FEDERAL COURT OF AUSTRALIA Thomas (Trustee), in the matter of Gidley (Bankrupt) v Clairbrook [2000] FCA 564 BANKRUPTCY – preference – s 122 of the Bankruptcy Act 1966 – whether creditor "acted in good faith". Bankruptcy Act 1966 – s 122 IN THE MATTER OF ALICE ISOBELLE GIDLEY AND RICHARD JOHN SHEARS GAVIN FREDERICK CRICHTON THOMAS (AS OFFICIAL TRUSTEE OF THE BANKRUPT ESTATE OF ALICE ISOBELLE GIDLEY AND RICHARD JOHN SHEARS) V LORRAINE CLAIRBROOK (PREVIOUSLY KNOWN AS LIBERTO) N 7930 OF 1999 JUDGE: BEAUMONT J DATE: 17 APRIL 2000 PLACE: SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 7930 OF 1999 IN THE MATTER OF: ALICE ISOBELLE GIDLEY AND RICHARD JOHN SHEARS BETWEEN: GAVIN FREDERICK CRICHTON THOMAS (AS OFFICIAL TRUSTEE OF THE BANKRUPT ESTATE OF ALICE ISOBELLE GIDLEY AND RICHARD JOHN SHEARS) APPLICANT AND: LORRAINE CLAIRBROOK (PREVIOUSLY KNOWN AS LIBERTO) RESPONDENT JUDGE: BEAUMONT J DATE OF ORDER: 17 APRIL 2000 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. There be judgment for the applicant in the sum of $20,000. 2. There be judgment for the applicant for pre-judgment interest at New South Wales Supreme Court prescribed rates from 10 August 1999 until this day. 3. The respondent pay the applicant's costs of the proceedings. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 7930 OF 1999 IN THE MATTER OF: ALICE ISOBELLE GIDLEY AND RICHARD JOHN SHEARS BETWEEN: GAVIN FREDERICK CRICHTON THOMAS (AS OFFICIAL TRUSTEE OF THE BANKRUPT ESTATE OF ALICE ISOBELLE GIDLEY AND RICHARD JOHN SHEARS) APPLICANT AND: LORRAINE CLAIRBROOK (PREVIOUSLY KNOWN AS LIBERTO) RESPONDENT JUDGE: BEAUMONT J DATE: 17 APRIL 2000 PLACE: SYDNEY REASONS FOR JUDGMENT BEAUMONT J: 1 Before the Court is a claim by a trustee in bankruptcy seeking to avoid what he claims is a preference within the meaning of s 122 of the Bankruptcy Act 1966 ("the Act"). There is no dispute about the primary facts which may be stated as follows. 2 In January 1996 the respondent was informed by a friend that the friend's sister, Isobelle Gidley, was looking for funds to assist in a project involving copra growing in Vanuatu. Shortly afterwards a discussion took place between Isobelle Gidley and the respondent in which Ms Gidley informed the respondent that her family's copra business in Vanuatu had been let slide for family reasons but that a buyer had been found to purchase the first shipment upon the reactivation of the business. Ms Gidley said: "All I need is cash in hand to pay the growers for their crops. I'm putting all my own money into it. Cynthia [my sister] is putting her own money into it and as well is getting bank loan to help fund the deal. The profit from the first shipment will be divided [as follows:] one third will be used to pay all costs, one third [will] plough into the next shipment and the balance of the third will be used to repay all the people who have helped." 3 It appears that on this occasion the respondent indicated that she might be in a position to advance, by way of loan, the sum of $10,000. In this connection, Ms Gidley said to the respondent "You will receive $20,000 back". At about this time Ms Gidley provided the respondent with a document in the nature of a prospectus of an informal kind, proposing investment by way of a partnership of joint venture in the copra business. That document was in the following terms: "COPRA For nearly 100 years, our family traded in Copra. Not only did we have our own coconut plantations but we also had ships and a trading store. When our mother became ill, we left to bring her to Sydney and access to medical facilities, thinking it would only be for a few months. But she was seriously ill and was never to recover. She is still seriously ill but our circumstances have changed in that now we have family from the islands to assist in her care so we can attend to the property. We have re-opened the plantation and have started up the copra business again to take advantage of what is presently a very decent price. We have about 6,000 to 7,000 tonnes of copra lying in the outer islands, and we have a refinery which is buying. But where we are short is the physical capital to collect up the product and get it to the warehouse in Santo where it is shipped out to Asia. I have been buying and pouring all my own capital in but I cannot earn fast enough to finish the deal which needs to be urgently completed so we are looking for a partner who can join with us. We have the product, the manpower, the storage docks, trucks and the buyer. We need an investor who can put up a minimum of $200,000 USD. That person will then become a full partner. They will get the money back in the first shipment and we split the profits 50/50 (fifty/fifty). The profit based on today's prices are conservatively, $50.00 per tonne minimum so we would be looking at splitting $250,000 i.e. $125,000 each. I have taken into account all costs and expenses. There is no risk. This is a very basic business. Copra stores for many months and it is a business we have all grown up in. The time it takes to get this return is usually one month. Say 90 days because it would be a new partnership and to allow for any slight delays." 4 In February 1996, the respondent paid the sum of $10,000 into the account in the name of Ms Gidley and her husband, Richard Shears. On 3 March 1996, a further meeting took place between the respondent, whose married name was Liberto, and Ms Gidley in which Ms Gidley handed the respondent a document in the following terms: "MARCH 3, 1996 This is to certify that Mrs Lorraine Liberto has invested AUD $10,000 in the copra business initiated and run by Carmille Trading Vanuatu LTD. In keeping with the philosophy of the company established by Isobelle Gidley, she is considered a part of the team which has regenerated the making of copra in Vanuatu and the setting up of direct markets for the island copra growers. The remuneration of this investment and commitment will be AUD $10,000, being return of Mrs Liberto's principle investment and AUD $10,000 being her 100% interest to be paid upon the first shipment set for March/early April, 1996. Total repayment will be AUD $20,000. Signed Isobelle Gidley 3 Burrawong Ave, Mosman, 2088." 5 Between March and December 1996, a number of conversations took place between Ms Gidley and the respondent. In those conversations Ms Gidley said words to the following effect: "The first shipment has arrived but the buyer has not paid cash as promised, but has given us promissory notes, which we have had to accept. There will therefore be delay in repaying you." 6 On another occasion Ms Gidley said: "The first shipment has been completed, but due to the manner of payment all our available funds have to be used to finance the second shipment which we are now organising." 7 On several occasions Ms Gidley said: "The Copra transaction is being held up because we've had to fight the 'Copra Mafia'. They have a strangle hold on the world market." 8 In November 1996, Ms Gidley's sister, Cynthia Berkemeier and her son, Ewen Berkemeier, met with the respondent. Mr Ewen Berkemeier said: "All of the other investors have now been repaid in full. You're the only one who is owed any money, we will be in a position to pay you soon." 9 In December 1996, Cynthia Berkemeier informed the respondent that if she came to Cynthia Berkemeier's premises she could collect a cheque to repay the respondent in full. The respondent went to Ms Berkemeier's house to be informed by Ms Berkemeier as follows: "Sorry, I haven't got the cheque. Richard [Shears] was going to bring it over and he has been called away at the last moment on a journalist job in Queensland." 10 Later in December Ms Berkemeier said to the respondent: "Go to Isobelle's house, the cheque is there to be picked up. If no-one's home, just wait, someone will be home shortly." 11 The respondent went to Ms Gidley's house and there had a conversation with Mr Ewen Berkemeier who said: "Here are two cheques, both for $10,000. Isobelle will call you shortly and talk to you about it." 12 Later that day, Ms Gidley telephoned the respondent and said: "I've had to break your money up into two cheques. Put the first cheque into your account on [a particular day then nominated] and put the second one into your account on [a later nominated day]. The reason I'm doing this is because money is coming and going in and out of my account all the time, but I know if you follow my instructions both cheques will be met." 13 Each of the cheques for $10,000 were dated 9 December 1996. They were drawn on the account "R. Shears and I. Gidley" held at the Mosman Junction branch of the National Australia Bank Limited. The first cheque was presented on 20 December 1996. It was dishonoured on presentation. It was re-presented on 23 December and eventually accepted for payment on 2 January 1997 and available for collection as from 8 January 1997. The second cheque was presented on 31 January 1997. 14 The relevant dates in the bankruptcy proceedings are as follows. 15 The bankrupts, Alice Gidley and Richard Shears, committed their act of bankruptcy on 14 November 1996, being their failure to comply with a fourteen day bankruptcy notice based upon a judgment obtained in the Supreme Court of New South Wales on 15 August 1995 by the Commonwealth Bank of Australia in the sum of $4,108,946.16. The creditors' petition in bankruptcy, being a petition by the Commonwealth Bank, was filed on 28 November 1996. The sequestration order was made on 25 November 1997. 16 The statement of affairs filed by the bankrupts showed no assets other than real estate (being a residential property in Mosman) and substantial creditors and a substantial deficiency. The property in Mosman was heavily mortgaged and upon its realisation, no surplus remained for unsecured creditors. No other assets are available for unsecured creditors and the deficiency, as I have said, is substantial. 17 In the circumstances, the Trustee sues upon the provisions of s 122 of the Act. In order to succeed the Trustee must first show that there has been, within the meaning of s 122(1), a transfer of property. The Trustee calls in aid the provisions of subs (8) of s 122, that is to say, he relies upon subpara (a) which provides that a transfer of property includes the payment of money. In the present case, there was clearly a payment of money in the form of the proceeds of each of the cheques for $10,000. 18 The next ingredient stipulated in s 122(1) is that the transfer must be by a person who is insolvent. In my opinion, at material times the debtors, now the bankrupts, were clearly insolvent and the contrary is not suggested. 19 The next ingredient is that the transfer must be in favour of a creditor. Again, it could not be disputed, and is not disputed, that the respondent was a creditor. 20 The Trustee must also show that the transfer within the meaning of s 122(1)(a) had the effect of giving the creditor a preference, priority or advantage over other creditors. In my opinion, given the parlous state of the debtors' finances at material times, the payment of $10,000 in the form of the two cheques mentioned, did have the effect of giving the respondent a preference priority of advantage over other creditors. 21 The next ingredient is that the transfer must have been made in the period that is relevant. For present purposes, that period is a period beginning six months before the presentation of the petition and ending immediately before the day of bankruptcy of the debtor. As noted, the petition was presented on 28 November 1996 and the sequestration order was made on 25 November 1997. It follows that the transfer in question was made in the relevant period. 22 However, subs (2) of s 122 provides that nothing in the section effects: "(a) the rights of a purchaser, payee or encumbrancer in the ordinary course of business who acted in good faith and who gave consideration at least as valuable as the market value of the property; or (b) the rights of a person who is making title through or under a creditor of the debtor in good faith and who gave consideration at least as valuable as the market value of the property; or (c) …" 23 Section 122(3) provides: "The burden of proving the matters referred to in subsection (2) lies upon the person claiming to have the benefit of that subsection." 24 In my view, the respondent has failed to discharge the burden of showing that she acted in good faith and gave consideration at least as valuable as the market value of the property, having particular regard to the provisions of s 122(4)(c). Section 122(4)(c) provides that for the purposes of s 122: " (c) a creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the transfer of property was made under such circumstances as to lead to the inference that the creditor knew, or had reason to suspect: (i) that the debtor was unable to pay his or her debts as they became due from his or her own money; and (ii) that the effect of the transfer would be to give him or her a preference, priority or advantage over other creditors." 25 In my opinion, taking the facts as I have described them into account, it may properly be said that the transfer took place under such circumstances as to lead to the inference that the creditor had reason to suspect that Mr Shears and Ms Gidley was each unable to pay his or her debts, as they became due from his or her own money; and that the effect of the payment of the sum of $10,000 on each occasion would be to give the respondent a preference priority of advantage over other creditors. 26 On the respondent's own evidence the transaction proceeded on an extraordinary footing, as is recounted in annexure "G" to Mr Thomas' affidavit dated 3 March 1996 which is set out above (the document). The transaction proceeded on the footing that an investment of $10,000 would be repaid with interest of a further $10,000 in approximately one month. The terms of such a dealing must have led to the inference that the borrower of such funds could only proceed by offering terms that were beyond those experienced in the ordinary course of business. This was an indication to the respondent of the desperate state of finances of the debtors at that time. 27 More particularly, the respondent, by the subsequent course of events up to December 1996, was put upon further notice of the difficulties being experienced by the debtors. The amount of the loan had not been repaid, although it was then many months overdue. Moreover, when the respondent was informed by Ms Gidley that the cheques could only be met if they were presented at different times, the only reasonable inference available is that the bank would not meet the cheques, if presented at the same time in the ordinary course. Any suspicions that the respondent should then reasonably have held could only have been reinforced when the first cheque was, in fact, dishonoured. In all those circumstances I am of the view that the respondent has not discharged the burden of proof mentioned in subs (2) of s 122. 28 I therefore conclude that the Trustee has made out his claim based upon s 122. 29 I order that there be judgment for the applicant in the sum of $20,000. 30 I order also that there be judgment for the applicant for pre-judgment interest at New South Wales Supreme Court prescribed rates from 10 August 1999 until this day. 31 I order that the respondent pay the applicant's costs of the proceedings. 32 (As I have mentioned earlier in the hearing, the question of enforcement and the time at which it takes place will no doubt be a matter to which the trustee will have regard.) I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beaumont. Associate: Dated: May 2000 Counsel for the Applicant: J T Johnson Solicitor for the Applicant: Colin Biggers & Paisley Counsel for the Respondent: G J Kennedy Date of Hearing: 17 April 2000 Date of Judgment: 17 April 2000