Burgess v John Connell-Mott, Hay and Anderson Pty Ltd

[1979] FCA 12

Re: ALEX NEVILLE BIRD (AS TRUSTEE OF THE ESTATE OF YIANGOS ARCADIOU, A
BANKRUPT)
Ex parte: SALVATORE POZZUTO, GIOVANNI NIGRO, PASQUALE NIGRO and ANGELO
POZZUTO
No. 68 of 1977
Bankruptcy Act 1966, s.122

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
Sweeney J.

CATCHWORDS

Bankruptcy Act 1966, s.122 - payees having failed to negative the inferences set out in sub-sec.(4)(c) held not payees in good faith; held, payment void as against the trustee of the estate of the bankrupt.

HEARING

MELBOURNE

#DATE 19:12:1979

ORDER

The payment of $10,000.00 made by the bankrupt to the respondents on 29 September 1976 is void as against the applicant as trustee of the property of the bankrupt and orders that the respondents pay to the applicant the sum of $10,000.00 together with his taxed costs of and incidental to the application, including reserved costs, such costs to be taxed, if not agreed. Liberty to apply is reserved to either party.

JUDGE1

In this application, as amended by leave, the applicant seeks the following declarations and orders:

"(a) That payment made by the bankrupt to the Respondent on the 29th September, 1976 for $10,000.00 is void as against the applicant as Trustee of the property of the bankrupt as being payment having the effect of giving the respondent a preference priority or advantage over creditors of the bankrupt or alternatively by virtue of the Bankruptcy of the Bankrupt having been deemed to have relation back to date the 20th day of September, 1976 on which date the bankrupt gave notice to some of his creditors namely Gubbatta Nominees Pty. Ltd. trading as Highett Timber Co. Tasmanian Board Mills Ltd., Beneficial Finance Corporation Ltd. and Alliance Acceptance Corporation Limited, that he has suspended or is about to suspend payment of his debts.

(b) An order that the respondent pay to the applicant the sum of $10,000.00."

In their notice of intention to oppose the application, as amended by leave, the respondents relied upon the following grounds:

"1. THAT the Respondents and all of them were payees in good faith and for valuable consideration and in the ordinary course of business, within the meaning of S.122(2)(a) of the Bankruptcy Act 1966.

2. THAT the payment was not made under such circumstances as to lead to the inference that the Respondents or any of them knew, or had reason to suspect -

(a) that YIANGOS ARCADIOU 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 the Respondents or any of them a preference, priority or advantage over other creditors -

so that the Respondents and all of them retain the rights of payees in good faith, and are not excluded from that status by the operation of S.122(4)(c) of the Bankruptcy Act 1966.

3. THAT the payment so made is not invalidated in that -

(a) the transaction took place before the date on which YIANGOS ARCADIOU became a bankrupt;

(b) the Respondents and any of them had no notice, at the time of the transaction of the presentation of a petition against YIANGOS ARCADIOU : and

(c) the transaction was in good faith and in the ordinary course of business -

so that the Respondents are entitled to rely on the validity of the transaction, which was a payment to any or all of them as creditors because of the provisions contained in S.123(1) of the Bankruptcy Act 1966."

Mr J.S. Stevenson, counsel for the respondents, said that their sole answer to the case based upon s.122 of the Bankruptcy Act 1966 was that, within the meaning of that section they were payees in good faith and for valuable consideration and in the ordinary course of business. Mr Irlicht, who appeared for the applicant, conceded that they were payees for valuable consideration.

The sole answer made by the respondents to the case based upon s.123 of the Act was that:

1. the transaction took place on or before the date on which the debtor became a bankrupt;

2. 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

3. the transaction was in good faith and in the ordinary course of business.

Mr Irlicht conceded the first two propositions but not the third.

Under s.122(3) the burden of proving that they were payees in good faith and in the ordinary course of business lies upon the respondents. Section 122(4)(c) provides that for the purposes of s.122:

"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 creditor 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."

Under s.123(2) the burden of proving that the transaction was in good faith and in the ordinary course of business lies upon the respondents.

Section 123(3) provides:

"For the purposes of sub-section (1) of this section, 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."

It was common ground that none of the respondents had notice of the commission of an act of bankruptcy by the bankrupt.

Mr Stevenson conceded that the bankrupt had on 20 September 1976 committed the act of bankruptcy alleged in the application and that, pursuant to the provisions of s.115, the bankruptcy of the bankrupt shall be deemed to have relation back to, and to have commenced at that time, so that, pursuant to the provisions of s.116, the sum of $10,000.00 paid on 29 September 1976 was property divisible among his creditors, unless his clients succeeded in relation to the grounds of opposition set out in their notice.

The evidence showed that from September 1973 the respondents, as concreters, carried out contracts for the bankrupt throughout the balance of 1973 and 1974 with increasing frequency, until they were devoting about 40% of their working time to his jobs. Until the end of 1974 the bankrupt was described as prompt in making payments.

Salvatore Pozzuto's narrative of the respondent's dealings with the bankrupt then continued as follows:

"8. THAT during the year 1975 I presented invoices to the said YIANGOS ARCADIOU for payment when I saw him on work sites, rather more frequently than before, because of his increasing slowness in payment. On some occasions the said YIANGOS ARCADIOU stated that he could not pay the full amount immediately, and on other occasions the said YIANGOS ARCADIOU stated that he could not pay at all for a few days, because of delays in settling sales of his properties. It was apparent to me, however, that the said YIANGOS ARCADIOU had a great deal of valuable real estate which was selling well.

9. THAT as 1975 drew to a close, these excuses of the said YIANGOS ARCADIOU for non-payment became more frequent. On some occasions, I would go to his home at 4 Glengala Road, Sunshine to present invoices for payment. Occasionally, there were other people who worked for him there, also requesting payment. Sometimes, he would tell us about slow settlement of sales of his properties, and that we would have to be satisfied by partial payment for a few days, or until the next week. On occasions when he didn't pay, he always reassured me, and others who might be with me, that his business was sound. Indeed, it was obvious to me, and I presume to anybody who might be present, that his residence was of a superior nature, and that it was full of all kinds of valuable goods. New building supplies were stored on the premises, in profusion. The said YIANGOS ARCADIOU also had a new car, I believe that it was a Ford "Fairlane".

10. THAT the said YIANGOS ARCADIOU had, since the beginning of 1975, stored building materials in a part of the "Collie Paving Company's" business premises which we were not using. This apparent ability to purchase building materials he was not going to use immediately reinforced my opinion that the said YIANGOS ARCADIOU was a wealthy man, who was well able to pay all his debts when he wanted to.

11. THAT toward the end of 1975, I was told by the said YIANGOS ARCADIOU that he had bought a large tract of land in Werribee for $500,000.00. This reinforced my own opinion that the said YIANGOS ARCADIOU's failure to make prompt payment to me and other creditors was due to wilful behaviour on his part, rather than any inability to pay. At the end of November and the beginning of December 1975, I, together with the other Respondents herein, worked on some of the said YIANGOS ARCADIOU's Werribee construction sites, and many other persons were working there; nobody was complaining about not being paid.

12. THAT in December of 1975 I met the said YIANGOS ARCADIOU and told him that I wanted the "Collie Paving Company's" invoices to be paid before Christmas, and the said YIANGOS ARCADIOU stated to me that there would be no trouble about that. However, no money was received. In spite of this, I and the other Respondents herein attended a Christmas party given by the said YIANGOS ARCADIOU for the people who worked for him at the Sunshine Heights Hotel, Sunshine. Many people were present at this lavish function, and nobody except the other Respondents herein and myself, appeared to me to be unhappy about the non-payment of accounts owing to them, or anything else.

13. THAT during the holidays that I and the other Respondents took immediately after Christmas 1975, we decided not to work for the said YIANGOS ARCADIOU in the future, until he paid us all the money that he owed us. I proposed this action because I thought it would put an end to what I considered to be some financial tricks I did not understand.

14. THAT in February of 1976 the said YIANGOS ARCADIOU telephoned me and told me that if the said "Collie Paving Company" would do a small job on a property at Craigieburn, he would pay off a large part of the amount owing to the said "Collie Paving Company". We did that job at a fair and reasonable price of $147.00, and the said YIANGOS ARCADIOU sent us a cheque in the amount of $5,000.00 almost immediately.

15. THAT in March of 1976 I went to see the said YIANGOS ARCADIOU and told him that we needed money to pay our taxes. The said YIANGOS ARCADIOU said that I should not worry, that he could easily pay the amount due to us on the settlement of the sale of a property due on 9th April, 1976, and that he would pay any interest charge incurred. I told the said COLIN ROBB BROWN of this conversation, and on 31st March 1976 he wrote a letter to the said YIANGOS ARCADIOU which I signed and posted."

That letter read as follows:

"We refer to the balance outstanding in your account with us, amounting to $17686.85 at the time of writing.

We acknowledge your latest promise of a remittance on or before 9th April, but, as we have had to raise finance to cover pressing commitments we now formally advise you that we must now impose an interest charge at the rate of 10% p.a. on the amount outstanding on 9th. April next, until finally liquidated.

This interest will be calculated on a daily basis, and on the present balance outstanding would amount to approximately $7. per day."

"16. THAT shortly after I sent the said letter dated 31st March 1976, I met the said YIANGOS ARCADIOU and he confirmed that he would pay the interest. After that I did not approach the said YIANGOS ARCADIOU so frequently for payment, because I considered that we had an interest-bearing investment. However, I and the other Respondents were still determined not to work for the said YIANGOS ARCADIOU again, until we had received payment in full of the amount owing to us.

17. THAT towards the end of April 1976 we did work at a property in Werribee at the request of the said YIANGOS ARCADIOU on the promise that a large payment of past due accounts would be forthcoming if we did so; but no payment was received.

18. THAT during the Winter of 1976 I had occasion to pass the said YIANGOS ARCADIOU's properties in Werribee frequently, while on other business. I then observed that there were many people working there, including some who were doing concreting work. The development of those properties appeared to me to be proceeding normally.

19. THAT on a day late in September 1976 the said YIANGOS ARCADIOU telephoned me and asked if the "Collie Paving Company" was prepared to do some work for him. I replied that we were unwilling to work for him unless we were paid the full amount of money owing to us; to this he answered that if I went to the Real Estate firm of Tribe and Associates in Sunshine the next night, he would see to it that we were paid.

20. THAT I proceeded to the premises of the firm of Tribe and Associates as instructed by the said YIANGOS ARCADIOU and there I met the said Yiangos Arcadiou's son PHILIP ARCADIOU. The said PHILIP ARCADIOU then gave me a cheque in the amount of $10,000.00 which had been written out by him, but signed by the said YIANGOS ARCADIOU; it was quite usual that the cheques I received from the said YIANGOS ARCADIOU were prepared for his signature by the said PHILIP ARCADIOU. I asked the said PHILIP ARCADIOU where the balance of the money owing to us was, and he replied that we would get it the next week. I then said that we would not start work until all the money due to "Collie Paving Company" had been paid, and the said PHILIP ARCADIOU replied that there was plenty of money, and that everybody was being paid.

21. THAT the balance due to "Collie Paving Company" was never paid, and the "Collie Paving Company" never did work for the said YIANGOS ARCADIOU again.

22. THAT I continued to telephone the said YIANGOS ARCADIOU from time to time, accusing him of unfairness in that he had not paid the said "Collie Paving Company" in full when he had paid off his other creditors. The said YIANGOS ARCADIOU continued to give various excuses for non-payment. Nevertheless, I was astonished when a "Notice of Meeting" of the creditors of the said YIANGOS ARCADIOU was sent to the "Collie Paving Company" late in February 1977, just one week after the said YIANGOS ARCADIOU removed property which he had stored free of charge at our business premises. The removal of that property is certainly an action I would not have permitted, if I had known that the said YIANGOS ARCADIOU was in such grave financial difficulties."

Under cross-examination on his affidavit Salvatore Pozzuto conceded that he must have known of the bankrupt's failure to make prompt payment ot other creditors when he referred in paragraph 11 to his "failure to make prompt payment to me and other creditors". Occasionally when he called at the bankrupt's home to present invoices for payment there were other people who worked for him also requesting payment. The bankrupt made frequent promises to pay him but broke his promises. He had never requested any other debtor to pay interest on unpaid accounts and the respondents had never had another debtor whose account was overdue for anthing like the time the bankrupt owed them money.

Mr Colin Brown made an affidavid in which he set out the accountancy services which he rendered to the respondents. His affidavit continued as follows:

"7. THAT until the end of 1974 it appeared to me that the said YIANGOS ARCADIOU was paying invoices within a few days of the time when I prepared them.

8. THAT on 14th January 1975 the said SALVATORE POZZUTO gave me a cheque in the amount of $2,000.00 he had received from the said YIANGOS ARCADIOU, to process. This distributed me, because it upset the system whereby I could see what invoices had been paid. The said SALVATORE POZZUTO explained to me that the said YIANGOS ARCADIOU had told him that he had a temporary shortage of cash, due to a delay in settling a sale of real estate; during the next month, payment was made in an amount sufficient to bring the account back to its usual current status.

9. THAT early in 1975 I visited the business premises of the "Collie Paving Company" and observed that there were several thousand feet of architraves stored there. On enquiry, I was informed that they belonged to the said YIANGOS ARCADIOU. Over the next few months, this accumlation of architraves built up to about 100,000 feet. I knew from my experience in and exposure to the building trade at that time that such architraves were worth about .18c per foot, so that 100,000 feet would be worth about $18,000.00, and readily saleable.

At about the end of 1976 or the beginning of 1977 I further observed that about 10 new washing machines had been stored on the business premises of the "Collie Paving Company", and again I was informed that they belonged to the said YIANGOS ARCADIOU. This storing of valuable goods on the premises of the "Collie Paving Company" was a factor which helped to confirm my belief that the said YIANGOS ARCADIOU was solvent at all times.

10. THAT until August of 1975 payment from the said YIANGOS ARCADIOU was slower than it had been in 1974, but the maximum delay in payment was well under 60 days purchase of the average of business being done, and in view of the size of the account and the time it had been running, and my high opinion of the worth of the said YIANGOS ARCADIOU, I was not at all concerned that the said YIANGOS ARCADIOU might not be able to pay his debts.

11. THAT in August of 1975 the payment of "round figure" amounts rather than exact invoice amounts resumed, but the said SALVATORE POZZUTO explained to me that the said YIANGOS ARCADIOU had told him of slight liquidity problems due to delays in settling sales of properties, and I was satisfied with that explanation.

12. THAT on several occasions during 1974 and 1975 I went to construction sites to see the said SALVATORE POZZUTO when some matter had arisen which I wished to discuss with him. On some of those occasions I saw the said YIANGOS ARCADIOU. Though I never exchanged more than formal greetings with the said YIANGOS ARCADIOU I was much impressed by his obvious energy and drive, and this added to my confidence in him which lasted into 1977.

13. THAT I thought it appropriate to confirm the favourable impression I had formed of such a large customer of "Collie Paving Company" as the said YIANGOS ARCADIOU, and asked acquaintances of mine who are prominent in the building trade, and who I consider to be most reputable, what was their opinion of the said YIANGOS ARCADIOU. On the occasions when I made such enquiries in 1975 and 1976, I was reassured by the replies I received.

14. THAT no delinquency in payment which I considered serious occurred until the end of 1975, when the said YIANGOS ARCADIOU's failure to make as substantial a payment as had been promised in December caused me some alarm. However, I was once again reassured not only by my own enquiries, but also by the Respondents herein, who appeared to be convinced that the said YIANGOS ARCADIOU was not in serious financial difficulties.

15. THAT early in 1976 the Respondents herein told me of their determination not to work for the said YIANGOS ARCADIOU until he had paid off the amount due to them; it was thought by me that the payment he could well afford could be forced out of him in this way.

16. THAT in March of 1976 it became apparent that the Respondents herein would be unable to pay all of their provisional income tax due on 31st March 1976 unless the said YIANGOS ARCADIOU paid off the amount that he owed to the "Collie Paving Company". After the said SALVATORE POZZUTO had had a meeting with the said YIANGOS ARCADIOU I composed and typed a letter to the said YIANGOS ARCADIOU inposing an interest charge on the amount outstanding if he did not pay as he had promised."

This was the letter earlier set out.

"It was my idea that the interest charged would offset the interest that the Respondents herein would have to pay on overdue taxes and finance charges; because of all I had seen on construction sites, and been told by various persons, I still held the opinion that the said YIANGOS ARCADIOU was a wealthy man who was seeking to augment his working capital by delaying payment to the "Collie Paving Company", though he was well able to pay promptly had he wished to do so.

17. THAT once the interest charge was imposed, I felt happier about the situation, in that I felt I had ensured that the "Collie Paving Company" and the Respondents herein would not lose money through the said "YIANGOS ARCADIOU's capricious failure to pay.

18. THAT it appeared to me that, in general, the years 1975 and 1976 were profitable and buoyant for the building trade in the Western suburbs of Melbourne, and I knew of no reason why the building operations of the said YIANGOS ARCADIOU should prove to be any exception to the rule.

19. THAT my confidence was reinforced when payment of $10,000.00 was received from the said YIANGOS ARCADIOU on 29th September 1976. I certainly knew of no meetings which the said YIANGOS ARCADIOU may have attended at about that time.

20. THAT on several occasions, both before and after September 1976, I have participated in meetings with the Respondents herein, when it was decided to write off bad debts. There was never any discussion about writing off any amounts owed by the said YIANGOS ARCADIOU prior to 1977, because they were always considered to be good.

22. THAT on one or two occasions the "Collie Paving Company" has obtained judgements against debtors who had failed to pay. Legal action was taken on my advice on those occasions; but I never advised legal action against the said YIANGOS ARCADIOU, nor was any ever taken, because it seemed to me that the best and least expensive course to adopt with a slow payer who was financially sound was to inpose an interest charge, and wait until he paid.

23. THAT because I never had any suspicion that the said YIANGOS ARCADIOU was anything more than a slow payer with occasional liquidity problems, I never warned any of the Respondents herein that the said Yiangos Arcadiou might have a fundamental financial problem which would prevent him from paying all his debts without any great delay; and I knew of no person to whom the said YIANGOS ARCADIOU owed money to the extent that such person would, in my opinion, have been well advised to contemplate taking legal action against him."

For the purposes of the hearing, a schedule was produced, which Mr Brown verified, in the following form:

"SCHEDULE OF AGE OF BALANCES OWING BY YIANGOS ARCADIOU TO COLLIE PAVING COMPANY AT END OF QUARTER, 31.12.73 TO 31.12.75

Less than

Date Balance 30 days 30-60 days 60-90 days 90-120 days

31.12.73 $239.00 $239.00

31.3.74 842.00 842.00

30.6.74 3174.10 3174.10

30.9.74 4246.20 4246.20

31.12.74 8805.50 8805.50

31.3.75 7423.80 6595.80 828.00

30.6.75 13194.36 6609.31 6585.05

30.9.75 15164.00 10338.70 4825.30

31.12.75 22539.85 10343.20 4235.30 4797.35 3164.00"

As will be seen from the reasons delivered in the case brought by the trustee of this estate against Casabene and others, which have also been published today, I am of opinion that it is for the respondents to prove that they were payees in good faith within the meaning of s.122 and to negative the inferences set out in sub-sec.(4) (c). In my opinion, the respondents have failed to do so.

As at 31 December 1975 the respondents were owed $22,539.85 by the bankrupt, including the amounts set out in the schedule above which ranged from the ages of less than 30 days to 90-120 days. Repeated pleas for payment in 1975 had been met with promises which had been broken. During the Christmas holidays, the respondents decided not to work for the bankrupt in future, until he paid the whole of his account. In February 1976 the bankrupt promised that if the respondents did a small job for him he would pay off a large part of the amount due. They agreed to do so and received a payment of a mere $5,000.00. In March 1976 they told him of their need for money to pay their taxes and received what was described as his "latest promise of a remittance before 9 April", which was not honoured. They imposed an interest charge which he agreed to pay but did not.

In April 1976 they again agreed to do some work for the bankrupt on the promise that "a large payment of past due accounts would be forthcoming". It is interesting to note that the bankrupt did not offer a promise to pay the whole of the amount outstanding, and in the event he made no payment.

In September 1976 the bankrupt asked the respondents to work for him and the reply was given that they were unwilling to do so unless they were paid the full amount of the money owing to them. He promised to do so but they received only $10,000.00 and said that they would not work until they were paid in full.

The payment of $10,000.00 was made under such circumstances as to lead to the inference that any reasonable business man in the position of the respondents must, at the least, have had reason to suspect the two matters specified in s.122(4)(c)(i) and (ii). In my opinion, the evidence establishes that the respondents in fact had reason so to suspect. They hoped that by promising to do more work for the bankrupt that they would receive payment for their past work, in preference to other creditors.

A man who was able to pay his debts as they became due from his own money would hardly have needed to plead with the respondents to work for him in return for a promise to pay accounts which were long overdue and had been the subject of earlier broken promises. The September promise to pay in full was itself broken. The fact that the bankrupt chose to store building supplies free of charge on the premises of the respondents does not disturb the conclusions to which the history of their dealings with the bankrupt so strongly points.

It is unnecessary to consider the applicant's claim based upon s.123.

The Court declares that the payment of $10,000.00 made by the bankrupt to the respondents on 29 September 1976 is void as against the applicant as trustee of the property of the bankrupt and orders that the respondents pay to the applicant the sum of $10,000.00 together with his taxed costs of and incidental to the application, including reserved costs, such costs to be taxed, if not agreed. Liberty to apply is reserved to either party.