El-Saedy, Hamdy Hussein v Dixon, Thomas William Frederick

[1998] FCA 826

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 8401 of 1997

In the matter of Magdy Mohamed Hussein and
   Sabria Hussein

BETWEEN:	HAMDY HUSSEIN EL-SAEDY APPLICANT
AND:	THOMAS WILLIAM FREDERICK DIXON RESPONDENT
JUDGE:		WHITLAM J
DATE OF ORDER:		17 JULY 1998
WHERE MADE:		SYDNEY

THE COURT ORDERS THAT:

1. The notice under s 139ZQ of the Bankruptcy Act 1966 dated 27 October 1997 is set aside.

DECLARES THAT:

1. The transaction pursuant to which a debt of $30,000 due by the bankrupt Magdy Mohamed Hussein and Sabria Hussein to the cross-respondent was forgiven is void against the cross-claimant.

AND ORDERS THAT:

1. The cross-claimant recover judgment against the cross-respondent for $45,000 on the cross-claim.

1. The cross-respondent pay the cross-claimant’s costs of the cross-claim.

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	NG 8401 of 1997

In the matter of Magdy Mohamed Hussein and
   Sabria Hussein

BETWEEN:	HAMDY HUSSEIN EL-SAEDY APPLICANT
AND:	THOMAS WILLIAM FREDERICK DIXON RESPONDENT

JUDGE:	WHITLAM J
DATE:	17 JULY 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

This is an application under s 139ZS of the Bankruptcy Act 1966 (“the Act”). The respondent is the trustee of the estate of Magdy Mohamed Hussein and his wife Sabria Hussein (“the bankrupts”) pursuant to a sequestration order made on 14 October 1992.

The s 139ZQ notice required the applicant to pay to the respondent an amount of $30,000. It impugned the transfer by the bankrupts of land at Toongabbie to the applicant on 19 August 1992. The notice alleged, in effect, that the applicant had paid only $100,000 of the consideration of $130,000 stated in the relevant instrument of transfer.

In the affidavit accompanying his application, the applicant said that the sum of $30,000 in question had been satisfied by his treating as repaid an equivalent sum previously lent by him to the bankrupts.  The respondent has cross-claimed for (1) a declaration that the transaction pursuant to which such a debt was forgiven is void against him, and (2) an order that the applicant pay him the sum of $30,000 plus interest.

The male bankrupt is the older brother of the applicant.  The chronology of relevant events is straightforward.

The bankrupts operated a petrol station and food store at Randwick.  They “walked out” of this business on 6 June 1988, which, according to their respective statements of affairs, is the date they were last able to pay their debts as they became due.

Beginning in 1988, the applicant lent the bankrupts various sums of money.  By the end of September 1990 the bankrupts owed the applicant in total an amount of $30,000.  A solicitor, Nick Milios, prepared a “loan agreement”, which the applicant and the bankrupts signed on 27 October 1990.  Mr Milios appears to have witnessed the parties’ signatures.  This is a confusing document.  It records the agreement of the applicant to lend the bankrupts the sum of $30,000 and the agreement of the borrowers “to pay the said sum after the expiration of three years from the date of this agreement”.  Yet the attached particulars refer to a term of five years.  In cross-examination, the applicant confirmed that the loan was for a period of five years.

In February 1992 the applicant and the male bankrupt attended a “family meeting”.  At this meeting the applicant was informed that the bank holding a mortgage over land at Toongabbie owned by the bankrupts was proposing to exercise its power of sale in respect of the land because the bankrupts were unable to pay the amounts due under the mortgage.

On 22 May 1992 the creditor’s petition was presented against the debtors.  According to the sequestration order made on that petition, their respective acts of bankruptcy were committed by the applicant’s brother on 21 February 1992 and by his wife on 13 March 1992.

A contract for sale of the Toongabbie land was exchanged on 5 June 1992 between the bankrupts as vendors and the applicant as purchaser.  Mr Milios’s firm acted for both sides in this transaction.  The particulars in the contract show a price of $130,000 comprising a deposit of $30,000 and a balance of $100,000.  The applicant gave evidence about how the price was struck.  In chief, he said that he applied for a loan and that “the amount [my brother] took from me will be the deposit or will be the balance of the value of the house”.  In cross-examination, he said that the price was “left to the solicitor” and that he did not discuss the price with his brother.

On 19 June 1992 the National Australia Bank wrote to Mr Milios informing him that finance totalling $100,000 had been approved to assist the applicant to purchase the Toongabbie land.  On 13 July 1992 a valuer inspected the land and valued it for stamp duty purposes at $130,000.  The valuer noted that the buildings on the land consisted of a residential dwelling and a garage, that it was surrounded by similar residences, and that the land was zoned for residential purposes. 

The sale of the land was completed on 19 August 1992.  The applicant was at the time a dentist in Orange.  He said, in his evidence in chief, that he purchased the land with a view to its possible use by him as a surgery if he relocated to Sydney.  He later said, in cross-examination, that he also had in mind its possible use as a matrimonial home, should he get married.  The applicant is now a dentist in Bathurst and has recently married.  His sister-in-law, the female bankrupt, who lived in the house on the land when the applicant purchased it, has continued in occupation up to the present time.  The applicant says that she pays him rent.  However, I do not believe the applicant’s claim that he purchased the land as a “business asset” so as to have a surgery “in the future”.  Its zoning and surrounds are obviously incompatible with such a use.

The applicant did not have a perfect command of English, which is quite obviously not his native language.  He said in his affidavit that the “balance of $30,000 . . . was withheld by me as repayment of the sum of $30,000 previously lent by me to [the bankrupt].”  In cross-examination, he agreed that he did not pay any money by way of deposit.  There is no document in evidence purporting to release the pre-existing debt.  The sum of $30,000 must be regarded as having been forgiven at settlement.

On 16 June 1993 the respondent’s solicitors wrote to the applicant, claiming that the application of the prior debt in payment of the deposit constituted a preference under s 122 of the Act and threatening recovery action if the sum of $30,000 was not received within fourteen days. On 11 November 1997 the notice under s 139ZQ of the Act that is now under challenge was served on the applicant.

Counsel for the respondent submits that, having regard to the dates of commission of the acts of bankruptcy, the land at Toongabbie was vested in the trustee under the doctrine of relation-back, and further that the forgiveness of the debt was a preference under s 122(1) of the Act. Counsel for the applicant does not gainsay the first of those submissions but relies on s 123 of the Act. So far as the second submission on behalf of the respondent is concerned, I do not understand counsel for the respondent to concede that s 122(1) applies, but in his outline of argument he also relies on s 122(2)(a).

In my view, the transfer of the Toongabbie land to the applicant did have the effect of giving him a “preference, priority or advantage” over the bankrupt’s other creditors within the meaning of s 122(1) of the Act. By that transfer the debt of $30,000 was discharged well before it was due, and the applicant did not have to prove it in the bankruptcy. It follows that in the present case, by virtue of s 122(3), the applicant is obliged to prove the matters referred to in s 122(2)(a).

The concepts of “good faith” and “the ordinary course of business” were explained by
Clarke JA in Harkness v Partnership Pacific Ltd (1997) 41 NSWLR 204. In the present case the applicant has frankly admitted that his brother told him that the bankrupts were unable to meet their mortgage commitments. I am quite satisfied that the applicant believed that the bankrupts were insolvent. I do not accept his claim that he did not know that the bankrupts had other creditors. The applicant knew that his brother had not worked since “walking out” of the bankrupts’ business in mid-1988. His boast in the witness box to counsel for the respondent, that “you have to prove it”, shows that he gravely misunderstood the onus upon him under s 122(3) of the Act. The bankrupts’ statements of affairs reveal that there were plenty of other creditors, and the inference may be comfortably drawn that the applicant knew of this fact. With the bankrupts facing a mortgagee’s sale of the Toongabbie land, the applicant must have known that the discharge of the debt gave him a preference over the bankrupts’ other creditors. I find that the applicant was not a purchaser in good faith. In saying that, I am referring to the applicant’s actual state of mind. It is thus not necessary to consider his position objectively under s 122(4)(c) of the Act.

Counsel made conflicting submissions on the meaning of the phrase “ordinary course of business” in s 122(2)(a). Strictly speaking, in the light of my finding on the issue of good faith, it is unnecessary to deal with this question. However, I should comment briefly on the holding in Re Sabri; Ex p. Brien v Australia & New Zealand Banking Group Ltd (1996) 21 FamLR 213. In that case Chisolm J said (at 220) that that phrase, where used in s 123(1)(g) of the Act, must refer to “transactions linked to something that can be called a “business””. I am, with respect, unable to agree.

Section 122(2) and 123(1) must be available to assist or protect a private individual who treats with a debtor, where neither one of them is in business. I can think of no good reason why the Act should provide superior rights for a creditor who is in business or whose debtor is in business. If that is the case, it may be that the phrase has no work to do in some situations, or its true meaning may be that a person must establish what Clarke JA described (at 224) as the “ordinariness of the transaction”. I incline to the latter view. As Chisolm J pointed out (at 219), the authorities concern cases where the debtors had a business of some kind. Indeed, most of them involve companies in liquidation.

Clarke JA was not, of course, dealing with the same point as that which has been agitated before me.  However, what I regard as the requirements in the present case emerge clearly from the following passage in his judgment (at 217-218):

“Although the High Court has continually emphasised that
[s 122(2)(a)] is concerned with the ordinary course of business generally and not the ordinary course of the business of the parties, it does not mean that the normal procedures and practices of the parties’ businesses and the trade in which they operate, as well as the dealings between them, are irrelevant.  Evidence of such matters is necessary so that the court may consider the payment in question in its factual context.

However, it does mean that the particular procedures followed in the parties’ businesses will not determine whether what occurred was in the ordinary course of business.  That issue falls to be determined by whether or not the transaction by which the payment was effected arose out of a special or particular situation calling for remark or comment.  A payment will fit that description when, for example, the method and timing of the payment, or the motivations which prompted its being made, indicate that it did not take place as part of ordinary business dealings.

Where, for instance, the debtor makes the impugned payment because of its unsure financial position and in order to protect the creditor it is difficult to conceive of the payment as one made in the ordinary course of business.  Indeed, in my opinion, the statement by Gavan Duffy CJ and Starke J in Robertson [v Grigg (1932) 47 CLR 257 at 267], “what a man might do without having any bankruptcy in view” focuses attention on the debtor’s knowledge and motive in a way which indicates the complementary nature of the concepts of “good faith” and “in the ordinary course of business”.  In the context that the section is concerned with an insolvent person, it seems to me that both inquiries are essentially concerned with the

reasons which led the debtor to pay (was it in the ordinary course of business?) and the creditor to accept (was it in good faith?) the payment.”  (Emphasis supplied)

The discharge of the debt owing to the applicant cannot be said to be without unusual incident.  It was made against the background of the threatened mortgagee’s sale, repayment of the debt was not yet due, and repayment was made by way of satisfying part of a price, which had been artificially struck by the solicitor acting for both the debtors and the creditor on the purchase of the land and not by arms-length commercial bargaining.  In the factual context the transfer of the Toongabbie land and the discharge of the debt of $30,000 were plainly not made “in the ordinary course of business”. 

My findings on the issues of “good faith” and “in the ordinary course of business”, untrammelled as they are by considerations under ss 122(4)(c) and 123(3), mean that the applicant also cannot succeed under s 123(1)(g). It follows that the transfer of the Toongabbie land is void against the respondent.

The s 139ZQ notice does not require the applicant to pay an amount equal to the value of the Toongabbie land. It seeks, in effect, the value of the preference received by the applicant. There was, of course, no actual payment by the bankrupts to the applicant, not even a round robin of cheques. The s 139ZQ notice does, however, give notice that the land is charged with the liability to pay the amount of $30,000 as if the notice were given in respect of the land.

I shall make the orders sought in the cross-claim.  In Re Fiorino; Ex p. Fiorino v Woodgate (unreported, 14 April 1994), Gummow J pointed out (at p 22) how such a declaration has utility in the administration of the bankruptcy. The respondent is entitled to recover the sum of $30,000, for which the applicant may prove in the bankruptcy. The applicant must pay interest for the period of just over five years since 1 July 1993 when the respondent asked for the amount of $30,000 to be paid to him. I think that an interest rate of 10 per cent yearly is fair. There will be judgment for $45,000 on the cross-claim. The s 139ZQ should accordingly be set aside. It should not remain extant and, as Gummow J hints in Re Fiorino at 23-27, such a notice may not be apt to recover the net value of the benefits received by a creditor.  I will make no costs order in respect of the application.

I certify that the preceding six (6) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Whitlam

Associate:

Dated:             17 July 1998

Counsel for the applicant and cross-respondent:	R W Tregenza
Solicitors for the applicant and cross-respondent:	Graeme V Collins & Associates
Counsel for the respondent and cross-claimant:	J T Johnson
Solicitors for the respondent and cross-claimant:	Roxburgh & Co
Date of hearing:	29 May 1998
Date of judgment:	17 July 1998