\e JUDGMENT No. ond Dt, ' CATCHWORDS BANKRUPTCY - Bankrupt estate - preferential payments - whether payment to the respondent is void as against the trustee - whether respondent is a payee in good faith and in the ordinary course of business Bankruptcy Act s 122 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 Spedley Securities Ltd (In liquidation) v Western United Ltd (In liquidation) (1992) 10 ACLC 357 Bank of Australasia v Hall (1907) 4 CLR 1514 Sandell v Porter (1966) 115 CLR 666 Downs Distributing Co Pty Ltd v Associated Blue Star Stores Ltd (In liquidation) (1948) 76 CLR 463 Re Cummins & Anor (1985) 8 FCR 546 No. SB 275 of 1994 Re: ROGER ALEC STECCA Ex Parte: ALAN GEOFFREY SCOTT Respondent: P' ACN 008 221 001 Branson J. Adelaide 12 December 1994 ) ) STRIC GISTRY ) ) GENERAL DIVISION ) No. SB 275 of 1994 ) BANKRUPTCY DISTRICT OF THE STATE ) ) OF SOUTH AUSTRALIA ) Re: ROGER ALEC STECCA Ex Parte: ALAN COT' VENS S Tt PITY LID ACN 008 221 001 Respondent ONS FOR JUDGMENT CORAM: Branson J. PLACE: Adelaide DATE: 12 December 1994 The applicant Alan Geoffrey Scott, is the trustee of the bankrupt estate of Roger Alec Stecca. A sequestration order against the estate of Mr Stecca was made on 28 February 1994 on a creditor's petition dated 6 September 1993. This application is for a declaration that the payment of $8,346.07 made on 1 October 1993 to the respondent is void as against the trustee by virtue of the provisions of section 122 of the Bankruptcy Act, 1966 ("the Act") as a payment by the bankrupt having the effect of giving the respondent a preference, priority or advantage over other creditors of the bankrupt. Orders are sought for the payment by the respondent to the thereon. -2- applicant of the sum of $8,346.07 plus interest Section 122 of the Act provides, so far as is here relevant, as follows:- "(1) A ..... payment made ..... by a person who is unable to pay his debts as they become due from his own money (in this section referred to as "the debtor"), in favour of a creditor, having the effect of giving that creditor a preference, priority or advantage over other creditors, being a ..... payment ..... made ..... : (a) [not here relevant]; 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; 1s void as against the trustee in the bankruptcy. (1A) [not here relevant] (2) (3) (4) Nothing in this section affects: (a) the rights of a..... payee ..... (b) [not here relevant]; or (c) [not here relevant]. The burden of proving the matters referred to in subsection (2) lies upon the person claiming to have the benefit of that subsection. For the purposes of this section: (a) [not here relevant]; (b) [not here relevant]; and (c) a creditor shall be 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 creditor knew, or had reason to suspect: -3- (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 ..... payment ..... would be to give him aie preference, priority or advantage over other creditors. (4A) ... (7) [not here relevant]." By the close of addresses in this matter the background facts were not in dispute. They are as follows. The bankrupt, Mr Stecca, was a director (it seems the Managing Director) of the company Adeltrone Pty Ltd (""Adeltrone") which traded as Denco Signs. Adeltrone was a family company under the control of Mr Stecca. It went into liquidation in July 1993. Adeltrone trading as Denco Signs was an ongoing customer of the respondent. It was ordinarily slow in making payments to the respondents. A large proportion of the respondent's customers were similarly slow in making payments. In discussions concerning outstanding liabilities of Adeltrone to the respondent Mr Stecca assured Mr Ian Broad, the Managing Director of the respondent, that, in effect, he would stand behind the company with respect to the payment of its debts and that he had "plenty of assets". On one occasion earlier than the transaction the subject of this dispute, Mr Stecca had given a personal guarantee with respect to a significant debt of Adeltrone to the respondent. Mr Broad, whose state of mind it is agreed is to be regarded as that of his company for present purposes, believed at all relevant times that Mr Stecca was a person who owned significant assets. -4- The debt with which this dispute is concerned is part of a larger debt incurred by Adeltrone in approximately October 1992. On 15 February 1993 Mr Stecca signed a letter addressed to the respondent concerning the larger debt. The true import of this letter is not wholly clear. I set out its operative contents in full:- "I Mr Roger Stecca personally guarantee the debt amount owed to STEVENS SHEET METAL PTY LTD as at 8.2.93 by Denco Signs of $11,844.05 will be paid on time on the dates as follows. FEBRUARY 28th 1993 - S2,000-00 MARCH 3ist 1993 ~ $4,000-00 APRIL 16th 1993 (APPROX) - $5,844-05 Failure by Denco Signs to meet any of these dates given, Stevens Sheet Metal has the right to commence legal action immediately to recover the remaining amount. Yours faithfully (signed) Mr Roger A Stecca."" Payment was made to the respondent of $2,000 on or about 28 February 1993. A further payment of $2,000 was made to the respondent on or about 5 April 1993. No further payments were made until the payment of $8,346-07 on 1 October 1993 referred to below. The evidence does not make clear whether the two payments of $2,000 were made by Adeltrone or by Mr Stecca. In mid April 1994 the respondent consulted a solicitor for the purpose of seeking to recover the amount still outstanding. Proceedings were issued against Mr Stecca in reliance on the -5- personal guarantee contained in the letter dated 15 February 1993 signed by him. The proceedings were not defended and judgment was signed. A warrant of sale was issued with respect to a property which inquiries had shown to be registered in the name of Mr Stecca. Notice of a sale by auction pursuant to the warrant was given in the press. Subsequently the solicitor acting for the respondent was contacted by a person who identified himself as a tenant in occupation of the property the subject of the warrant of sale. Agreement was reached between them for the advertised auction to be cancelled to allow time for the tenant and Mr Stecca to reach an agreement for the private sale and purchase of the property. Such an agreement was reached and settlement of the contract of sale and purchase was effected on 1 October 1993. The respondent's solicitor attended at the settlement and upon receiving payment of the sum of $8,346-07 provided a withdrawal of the warrant of sale. Prior to the date of settlement the respondent through its solicitor had learnt of the registration of a second warrant of sale on the title of the property. It had also learnt that at settlement approximately $22,000 would be available for payment to Mr Stecca. I was informed by counsel that the following matters are agreed by the parties:- -6- (1) as at 1 October 1993 Mr Stecca was unable to pay his debts as they became due from his own money; (2) the payment of $8,346-07 made to the respondent on 1 October 1993 was a payment made in favour of a ereditor of Mr Stecca; (3) the payment had the effect of giving the respondent a preference, priority or advantage over other creditors of Mr Stecca; (4) the payment was made for valuable consideration within the meaning of section 122(2)(a) of the Act. As the payment was made after the day on which the petition on which Mr Stecca became bankrupt was presented and before the day on which he became bankrupt (s 122({1)(b)), the payment is in the circumstances void against the trustee in bankruptcy unless the respondent satisfies the burden of proving that it was a payee in good faith and in the ordinary course of business (s 122(2)(a) and (3)). Whilst the respondent bears the onus of proving that it was a payee in good faith, consideration must also be given to 6 122(4)(c) which is set out above. The corresponding section (s 95(4)) of the Bankruptcy Act 1924) was considered in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 where Barwick CJ said at pp 287~-288:- "The proof of the circumstances under which the payment was made would seem to be an indispensable step in an -7- attempt to prove that the creditor in receiving it was acting in good faith within the meaning of s 95(2). But, though s 95(4) relates to good faith, it does not extend the onus cast by sub-s (3) so [as] to require the creditor to negative the existence of circumstances from which the described inference could be drawn by the court. Se i i i i i oP i) If the court, otherwise satisfied of good faith, has no material or insufficient material from which it can draw the inference mentioned in s 95(4), the creditor's exculpation under s 95(2), if otherwise made out, will be complete; or if, in such circumstances, the court is in doubt as to whether or not the inference should be drawn, the preference should not be avoided." As has been pointed out on other occasions (see, for example, Re Cooke (1985) 4 FCR 398 at 410 and Re K.D.S. Construction Services Pty Ltd (1986) 4 ACLC 250 at 254) the conclusion reached by Barwick CJ in Queensland Bacon Pty Ltd v Rees set out above is in conflict with his observations in Rees v Bank of N.S.W. (1964) 111 CLR 210 at 216-217. However nothing said by the other members of the Court in Queensland Bacon Pty Ltd v Rees indicated any reservations as to what was there said by the Chief Justice. Support is found for the contrary argument that the burden of proof of proving good faith which lies on the respondent by reason of s 122(3) includes the burden of proving the absence of circumstances of the kind referred to in s 122(4)(c) not only in Rees v Bank of N.S.W. per Barwick CJ but also in Re Bird (As Trustee of the Estate of Arcadiou) (1979) 39 FLR 281 at 283-7 per Sweeney J and Re Cummins & Anor (1985) 8 FCR 546 at 554 per Spender J. -8- However I agree with the view expressed by McLelland J in Spedley Securities Ltd (In Liquidation) v Western United Ltd (In Liquidation) (1992) 10 ACLC 357 at 361 that the greater weight of, and more convincing, authority is that the onus cast by sub-s (3) does not extend to s 95 (4). I do not seek to set out an exhaustive list of such authorities. I refer, however, to Re Cooke (supra) at 410-411 per Smithers J, Re Southern Cross Commodities (1984) 58 ALR 149 at 161 per Matheson J, Ex parte Ripkin (1983) 68 FLR 162 at 167-168 per Fisher J and Re K.D.S. Construction Services Pty Ltd (1986) 4 ACLC 250 at 254 per Kelly ACJ. Evidence was given on the hearing of this application by two witnesses, each of them called on behalf of the respondent. The first was Mr Roy Hasda, the solicitor who acted on behalf of the respondent in respect of the recovery of the relevant debt. The second was Mr Ian Broad, the Managing Director of the respondent. The affidavit of Mr Broad sworn on 1 November 1994 was placed in evidence. I accept each of the witnesses as witnesses of truth. Mr Broad gave evidence that he first learnt of the bankruptcy of Mr Stecca in July 1994. He said that he was shocked when he received this information. He went on:- "I thought Roger was, you know, a man of substance. I thought he had the assets, I didn't believe that there was any problem that way. I knew he'd had a bit of a rough time with his company but personally, himself, as he always told me that he had no problems financially wise." -~9- As to the institution of recovery proceedings against Mr Stecca, Mr Broad's evidence was that he thought that Mr Stecca was deliberately being slow in paying and that "the best way to precipitate it quickly [was] to get a solicitor involved." I accept Mr Broad in this and other regards. Did the respondent in the circumstances have reason to suspect that Mr Stecca was unable to pay his debts as they became due from his own money? The test is an objective one (Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liquidation) (1948) 76 CLR 463) but the inference to which sub-s 4(c) refers is an inference which the court draws from the circumstances known to the payee at the time when he accepts the payment (Queensland Bacon Pty Ltd v Rees per Kitto J at p 312). In my view, the respondent had reason to suspect that Adeltrone was insolvent in February 1993. It may be that it obtained the letter dated 15 February 1993 signed by Mr Stecca because it in fact suspected that Adeltrone was insolvent. However what is important is what, aif anything, the respondents had reason to suspect with respect to Mr Stecca. The applicant disowned reliance upon the mere signing of the letter of 15 September 1993 by Mr Stecca for the purpose of raising an inference that the respondent had reason to suspect that Mr Stecca was at the time unable to pay his debts as they became due from his own money. It did however, place reliance -10- on the fact that payments were not made in accordance with the schedule in the letter. I do not accept that standing alone the fact that the respondent did not receive payments in accordance with the schedule contained in the letter of 15 February 1993 takes the matter any further. The letter as drawn reflects a principle obligation on Adeltrone trading as Denco Signs to make such payments. The evidence does not make it clear when, if at all, an express demand was made on Mr Stecca personally pursuant to the guarantee. The situation after judgment was signed against Mr Stecca and the warrant of sale issued was different. The warrant issued on 22 June 1993. The debt remained unpaid for more than three months thereafter. During that time the respondent learnt of the existence of another judgment creditor of Mr Stecca who had issued a warrant of sale against what was apparently the only piece of real estate owned by Mr Stecca in this State. Although Mr Broad felt comfortable in dealing with Mr Stecca because he believed him to own assets, the test of whether a debtor is able to pay his or her debts as they become due from his or her own money involves more than a mere consideration of the extent of the debtor's assets. As was pointed out by Griffith CJ in Bank of Australasia v Hall (1907) 4 CLR 1514 at 1528 - 'The question is not whether the debtor would be able, if time were given to him to pay his debts out of his assets, but whether he is presently able to do so with moneys actually available. The most favourable construction that can be put on the words "his own -11- moneys" is that they include any moneys of which the debtor can obtain immediately command by sale or pledge of his assets.' The same approach was taken by Barwick CJ in Sandell v Porter (1966) 115 CLR 666 at 670 where he said:- "It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency." I consider that there was a period of time between the issue of the warrant of sale and 1 October 1993 during which the respondent had reason to suspect that Mr Stecca was unable to pay his debts as they became due from his own money as that expression is explained by the authorities. The failure to make payment of judgment debts notwithstanding the issue of warrants of sale of real estate is suggestive, in my view, of an "actual inability on the part of the [debtor] to pay his debts as they become due, as distinguished from a reluctance to accommodate his wider purposes to the limitations of his resources" (see Queensland Bacon Pty Ltd v Rees per Kitto J at 312). Like Smithers J in Re Cooke I understand His Honour in referring to "a reluctance to accommodate his wider purposes to the limitations of his resources" to mean "a reluctance to dispose of assets existing in some particular or permanent form to meet immediate demands" (Re Cooke at p 415). However the issue for determination is whether the payment made on 1 October 1993 was made under such circumstances as to lead to the inference that the creditor had reason to suspect at that time - (a) that the debtor was unable to pay his debts as they became due from his own money; and (b) that the effect of the payment would be to give it a preference, priority or advantage over other creditors. The circumstances as at 1 October 1993 were that Mr Stecca was on that day disposing of a significant asset: settlement of a contract for sale and purchase of a residential property registered in his name was being effected. The title of the property was subject to a mortgage and two warrants of sale had been issued with respect to the property. However, Mr Hasda gave evidence, which I accept, that no other creditor, apart from a representative of the mortgagee, attended at the settlement on 1 October 1993 and that approximately $22,000 was received by Mr Stecca at that settlement after payment of the mortgage debt and the amounts secured by the two warrants of sale. The sum of $22,000 is a large sum when compared with the two debts secured by the warrants of sale. It is not suggested that there was evidence of other indebtedness of Mr Stecca of which the respondent ought to have been aware on 1 October 1993, although as I understand the argument of the respondent, it is contended that the respondent should have envisaged the possibility of other indebtedness. -1 3- As Kitto J stated in Queensland Bacon Pty Ltd v Rees 115 CLR 266 at p 303:- '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 or 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 is more than a reason to consider or look unto 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", I am not satisfied that the payment to the respondent was made under such circumstances as to lead to the inference that the respondent had reason to suspect that Mr Stecca was unable to pay his debts as they fell due from his own money and that the effect of the payment would be to give it a preference, priority or advantage over other creditors. The respondent is not therefore to be deemed not to be a payee in good faith. Has the respondent satisfied the burden of proving that it was in fact a payee in good faith within the meaning of 8 122(2)(a) of the Act? In my view good faith in this subsection relates to the actual state of mind of the payee. As McLelland J observed in Spedley Securities Ltd (In Liquidation) v Western United Ltd (In Liquidation) at 362:- -14- 'subject to the operation of s 122(4)(c), a creditor is a "payee ..... in good faith" within the meaning of S 122(2)(a) 1f at the time of the payment to him he neither believed nor suspected that the payment was such as to give him a preference over other creditors of an insolvent debtor'. I am satisfied on the basis of the unchallenged evidence of Mr Broad that at the time of the payment to it on 1 October 1993 the respondent neither believed nor suspected that the payment was such as to give it a preference over other creditors of an insolvent debtor. The respondent has satisfied the burden of establishing that it was a payee in good faith. The remaining issue is that of whether the respondent was in the circumstances a payee in the ordinary course of business. The High Court has made it clear that this is a requirement cumulative upon good faith and valuable consideration. In the words of Rich J in Downs Distributing Co Pty Ltd v Associated Blue Star Stores Ltd (In Liquidation) at p 477 - "It is therefore, not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual or normal character of the transaction. The provision does not require that the transaction shall be in the course of any particular trade, vocation or business. It speaks of the course of business in general but it does suppose that according to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that 1t should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation." -~15- As Menzies J pointed out in Taylor v White (1964) 110 CLR 129 at 160 little help as to the meaning of "in the ordinary course of business" is obtained from decisions where the distinction between a payee "in the ordinary course of business" and a payee "in good faith" did not have to be observed. The payment in dispute in this case was made after the respondent had obtained judgment against Mr Stecca and issued a warrant of sale in respect of real property owned by him. Although a private sale of the property was ultimately completed this was only achieved by reason of the respondent's agreeing not to proceed with the auction which had been scheduled pursuant to the warrant. Settlement of the sale proceeded upon the respondent's withdrawal of its warrant having received full payment of its judgment debt. The payment was received more than 3 months after the date of the judgment debt and the issue of the warrant of sale. Although I accept the submission made on behalf of the respondent that it is common for businesses to resort to legal proceedings to recover debts, it does not follow from this that the debts so recovered are paid in the ordinary course of business within the meaning of s 122(2)(a) of the Act. As was stated by Spender J in Re Cummins at 553:- 'A reference to "payments made in the ordinary course of business" implies that some payments occurring un a business context are not in the ordinary course of business. Recourse is frequently made to collection agencies in an attempt to secure the payment of long outstanding debts, yet the commonness of that course in my opinion does not mean that the payment of a debt secured after recourse to such a procedure is in the ordinary course of business. As Thomas J observed in Re Lee Furniture Pty Ltd (In Lig) [(1983) 8 ACLR 251] at 256-257: "The circumstances of the issue of a writ does not indicate any clear picture of the business situation between a plaintiff and a defendant. It is true that it is relatively uncommon if one looks at the whole field of debt collection. But that does not automatically place it outside the ordinary course of business. A writ or a plaint can become necessary because a defendant believes that he has a good defence, from ambiguity or misunderstanding as to the nature of the claim, from disinclination to pay (for relevant or irrelevant reasons), as well as for reasons of insolvency or financial stringency". It may be open to conclude that payment after the mere issue of a writ does not mean that the payment was outside the ordinary course of business. Nonetheless it is an indicium in my view requiring aé_e careful consideration of the other attendant circumstances.' (emphasis in the original) (See also Re Hoare [{1972-73] ALR 1134). Having regard to the totality of the circumstances outlined above I am not satisfied that the payment made by Mr Stecca to the respondent on 1 October 1993 was a payment which fell into Place "as part of the undistinguished common flow of business done" and which arose out of "no special or particular situation" (see per Rich J in Downs Distributing Co Pty Ltd v Associated Blue Star Stores Ltd (In Liquidation) at p 477). I find that the payment was not received by the respondent in the ordinary course of business. I therefore declare that the payment made on 1 October 1993 by Mr Stecca to the respondent of $8,346-07 is void as against -17- the applicant. I will hear counsel as to interest and costs. Counsel for the Trustee Solicitors for the Trustee Counsel for the Respondent Solicitors for the Respondent Hearing Date I certify that this and the 1G preceding pages are a true copy of the Reasons for Judgment of Justice Branson. Associate: C ted/ Dated: 12 Basuter AA Dr R Baxter Johnson Winter & Slattery Mr R Bellman Windevere Bellman : 6 December 1994