1988