FEDERAL COURT OF AUSTRALIA Thomas, in the matter of Gidley & Shears v Bode [2000] FCA 1907 BANKRUPTCY - application to set aside a transfer - whether a series of transfers by a bankrupt were void dispositions or voidable preferences – whether the transfers were made above market value - whether the transfers were made without consideration - whether the transfers were made in good faith in the ordinary course of business - where the transfers were repayments on a loan Bankruptcy Act 1966 ss 120, 122 & 123 Robertson v Grigg (1932) 47 CLR 257 applied Downs Distributing Co Pty Limited v Associated Blue Star Stores Pty Limited (In Liquidation) (1948) 76 CLR 463 applied Re Sabri; Ex parte Brien v Australia and New Zealand Banking Group Ltd (1996) 21 Fam LR 213 distinguished In The Matter of ALICE ISOBELLE GIDLEY & RICHARD JOHN SHEARS GAVIN FREDERICK CRICHTON THOMAS (AS OFFICIAL TRUSTEE OF THE BANKRUPT ESTATE OF ALICE ISOBELLE GIDLEY AND RICHARD JOHN SHEARS v EVA BODE AND ALICE ISOBELLE GIDLEY AND RICHARD JOHN SHEARS N 7931 of 1999 TAMBERLIN J SYDNEY 21 DECEMBER 2000 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 7931 OF 1999 In The Matter of ALICE ISOBELLE GIDLEY & 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: EVA BODE FIRST RESPONDENT ALICE ISOBELLE GIDLEY AND RICHARD JOHN SHEARS SECOND RESPONDENT JUDGE: TAMBERLIN J DATE OF ORDER: 21 DECEMBER 2000 WHERE MADE: SYDNEY THE COURT ORDERS THAT: The application is dismissed with costs. 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 7931 OF 1999 In The Matter of ALICE ISOBELLE GIDLEY & 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: EVA BODE FIRST RESPONDENT ALICE ISOBELLE GIDLEY AND RICHARD JOHN SHEARS SECOND RESPONDENT JUDGE: TAMBERLIN J DATE: 21 DECEMBER 2000 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The applicant ("the Trustee") seeks a declaration that a series of payments made to Eva Bode ("Bode") by the bankrupts Alice Gidley and Richard Shears ("Gidley and Shears") between April and October 1997 are void transfers under either ss 120 or 122 of the Bankruptcy Act 1966 ("the Act") and repayment of an amount of $60,700 being the total of those transfers. 2 Gidley and Shears were made bankrupt on 25 November 1997 pursuant to a petition presented to the Court on 28 November 1996 by the Commonwealth Bank of Australia. The act of bankruptcy was a failure to comply with a bankruptcy notice, based on a judgment against Gidley and Shears in the sum of $4,108,946.16 and entered on 15 August 1995. The date of the bankruptcy was 14 November 1996. 3 As at 7 December 2000 there were no known assets of any value to be realised except for some potential assets which were under investigation or were the subject of litigation. The funds received by the Trustee up to 7 December 2000 were not sufficient to meet the costs of administration and it is unlikely that there will be any distribution to creditors. Creditors claims have been admitted for a total amount well in excess of $3.7 million. 4 Eve Bode is the wife of Tibor Bode. It is apparent from the evidence that her understanding of English is extremely limited and that she left all relevant business dealings in this matter to her husband. She was in all respects content to let him handle these matters on her behalf. 5 For present purposes it is not in dispute that Gidley and Shears deceived the Bodes into making substantial investments in a copra exporting venture in Vanuatu. The investments were in the form of loans at very high interest rates and were made by way of cheques totalling $72,500 written in the period February to September 1997. A further investment of approximately $7,000 was made in May 1998. The major area of dispute is the circumstances surrounding the investment, particularly to whom the loans were made, and whether Gidley was a creditor of Bode. 6 Mr Tibor Bode first became aware of a corporation by the name of Carmille Pty Ltd ("Carmille") in December 1996 when he received a facsimile which relevantly reads: "Carmille Pty. Ltd. 3 Burrawong Ave Mosman, Sydney, N.S.W. Australia Phone : 61-2-9960-3095 Fax: 61-2-9960-3580 Carmille Pty. Ltd. is engaged in the export of copra from Vanuata. Because funds are currently tied up in stock for a December shipment, we are experiencing cash flow problems. We have four containers of Jute Bags sitting on the wharf in Port Vila. We urgently require these bags for our product but cannot collect them due to this cash shortage. The cost of these four containers of bags is USD $74,000.00 (Seventy Four Thousand United States Dollars). We are looking for USD $74,000.00 to pay out this account with Bag and Jute Company N.S.W. so that we can clear the containers from dockside. We are offering a 50% (Fifty Percent) return in the dollar for immediate assistance. The money will be repaid within four months. Please contact Isobelle Gidley or Cynthia Berkemeier if you are able to invest in this deal. Telephone : 61-2-9960-3095 61-2-9969-2786 Fax: 61-2-9960-3580" 7 The address and telephone number of 3 Barralong Avenue Mosman and 9960-3095 are those of Isabelle Gidley. 8 The investments were made in the name of Bode, for tax reasons, although the cheques were drawn on the funds she held jointly with her husband and were signed by him. All of the cheques bar one were made payable to Carmille. A single cheque, in the sum of $12,000 and dated 12 September 1997, was made payable to Gidley and Shears personally. One cheque, in the sum of $3,000 and dated 5 September 1997, was endorsed to Gidley and Shears. In fact Carmille had nothing to do with the venture or with Gidley and Shears. It was registered in Queensland. A company search indicates that it was incorporated in Queensland and had Queensland directors. There is no evidence or indication of any connection with Gidley and Shears. However, there is also in evidence a search of a company known as Carmille Trading Pty Limited ("Carmille Trading") which has Gidley as a director up to October 1997 and Shears as a director up to March 1997. A Mr Sumer appeared as one of the directors from March 1997 and the company secretary from October 1997. 9 The Trustee produced in evidence six written notices dated between 5 August and 6 September 1997 which contained acknowledgments that Carmille owed Eva Bode a total of $58,950, with repayments due on 1 December 1997. These were written on the letterhead of Carmille, although no ACN number was quoted. There was also evidence from the Trustee that on 2 July 1997 $20,000 from T & E Bode Nominees and on 30 July 1997 $10,000 from Tibor Bode were banked into a joint account of the two bankrupts held with the National Australia Bank. These transactions did not correspond to the amounts of the cheques written out to Carmille. Nor was there any evidence as to any other monies from Bode being banked into known accounts of Gidley or Shears. 10 In my view nothing turns on the difference between Carmille and Carmille Trading as the crucial issue in these proceedings is whether Gidley and Shears were creditors of Bode. 11 The transfers from Gidley to Bode that the Trustee seeks to avoid took place from 9 April 1997 to 20 October 1997. They totalled $60,700.00 and were drawn on a joint account of Gidley and Shears held with the National Australia Bank. They were signed by Gidley. In all cases except one the payee was Eva Bode and in one case the payee was E & T Bode. 12 In relation to the issue whether Gidley and Shears were creditors of Bode, the Trustee pointed to a number of documents submitted by the Bodes to the effect that they were not creditors of Gidley or Shears including two Proofs of Debt submitted in the bankruptcy of Gidley. One, submitted in the name of Bode, related to a debt of $57,450.00, said to be a loan to Carmille of $38,300 plus 50% interest due on 1 December 1997. This was rejected by the applicant on the ground that it disclosed the indebtedness of Carmille Trading, not Gidley. Another Proof of Debt was submitted by Bode Nominees Pty Ltd. It claimed the sum of $10,800.00 in relation to a loan to Carmille "with director's guarantee of repayment". The loan was said to be in the sum of $9000 plus 20% interest. 13 There was also evidence that on 21 May 1998 the Trustee wrote to Bode asking, inter alia, "Were you a creditor of the bankrupts at the time you received the [transfers in dispute]?" By letter dated 9 June 1998 the solicitors for Bode replied that she was not. This letter also stated that the Bodes lent monies to Carmille Trading. 14 The applicant was cross examined as to his investigation of the affairs of Gidley and Shears and those of Carmille and Carmille Trading. In relation to the payments made by the Bodes to Carmille the applicant was able to say that $30,000 had found its way into the personal account of Gidley and Shears in July 1997. 15 Gidley's Statement of Affairs submitted in her bankruptcy listed "Tibor Bode & Associates" as a secured creditor in the sum of $90,000, and an unsecured creditor in the sum of $68,250. Under cross examination the applicant stated that he had not asked Gidley to explain these entriesin any relevant respect. 16 Although Eva Bode gave evidence, she left all of the business dealings to her husband. Her evidence does not greatly add to his. 17 Relevantly, Tibor Bode's evidence was that at the time he handed over the first cheque, and frequently throughout the association with Gidley and Shears, Gidley told him that there was no need to worry about the money because she guaranteed repayment of it personally. Also at this first meeting Tibor Bode said that Gidley explained to him that she could purchase copra at $15 per tonne, and sell it at between $40 and $70 per tonne. She said that a market opportunity existed because the current purchase of copra had been underpaying the 'native' suppliers. The 'natives' would be happier to deal with Gidley, she said, because she would pay a fairer price and was a 'native' herself. After this meeting, Tibor Bode said he was comfortable making the investment. 18 Tibor Bode also said that when the time for the first repayment was due, he was informed by Gidley that funds from North American Indians had been delayed, and she had given him a choice of collecting his money or reinvesting. He decided to reinvest after having a meeting with Gidley and Mr Summer. Tibor Bode had further meetings with Gidley at which he received assurances that the money from the American Indians was on its way. At one meeting he was told of future plans to build a coconut oil processing plant in Vanuatu and was shown engineering plans, supposedly of the plant. 19 The evidence of Tibor Bode was that future repayments were "rolled over" into new investments in Camille. He said that he had no problems with repayments until about November 1997. Just prior to November 1997 he had consulted a solicitor in relation to a much larger investment, in the order of $30,000, in the copra venture. He was advised by the solicitor against making the investment because Gidley's property was charged to other creditors. In relation to this larger investment Tibor Bode accepted security offered by Gidley, a practice he had not undertaken in the past. His reason for doing so was said by him to be that this was a larger investment. 20 In early October 1997 Tibor Bode sought a special clearance from the Bank of two cheques he had received from Gidley. He said he had done this because he had to pay tradespeople and wanted to make sure that the money was in his account to pay them. 21 Under cross-examination Tibor Bode denied that the letter sent by his solicitors to the applicant was correct when it states his wife was not a creditor of Gidley and Shears. Mr Bode said that he did not challenge the rejection of the Proofs of Debt by the applicant as he had learned that there was no money in the estate of Gidley and Shears. 22 He says he understood the repayment to be from Carmille, and not repayments under a guarantee. 23 The evidence establishes that the Bodes were at all material times unaware of any judgment against Gidley and Shears for any amount, and certainly not a judgment for four million dollars. They were unaware of the bankruptcy notice, the petition and the sequestration order when the payments were received by Bode. Relevant Law 24 The main provisions which are relevant to this application are ss 120, 122 and 123 of the Act. 25 Section 120 provides: "(1) A transfer of property by a person who later becomes a bankrupt ('the transferor') to another person ('the transferee') is void against the trustee in the transferor's bankruptcy if: (a) the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and (b) the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property. … (7) For the purposes of this section: (a) 'transfer or property' includes a payment of money; and (b) a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person; and (c) the 'market value' of property transferred is its market value at the time of the transfer." 26 Section 122 of the Act provides: "(1) A transfer of property by a person who is insolvent (the 'debtor') in favour of a creditor is void against the trustee in the debtor's bankruptcy if the transfer: (a) had the effect of giving the creditor a preference, priority or advantage over other creditors; and … (2) Nothing in this section affects (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) a conveyance, transfer, charge, payment or obligation of the debtor executed, made or incurred under or in pursuance of a maintenance agreement or maintenance order; or (d) a transfer of property under a debt agreement. … (8) For the purposes of this section: (a) 'transfer of property' includes a payment of money; and … (c) the 'market value' of property transferred is its market value at the time of the transfer. 27 Section 123 relevantly provides: (1) Subject to sections 118 to 122 (inclusive), nothing in this Act invalidates, in any case where a debtor becomes a bankrupt: (a) a payment by the debtor to any of his or her creditors; (b) a conveyance, transfer or assignment by the debtor for market value; (c) a contract, dealing or other transaction by or with the debtor for market value; or (d) any transaction to the extent of a present advance made by an existing creditor; if: (e) the transaction took place before the day on which the debtor became a bankrupt; (f) the person, other than the debtor, with whom it took place, did not, at the time of the transaction, have notice of the presentation of a petition against the debtor; and (g) the transaction was in good faith and in the ordinary course of business. (2) The burden of proving the matters referred to in paragraphs (1)(e), (f) and (g) in relation to a transaction lies upon the person who relies on the validity of the transaction. (3) For the purposes of subsection (1), a transaction shall not be deemed not to have been in good faith and in the ordinary course of business by reason only that, at the time of the transaction, the person, other than the debtor, with whom it took place had notice of the commission of an act of bankruptcy by the debtor. … (7) In this section: 'payment' includes the drawing, making or indorsing of a bill of exchange, cheque or promissory note; 'transaction' includes payment, delivery, conveyance, transfer, assignment, contract or dealing." 28 The expression "the ordinary course of business" was considered by the High Court in Robertson v Grigg (1932) 47 CLR 257 at 267 where Gavan Duffy CJ and Starke J said: "Therefore, the test under sec. 95 of the ordinary course of business is not whether the Act is usual or common in the business of the debtor or of the creditor, but whether it is a 'fair transaction and what a man might do without having any bankruptcy in view.'" 29 In Downs Distributing Co Pty Limited v Associated Blue Star Stores Pty Limited (In Liquidation) (1948) 76 CLR 463 at 480 where Williams J said in relation to the expression: "It seems to me, therefore, that the expression refers to a transaction into which it would be usual for a creditor and debtor to enter as a matter of business in the circumstances of a particular case uninfluenced by any belief on the part of the creditor that the debtor might be insolvent." 30 Justice Rich said, in the same case, at 477: "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 transactions must fall into place as part of the undistinguished common flow of business done, that it 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." Submissions for Trustee 31 In written submissions, the Trustee submitted that Gidley had agreed to guarantee the repayment of the moneys paid to Carmille and so was a creditor, albeit contingent of Bode. There was no evidence of Eva Bode being a creditor of Shears. Before me however the Trustee submitted that there was no evidence that Gidley was a creditor of Bode at all, as all payments had been made to Carmille. There was a suggestion that the claimed guarantee was a recent invention. 32 Insofar as he relies on s 120 of the Act, the Trustee submits that Eva Bode gave no consideration for the repayment of the monies totalling $60,700, or gave consideration that was less than the market value. It is said that this flows from the fact that Bode never advanced money to Gidley and Shears, only to Carmille. 33 In relation to the s 122 claim by the Trustee it is said that if Bode was a creditor of Gidley and Shears she was paid by them in preference to other creditors. 34 The Trustee further submitted that the protective provisions of s 122(2) and s 123 did not apply because Eva Bode has not discharged the onus of proof imposed on her under those sections. The Trustee points to the non-payment of the investment and the repeated promises as to payment by Gidley and also on the fact that special clearances were sought by the Bodes in respect of two of the cheques in contention. These factors are said to support a conclusion that the Bodes should have entertained a reasonable anticipation that the bankrupts were unable to pay their debts, and as such the transfers were not in good faith. It is also said that the transfers are not in the ordinary course of business. Reasoning 35 It is clear from the evidence that the full facts surrounding the dealings between the bankrupts and the Bodes are not known. It is therefore necessary to make inferences where possible from the material before the Court as to what, on the balance of probabilities, occurred. 36 I am satisfied on the evidence that there was no connection between Carmille and either Gidley or Shears, and that the cheques made payable to that company were more likely than not appropriated by them for their own use. This is so whether the company ostensibly receiving the invested funds is regarded as Carmille or Carmille Trading. The Trustee was able to trace $30,000 to the joint personal account of the bankrupts. Although there is no direct evidence as to what happened to the balance it is consistent with the apparent appropriation of the amount of $30,000 that the balance was also appropriated by Gidley and Shears for their own use. As regards the Bodes, the scheme embarked on by the bankrupts has all the hallmarks of fraud. So much was conceded by the Trustee when it was said that they were "conned" into the transaction. Since the moneys more probably than not found their way into the possession and ownership of Gidley and Shears and were never paid into the entity known as Carmille or Carmille Trading, I find that the bankrupts were debtors of the Bodes and had a duty to repay the loans to Bode on the terms under which they were made independently of any guarantee that Gidley offered Tibor Bode. 37 Against this view the Trustee refers to: (i) the statements in the Proofs of Debt to the effect that funds were loaned to Carmille; and (ii) the negative answer contained in the letter dated 9 June 1999 from the solicitors for the Bodes to the Trustee. I do not consider that the statement by the solicitor in that letter accurately reflects the position. Moreover, I am satisfied that, despite the fact that they had retained a solicitor, the Bodes had an imperfect understanding of the assertions in that letter and those answers are not determinative. The letter of 9 June 1999 refers to moneys having been lent to Carmille Trading. Gidley and Shears had been directors of that company. 38 In my view neither this letter nor the Statements in the Proofs of Debt establish that the loan was made to Carmille Trading. The true position, in my view, was that the Bodes understood, as a result of the circular quoted above, that Carmille was a company associated with the bankrupts and that moneys were advanced to that entity, but that in fact these moneys were diverted to the personal account and use of Gidley and Shears. 39 Section 120 does not apply in this case because the transferee (Bode) gave consideration for the transfer namely; the making of the advance in the first instance on the basis that it would be repaid with interest. Tibor Bode's evidence was that throughout 1997, $72,500 was invested with Carmille, or paid to Gidley and Shears directly. There is evidence of a further $7000 investment in May 1998. The repayments total $60,700. There was therefore clearly consideration equal to or in excess of the market value of the amount advanced. 40 In relation to s 122(1) it is apparent on the facts as I have found them that there was a preference, priority or advantage given to Bode over other creditors. However, the evidence leads me to the conclusion that she was a payee in the ordinary course of business, within the meaning given by the cases cited earlier, and that she acted in good faith giving consideration at least as valuable as "the market value" of the repayment which in the case of cash is presumably at least the amount of cash advanced. In reaching my conclusion I appreciate that the burden of proof rests on the payee but I am satisfied that this burden has been discharged and that s 122(2) applies. I accept the Bodes as honest witnesses, whose evidence I accept, and who were, through imprudence, enticed into an extremely dubious and probably fraudulent investment scheme. 41 It was argued that the repayments were not made in the ordinary course of business. I do not accept this submission. The business was the lending of money and the repayment of that money with interest. The repayments were made in the ordinary course of this business to meet the obligations of Gidley and Shears under the loans. The case is distinguished from Re Sabri; Ex parte Brien v Australia and New Zealand Banking Group Ltd (1996) 21 Fam LR 213, a case cited by the Trustee because in that case the transfer between a husband and wife was a single transaction in an entirely domestic context, where it could not be said anybody was engaged in a business. 42 Although the interest rate was extraordinary when compared with prevailing commercial rates, the context in which the investment was entered into (including the statements set out in the initial facsimile sent to the Bodes in December 1996 and the oral explanation as to copra prices provided by Gidley) made it not unduly disproportionate to the likely profits which might be available to the bankrupts if their scheme was successful. Furthermore, the fact that the money was not repaid but was allowed to roll over on occasions was not sufficient to take the case outside the ordinary course of business. Tibor Bode gave a credible and uncontradicted account as to why the special clearances were obtained for some cheques received from the bankrupts: namely that there was a need to pay expenses on moving house and establishing a new residence. Nor are the facts sufficient to have led them reasonably to infer that the bankrupts were insolvent or that the repayments were made with bankruptcy in view. On their face the repayments were 'fair transactions". As earlier stated it is not suggested that they were aware of the relevant steps or circumstances leading to the bankruptcy. The issue of good faith focuses on the mind of the payee, in this case Bode: Re:Dalton (A Bankrupt); Ex parte Herrington & Carmichael (A Firm) v The Trustee [1963] 1 Ch 336 at 354. I am satisfied Bode acted in good faith. 43 The concept of "market value" in relation to a payment of money is somewhat artificial however, as noted earlier, the repayments were less than the amount advanced so this part of the defence is satisfied. 44 For the above reasons in my view, the transfers cannot be set aside under either s 120 or 122. I dismiss the application with costs. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin. Associate: Dated: 21 December 2000 Counsel for the Applicant: J Johnson Solicitor for the Applicant: Colin Biggers & Paisley Counsel for the Respondent: B Skinner Solicitor for the Respondent: KNPW Lawyers Date of Hearing: 11 & 12 December 2000 Date of Judgment: 21 December 2000