JUDGMENT No. sae Sactctul ncct Ee CATCHWORDS Bankruptcy - preferences - payment of rental arrears - sale of one business to meet debts Bankruptcy Act 1966 s. 122 a arris v.Refrigeration Pa id Lt (1985) 8 PCR S86 td. v. Associated Blue tores Ltd. Liquidation) (1948) 76 CLR. 463, 477 Taylor v. White (1964) 110 C.LR. 129, 136 29 NOV 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY No. OB 964 of 1993 Kiefel J.. Brisbane, 28 November 1994 JUDGE MAKING ORDER: Kiefel J. DATE OF ORDER: 28 November 1994 WHERE MADE: Brisbane MINUTES OF ORDER THE COURT DECLARES THAT: 1. The payment made by the bankrupt to the respondent of $30,697.50 on 14 May 1993 is void as against the trustee. THE COURT ORDERS THAT: 2. The respondent pay to the trustee, J. Arscott Stevenson, the sum of $30,697.50 together with interest thereon at 10% per annum from 5 July 1994 to the date of payment. 3. The respondent pay the trustee's costs of and incidental to this application to be taxed if not agreed. NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. RE: GRAHAM DAVID ALLEN ; Applicant EX PARTE EVERTON HILLS NOMINEES PTY LTD Respondent CORAM: siKiefel J DATE: 28 November 1994 PLACE: Brisbane REASONS FOR JUDGMENT The trustee of the property of Graham David Allen seeks a declaration that a payment of $30,697.50 made to Everton Hills Nominees Pty Ltd ("the respondent") on 14th May 1993 constituted a preference within the meaning of s. 122 of the Bankruptcy Act 1966 (Cth) and an order for payment of that sum. The Bankrupt's estate was sequestrated on 20 May 1993. The payment made to the respondent was in satisfaction of arrears of rental then due to it. That the payment was made for valuable consideration within the meaning of s. 122(2)(a) was not in contention. The respondent, whilst conceding that the payment has the effect of a preference, however contended that it was one made in good faith and in the ordinary course of business. It is necessary to recite something of the history of the payment of rental from time to time as this forms the "context" in which the respondent argues that these issues ought be determined. From January 1989 the bankrupt, Mr Allen, carried on a business under the name "Arana Steel Construction" at premises at Everton Hills owned by the respondent. Mr Allen's brother, and before him his father, had conducted that business at those premises for some years. He took over the business from his brother in 1989 and the rent then outstanding (and to be paid by Mr Allen) was in the order of $6,000.00. In February 1990 Mr Allen rented two further "bays" (units of space) and between March and November 1992, he rented some further space. The business of Arana was that of steel fabricator. Mr Allen later conducted another business from about 1990 under the name "Intruderguard" which involved the manufacture of security and aluminium screens. The two businesses were conducted in different areas although they overlapped when the steel fabrication business Tequired further space. Although the respondent had pressed for written agreements for lease, none was ever entered into and Mr Allen was treated as a monthly tenant. The invoices rendered to him would specify the rent applicable to each part and were addressed to the business referable to that part but he did not ever draw such a distinction and simply made what payments he did towards rental of all of the space. The respondent for its part appropriated the payments in its books as it saw fit. The history of rental payments is substantially one of arrears from January 1989, there being only two months Jate in that year when the bankrupt was in credit and no other point where he was not in arrears. Between 1989 and 1991 the amount outstanding was often in the order of $4,000.00 and as much as $9,000.00 and in June and September 1991 escalated to over $11,000.00 and then again to over $14,000.00 in October, following which a large payment was made reducing the arrears to previous levels until April 1992 when they again increased to almost $13,000.00. (From late 1990 the total monthly rent payable was $2525.00 which increased for some months in 1992 to $3155.00 when the further space was taken). With another large payment they were again reduced but by October 1992 they had increased to $18,930.00. The pattern of payment by the bankrupt was relatively constant throughout 1989 but could not be so described thereafter. From mid-April 1991 the course which seemed to follow was for the landlord to make demand and then for Mr Allen to then make promises or arrangements for payment. In 1994 Mr Badgery, a solicitor and secretary and director of the respondent company, was obliged to seek or demand payment on five occasions. In 1992 demands were made on some nine occasions and in June and October 1992 proceedings were threatened. It was the arrangements entered into following Mr Badgery's letter of demand of 15 October 1992 which resulted in the payment in question being made. Following receipt of that letter Mr Allen spoke to Mr Badgery and advised that he "did not have any work comung in", promised the payment of some monies in October (they were in fact paid mn November) and advised that he had the Intruderguard business on the market and wished to pay the arrears out of the proceeds of that business. Mr Badgery agreed to defer further proceedings whilst Mr Allen found a buyer. At about the same time Mr Allen relinquished tenancy of the additional space. However by February 1993 Mr Badgery was obliged to mng Mr Allen since there was then about $23,660.00 owing and advised him that the respondent intended suing for recovery. Mr Badgery had searched the business names register with a view to commencing those proceedings. Mention was then made of a prospective purchaser. In early April he met the persons whose company eventually purchased the business and agreed on behalf of the respondent to grant a lease for the bays in question subject to all rental then owing being paid out of the proceeds of sale. Settlement occurred on 14 May 1993 at which time Mr Badgery was given, as requested, a separate bank cheque by the purchasers. Section 122 Section 122(1) provides that a conveyance having the effect of giving a creditor a preference is void against the trustee. Subsections (2)(a), (3) and (4)(c) provide as follows: "(2) Nothing in this section affects - (a) the rights of a purchaser, payee or encumbrancer in good faith and for valuable consideration and in the ordinary course of business; (3) | The burden of proving the matters referred to in sub-section (2) lies upon the person claiming to have the benefit of that sub- section, (4) (c) a creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the conveyance, transfer, charge, payment or obligation was executed, made or incurred under such circumstances as to lead to the inference that the creduor knew, or had reason to suspect - (i) that the debtor was unable to pay his debts as they became due from his own money; and (ii) that the effect of the conveyance, transfer charge, payment or obligation would be to give him a preference, priority or advantage over other creditors." The respondent then carries the burden of establishing the two Matters in question. It follows in my view that, with respect to the questions arising under subsection (4)(c) that the respondent would also necessarily be required to negative any such inference arising (and see Re Cummins & Anor, ex parte Harris & Anor v. Refrigeration Parts (Qld) Pty Lid (1985) 8 FCR 546). Good Faith I accept that Mr Badgery may not, prior to 15 October 1992, have consciously evaluated whether Mr Allen was in fact unable to pay his debts. Mr Allen's conduct in the preceding years could well suggest, as Mr Badgery said, that he was a person who paid when it suited him and to that extent he had historically taken advantage of his landlord. Whilst another inference was open, namely that he was experiencing difficulties with liquidity from time to time, until mid-1991 the arrears were usually no more than a few months rent, a position which had long prevailed. Mr Allen had never really been pressed to pay more promptly which may have tested the matter. Mr Badgery did not know that at some time in 1991 Mr Allen had in fact experienced losses or difficulties in payment from a particular, large project. By late 1992 the position was however changing. Even conscious of the benefit of hindsight, serious demands, not previously made, were now made by the landlord and the amount outstanding had increased to an unusual level. Mr Allen's advice that he had "no work", not something usually volunteered by him, combined with an obvious need to sell to meet a substantial amount of rent outstanding would I consider have led an ordinary reasonable person to beleve that Mr Allen was unable to meet his debts from his own monies. The trustee also pointed to the respondent's requirement for all rental (not just those referable to the Intruderguard business) to be paid and to the fact that a separate cheque was required. But I do not think these factors take the matter any further. The parties had always dealt with payments of outstanding rental on a global basis. The requirement for a cheque before furnishing an agreement for lease could, if there were no other circumstances, be explained simply on the basis of good business practice. For the reasons I have outlined however I consider that whilst Mr Badgery may not have had knowledge in fact, the circumstances were, objectively, such as to lead to the inferences referred to in subsection (4)(c). " + of b 7 Ll In any event I would consider that the transaction in question was not one of a payment made "in the ordinary course of business" as s. 122(2) requires, a requirement additional to that of good faith. It cannot be said to: "fall into place as part of the undstinguished common flow of business done.. calling for no remark and arising out of no Special or particular situation". Downs Distributing Co. Pty Ltd v. Associated Blue Star Stores Pty Lid (In Liquidation) (1948) 76 CLR 463, 477 and to similar effect Taylor v. White (1964) 110 CLR 129, 136.). The payment of a large sum of outstanding rental from the proceeds of the sale of a substantial asset, indeed a complete business, could not be described as "in the ordinary course of business" whether it is regarded as in the course of a single business alone or businesses generally conducted by a debtor. The fact that a payment is made from the proceeds of sale of a business and its assets may not always disqualify the transaction. Whilst "in the course of" mught be thought to refer only to intermediate steps and thus exclude those taken in conclusion of a business, businesses are now commonly bought and sold and in any event have a commencement and conclusion. It is possible that payments made consequent upon sale could still be seen in the sense referred to by Rich J. in Downs Distributing, although one would expect creditors to be more alert in those circumstances. These transactions are, consequently, more lkely to be determined by reference to the requirement of good faith. In the present case however there was no orderly sale of the business for profit. Rather it is to be seen as the realisation of assets in the background of substantial and pressing debt. Mr Badgery referred to such a process as one which commonly occurred during the "recession" then taking place. A distinction, however needs to be drawn between the liquidation of assets to meet substantial debts (which implies financial difficulty) and a proper rationalisation of assets or reduction of expenses before that position has arisen. I am not satisfied that the payment was made in all of the circumstances required by s. 122(2) (a). I therefore declare that the payment made by the bankrupt to the respondent of $30,697.50 on 14 May 1993 is void as against the trustee. I will order that the respondent pay to trustee J. Arscott Stevenson that sum and will hear further argument as to the matter of interest raised in the trustee's application. There will be a further order that the respondent pay the trustee's costs of and incidental to his application and to that brought by the respondent such costs to be taxed if not agreed. I certify that this and the preceding seven (7) pages are a true copy of the reasons for judgment herein of the Honourable Justice Kiefel. Date: 28 November 1994 MY Bard Counsel for the applicant: Solicitors for the applicant: Counsel for the respondents: Solicitors for the respondents: Date of Hearing: Mr S. Eleftheriou M J. Murray & Associates Mr D. Campbell R.M. Badgery 21 November 1994 # +y AUSTRALIA, + Ay Od. wo, O89bYV YrERr JUDGES* CHAMBERS FEDERAL COURT OF AUSTRALIA 119 NORTH QUAY BRISBANE 4000 AUSTRALIA JUDGMENT No. sonScctteanl anton CATCHWORDS Bankruptcy - preferences - payment of rental arrears - sale of one business to meet debts (1985) 8 F.CR. 346 Downs Distributing Co. Pty. Lid. v. Associated Blue Star Stores Pty. Lid, (In Liquidation) (1948) 76 C.L.R. 463, 477 Taylor v. White (1964) 110 CLR. 129, 136 No. OB 964 of 1993 Kiefel J.. Brisbane, 28 November 1994 JUDGE MAKING ORDER: Kiefel J. DATE OF ORDER: 28 November 1994 WHERE MADE: Brisbane MINUTES OF ORDER THE COURT DECLARES THAT: 1. The payment made by the bankrupt to the respondent of $30,697.50 on 14 May 1993 is void as against the trustee. THE COURT ORDERS THAT: 2. The respondent pay to the trustee, J. Arscott Stevenson, the sum of $30,697.50 together with interest thereon at 10% per annum from 5 July 1994 to the date of payment. 3. The respondent pay the trustee's costs of and incidental to this application to be taxed if not agreed. NOTE: Settlement and entry of orders 1s dealt with in Rule 124 of the Bankruptcy Rules. GENERAL DIVISION No. OB 964 of 1993 BANKRUPTCY DISTRICT T. EN. RE: GRAHAM DAVID ALLEN Applicant EX PARTE EVERTON HILLS NOMINEES PTY LTD Respondent CORAM: _ Keefel J DATE: 28 November 1994 PLACE: Brisbane REASONS FOR JUDGMENT The trustee of the property of Graham David Allen seeks a declaration that a payment of $30,697.50 made to Everton Hills Nominees Pty Ltd ("the respondent") on 14th May 1993 constituted a preference within the meaning of s. 122 of the Bankruptcy Act 1966 (Cth) and an order for payment of that sum. The Bankrupt's estate was sequestrated on 20 May 1993. The payment made to the respondent was in satisfaction of arrears of rental then due to it. That the payment was made for valuable consideration within the meaning of s. 122(2)(a) was not in contention. The respondent, whilst conceding that the payment has the effect of a preference, however contended that it was one made in good faith and in the ordinary course of business. It is necessary to recite something of the history of the payment of rental from time to time as this forms the "context" in which the respondent argues that these issues ought be determined. From January 1989 the bankrupt, Mr Allen, carried on a business under the name "Arana Steel Construction" at premises at Everton Hills owned by the respondent. Mr Allen's brother, and before him his father, had conducted that business at those premises for some years. He took over the business from his brother in 1989 and the rent then outstanding (and to be paid by Mr Allen) was in the order of $6,000.00. In February 1990 Mr Allen rented two further "bays" (units of space) and between March and November 1992, he rented some further space. The business of Arana was that of steel fabricator. Mr Allen later conducted another business from about 1990 under the name "Intruderguard" which involved the manufacture of security and aluminium screens. The two businesses were conducted in different areas although they overlapped when the steel fabrication business required further space. Although the respondent had pressed for written agreements for lease, none was ever entered into and Mr Allen was treated as a monthly tenant. The invoices rendered to him would specify the rent applicable to each part and were addressed to the business referable to that part but he did not ever draw such a distinction and simply made what payments he did towards rental of all of the space. The respondent for its part appropriated the payments in its books as it saw fit. The history of rental payments is substantially one of arrears from January 1989, there being only two months late in that year when the bankrupt was in credit and no other point where he was not in arrears. Between 1989 and 1991 the amount outstanding was often in the order of $4,000.00 and as much as $9,000.00 and in June and September 1991 escalated to over $11,000.00 and then again to over $14,000.00 in October, following which a large payment was made reducing the arrears to previous levels until April 1992 when they again increased to almost $13,000.00. (From late 1990 the total monthly rent payable was $2525.00 which increased for some months in 1992 to $3155.00 when the further space was taken). With another large payment they were again reduced but by October 1992 they had increased to $18,930.00. The pattern of payment by the bankrupt was relatively constant throughout 1989 but could not be so described thereafter. From mid-April 1991 the course which seemed to follow was for the landlord to make demand and then for Mr Allen to then make promises or arrangements for payment. In 1994 Mr Badgery, a solicitor and secretary and director of the respondent company, was obliged to seek or demand payinent on five occasions. In 1992 demands were made on some nine occasions and in June and October 1992 proceedings were threatened. It was the arrangements entered into following Mr Badgery's letter of demand of 15 October 1992 which resulted in the payment in question being made. Following receipt of that letter Mr Allen spoke to Mr Badgery and advised that he "did not have any work coming in", promised the payment of some monies in October (they were in fact paid in November) and advised that he had the Intruderguard business on the market and wished to pay the arrears out of the proceeds of that business. Mr Badgery agreed to defer further proceedings whilst Mr Allen found a buyer. At about the same time Mr Allen relinquished tenancy of the additional space. However by February 1993 Mr Badgery was obliged to ring Mr Allen since there was then about $23,660.00 owing and advised him that the respondent intended suing for recovery. Mr Badgery had searched the business names register with a view to commencing those proceedings. Mention was then made of a prospective purchaser. In early April he met the persons whose company eventually purchased the business and agreed on behalf of the respondent to grant a lease for the bays in question subject to all rental then owing being paid out of the proceeds of sale. Settlement occurred on 14 May 1993 at which time Mr Badgery was given, as requested, a separate bank cheque by the purchasers. Section 122 Section 122(1) provides that a conveyance having the effect of giving a creditor a preference is void against the trustee. Subsections (2)(a), (3) and (4)(c) provide as follows: "(2) Nothing in this section affects - (a) the rights of a purchaser, payee or encumbrancer in good faith and for valuable consideration and in the ordinary course of business; (3) The burden of proving the matters referred to in sub-section (2) lies upon the person claiming to have the benefit of that sub- section. (4) (c) a creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the conveyance, transfer, charge, payment or obligation was executed, made or incurred under such circumstances as to lead to the inference that the creduor knew, or had reason to suspect - (i) 'that the debtor was unable to pay his debts as they became due from his own money; and (i) that the effect of the conveyance, transfer charge, payment or obligation would be to give him a preference, priority or advantage over other creditors." The respondent then carries the burden of establishing the two matters in question. It follows in my view that, with respect to the questions arising under subsection (4)(c) that the respondent would also necessarily be required to negative any such inference arising (and see Re Cummins & Anor, ex parte Harris & Anor_v, Refrigeration Parts (Old) Pty Ltd (1985) 8 FCR 546). Good Faith I accept that Mr Badgery may not, prior to 15 October 1992, have consciously evaluated whether Mr Allen was in fact unable to pay his debts. Mr Allen's conduct in the preceding years could well suggest, as Mr Badgery said, that he was a person who paid when it suited him and to that extent he had historically taken advantage of his landlord. Whilst another inference was open, namely that he was experiencing difficulties with liquidity from time to time, until mid-1991 the arrears were usually no more than a few months rent, a position which had long prevailed. Mr Allen had never really been pressed to pay more promptly which may have tested the matter. Mr Badgery did not know that at some time in 1991 Mr Allen had in fact experienced losses or difficulties in payment from a particular, large project. By late 1992 the position was however changing. Even conscious of the benefit of hindsight, serious demands, not previously made, were now made by the landlord and the amount outstanding had increased to an unusual level. Mr Allen's advice that he had "no work", not something usually volunteered by him, combined with an obvious need to sell to meet a substantial amount of rent outstanding would I consider have led an ordinary reasonable person to believe that Mr Allen was unable to meet his debts from his own monies. The trustee also pointed to the respondent's requirement for all rental (not just those referable to the Intruderguard business) to be paid and to the fact that a separate cheque was required. But I do not think these factors take the matter any further. The parties had always dealt with payments of outstanding rental on a global basis. The requirement for a cheque before furnishing an agreement for lease could, if there were no other circumstances, be explained simply on the basis of good business practice. For the reasons I have outlined however I consider that whilst Mr Badgery may not have had knowledge in fact, the circumstances were, objectively, such as to lead to the inferences referred to in subsection (4)(c). In any even I would consider that the transaction in question was not one of a payment made "in the ordinary course of business" as s. 122(2) requires, a requirement additional to that of good faith. It cannot be said to: "fall into place as part of the undistinguished common flow of business done.. calling for no remark and arising out of no special or particular situation". Liquidation) (1948) 76 CLR 463, 477 and to similar effect Taylor v, White (1964) 110 CLR 129, 136.). The payment of a large sum of outstanding rental from the proceeds of the sale of a substantial asset, indeed a complete business, could not be described as "in the ordinary course of business" whether it is regarded as in the course of a single business alone or businesses generally conducted by a debtor. The fact that a payment is made from the proceeds of sale of a business and its assets may not always disqualify the transaction. Whilst "in the course of" might be thought to refer only to intermediate steps and thus exclude those taken in conclusion of a business, businesses are now commonly bought and sold and in any event have a commencement and conclusion. It is possible that payments made consequent upon sale could still be seen in the sense referred to by Rich J. in Downs Distributing, although one would expect creditors to be more alert in those circumstances. These transactions are, consequently, more likely to be determined by reference to the requirement of good faith. In the present case however there was no orderly sale of the business for profit. Rather it is to be seen as the realisation of assets in the background of substantial and pressing debt. Mr Badgery referred to such a process as one which commonly occurred during the "recession" then taking place. A distinction, however needs to be drawn between the liquidation of assets to meet substantial debts (which implhes financial difficulty) and a proper rationalisation of assets or reduction of expenses before that position has arisen. I am not satisfied that the payment was made in all of the circumstances required by s. 122(2) (a). I therefore declare that the payment made by the bankrupt to the respondent of $30,697.50 on 14 May 1993 is void as against the trustee. I will order that the respondent pay to trustee J. Arscott Stevenson that sum and will hear further argument as to the matter of interest raised in the trustee's application. There will be a further order that the respondent pay the trustee's costs of and incidental to his application and to that brought by the respondent such costs to be taxed if not agreed. I certify that this and the preceding seven (7) pages are a true copy of the reasons for jedgment herein of the Honourable Justice Kiefel. Date: 28 November 1994 MY BllopA Counsel for the applicant: Solicitors for the applicant: Counsel for the respondents: Solicitors for the respondents: Date of Hearing: Mr S. Elefthenou M.J. Murray & Associates Mr D. Campbell R.M. Badgery 21 November 1994