Hedditch, Noel Wynyard Ex Parte Dunn, Robert George

[1984] FCA 296

Re: NOEL WYNYARD HEDDITCH
Ex Parte: ROBERT GEORGE DUNN and HAZEL IRENE HEDDITCH
No. 208 of 1982/X
84 ATC 4683
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Fox J.

CATCHWORDS

Bankruptcy - Application by trustee to have payments from the debtor to his wife declared void - alleged preference - whether payments were made in good faith and in the ordinary course of business.

Bankruptcy Act 1966 - ss.120, 122.

HEARING

SYDNEY

#DATE 26:9:1984

ORDER

Noel Wynyard Hedditch paid -

(a) $77,734.68 to the respondent by cheque number 785757 dated 9 August 1982, drawn on the account of E.S. Hedditch with the Bank of New South Wales on or about 9 August 1982:

(b) $298171.03 to the respondent by cheque number 480819 dated 20 August 1982, drawn on the account of Denniston & Day with the Commonwealth Trading Bank of Australia on or about 20 August 1982;

(c) $12,488.48 to the respondent by cheque number 480800 dated 17 August 1982, drawn on the account of Denniston & Day with the Commonwealth Trading Bank of Australia on or about 20 August 1982.

Each of the payments referred to in Order 1. above are void as against the trustee, as being preferences.

THE COURT ORDERS THAT:

The respondent pay to the applicant the sum of $119,394.19 and interest thereon.

The respondent pay the applicant's costs of this application.

JUDGE1

This is an application by a trustee appointed under Part X of the Bankruptcy Act 1966 ("the Act") as trustee of a deed of assignment for declarations and orders respecting three payments made by the debtor to the respondent, his wife, prior to the execution of the deed, which occurred on 6 October 1982.

It is claimed that each payment was void as against the trustee as being a settlement under s.120 of the Act, or a preference under s.122. The payments in question are described in the application as follows:

"(a) $77,734.68 to the respondent by cheque number 785757 dated 9th August, 1982 drawn on the account of E.S. Hedditch with the Bank of New South Wales on or about 9th August, 1982.

(b) $29,171.03 to the respondent by cheque number 480819 dated 20th August, 1982 drawn on the account of Denniston & Day with the Commonwealth Trading Bank of Australia on or about 20th August 1982."

A claim is also made for a declaration that real estate, being the respondent's interest in the land comprised in Certificate of Title Volume 2884 folio 98, and known as 4 Beatty Street, Southport, Queensland is held in trust for the applicant, and an order is sought that the interest be transferred to the applicant.

The defences raised are those appearing in the language of the relevant sections, namely, as to s.120, that the money payments did not involve settlements of property, and in any event, that the settlements were made in good faith and for valuable consideration, and that, in relation to s.122, although the payments and transfer were admitted to have been preferences, the respondent was a purchaser or payee in good faith and for valuable consideration and in the ordinary course of business.

Examinations of the debtor and his wife under s.81 of the Act have taken place and part of the transcript was placed before me. Objection being taken to the admissibility of the transcript of the debtor's evidence, I disallowed it. There was affidavit evidence read before me, and some oral evidence, notably that of the respondent.

It is convenient to take first the case under s.122. The onus of establishing the defence under this section is, by the Act itself, imposed upon the respondent (s.122(3)).

The relevant evidence is very largely that of the respondent, Mrs. Hedditch. She was cross-examined at some length, and I should say at once that there was nothing in her demeanour in the witness box, including the way in which she answered questions, which suggested to me that she was dishonest, or otherwise lacked credibility.

Mrs. Hedditch married the debtor in 1976. At that time she was carrying on a business in baby wear, which, as she says "went very well". She sold it in 1979 for $48,000, and this amount was paid to a company described by her as "one of Noel's companies", which was at the time her estate agent. Her husband carried on an extensive business in and around Wagga Wagga as a real estate agent, speculator and developer. This would seem to have been done largely through companies, and had all the appearance of being very successful. The respondent's shop had been in an arcade owned by one of her husband's companies, and during the period 1971 to 1975 the respondent had come to manage five of his shops. She was not paid for this work, but was assured that she would be "well looked after". More directly relevant to this case, the proceeds of sale of her own business were kept by "Noel's company" to which they had been paid. She estimates that she was entitled to about $38,000 as the net proceeds of sale.

In 1970 Mrs. Hedditch owned some real estate in Lake Macquarie which she sold and bought another house property, both through or with the assistance of the debtor. This latter property was sold in 1974, and the net proceeds left with the debtor with the request "See if you can buy another cheap house for me like this one". In 1975 Mrs. Hedditch won the New South Wales lottery, with a prize of $12,000. She sent $8,000 of this money to the debtor, and this was not repaid. The debtor told her subsequently that he had given her a first mortgage over land to secure the "loan".

In 1979 Mrs. Hedditch was told by the debtor (then her husband) that he had bought a house in her name, but he subsequently sold it (at a higher price) and kept the proceeds. In 1980 the debtor said he had bought her another house, but this was sold shortly afterwards. Mrs. Hedditch said to the debtor "I will lend the proceeds to you interest free".

Mrs. Hedditch says that until about 24 September 1982 she had no suspicion that her husband's business activities were anything other than completely successful. I accept this evidence. It was on 24 September that she found a senior employee of the applicant trustee in her husband's office and was introduced to him by her husband as his trustee.

I mention here that two tenders were made by the applicant which at the time I admitted subject to objection. The first comprised part of the minutes of a meeting of creditors of the present debtor, held on 6 October 1982. The tender was made for completeness in the event that certain parts of the minutes were relied on by counsel for the respondent. This did not happen, and it is unnecessary to pursue the matter. The second tender was of a letter dated 2 March 1983 written by Mr. Dunn, the trustee, in his capacity as liquidator of a company called Bourkelands Pty. Limited, to Mr. Selwyn Hedditch, and the reply of the latter in a letter written in April (the exact date being indistinct). These were tendered in reliance upon s.7B of the Evidence Act 1905 (Cth) and s.14CE of the Evidence Act 1898 (N.S.W.), as amended. In my opinion the tender does not satisfy the requirements of these sections, and is rejected.

It seems to me to be apparent that there had been from about 1971 a degree of trust between the respondent and the debtor (as he was to become), and a degree of mutual assistance. The respondent for her part regarded the debtor as a highly successful businessman, and was casual in relation to her financial and business arrangements with him. However, about the end of 1980 she had come to realise that they were, as she has said, "incompatible". When she read his will and found she was left almost nothing, she says she became embittered because she had no money and no home to go to. Her solicitor advised her not to leave. When she learned of his financial collapse she also felt that, as a matter of loyalty, she should not leave him, for the time being.

From about this time (1980) the respondent repeatedly asked for the repayment to her of her money. In late 1981 she threatened to sue. She later came to believe for a while that he didn't pay because he feared that if he did, she would leave. No repayments were made until 1982. There is no dispute that those referred to in the application were made to her, in the amounts and according to the particulars described. E.S. Hedditch, referred to in the first as the drawer of the cheque, is Selwyn Hedditch, a brother of the debtor. Larry Searle, whose name also appears in the account of proceedings is a son of the respondent by an earlier marriage and lives in Ipswich, Queensland.

Cheques for each of the payments passed through Mrs. Hedditch's hands and were collected through an account in Queensland in the name of Larry Searle. Her explanation for sending the moneys to be banked to the credit of her son's account is that she wanted to get the money away from the reach of her husband, who had many accounts in Wagga Wagga, including at least one in her name, and in relation to which she, at his request, signed cheques. Added to this was the fact that she was going to live in Queensland. A home for her to live in was in fact purchased out of those moneys in March 1983 in the son's name. This house, no. 4 Beatty Street, Southport, is the house referred to in the application. It was transferred by her son into her name, but has recently been sold by a mortgagee, and Mrs. Hedditch has ceased to live there. Although the evidence does not disclose the amounts involved, Mrs. Hedditch, from at least October 1982, was using part of all moneys which had been received to discharge some of his debts. Her evidence about this is as follows:

"When did you - well, initially when you received the money, you intended not to allow your husband to get his hands on it, did you not?---Yes.

And you later changed that intention did not you?---Yes.

When did you change your intention?---When my husband signed that proxy votes at this creditors meeting that gave Mr Dunne the right to be trustee.

Was that in October?---Yes. I was of the opinion, and so was my husband, Mr Noel, that he would work with Mr Dunn in Wagga, in the office, and help try to steer - or to help these newcomers into the business - into the complexities of his whole business, and I thought that my husband would be staying in Wagga with a job and a place to live, but when it came to the crunch after Mr Dunn had got the proxy and the vote and the trusteeship of Noel's business they did not want him, and he had no money, nowhere to live and all his family, children, friends, brothers just disappeared. He was alone; completely alone. He did not have the price of a dinner in his pocket. So, what was I to do, say goodbye to him. I had to stay because it was my moral obligation to stay under such circumstances."

The debtor, in late 1981, promised the respondent the proceeds, or part of the proceeds of sale, of the racehorse Biscay which he owned, or in which he had an interest, but when, in April 1982 she pressed him for payment, he said he could not pay her then. This might have been a plea of insolvency, but she did not think it amounted (if believed) to more than a statement of temporary embarrassment. She explains the matter thus:

". . . One week he could have had $500,000, the next week he could have been waiting for someone to give him $50,000, it was not a business of owing and not owing. There was money there all the time."

As to the relations between them at about this time, the following is her evidence in cross-examination:

"From the end of 1981 what was your belief at that time as to why your husband did not repay you?---Well, I hung on to the theory really that he did not want me to leave him. I really did not have any thoughts about it. I just kept on staying hoping that all would turn out well. I was married to the man, I did not want to walk out on him, I had no reason except that I wanted my own money and my own bank account. He was a very generous man, a very kind man, he was everything, a very honest man. I do not know how you can mix up all this matrimonial business with money, I just do not see it."

Mrs. Hedditch was present when Selwyn Hedditch made out the cheque for $77,734.68 in her son's favour. Her view, and it seems to be the fact, was that the money was the property of her husband, and the cheque was made out at her husband's direction. It seems to have been part of the proceeds of the horse "Biscay". Any conspiratorial arrangement between the respondent and Selwyn Hedditch has been firmly denied by her.

One of the two smaller cheques the subject of the application was expressed to be payable to her husband, by name, the other to "Hedditch and Company". He gave them both to her by hand, saying "Here is the rest of the money", or words to that effect.

The respondent did not keep records of what the debtor owed her. If the debtor kept any (about which she is unsure), they are not before me. In her evidence in the s.81 examination, Mrs. Hedditch thought that she may have received about $12,000 more than she had lent, but she said that a difference of "a few thousand dollars did not matter between husband and wife". She later assented to the proposition that she "made part of the money (received) available to him from time to time". A complication is that moneys owing were used in the business, and that repayments could quite properly take into account, if not profits, at least inflation. Moneys lent to the debtor were, however, regarded by Mrs. Hedditch as having been lent interest free. It does seem reasonably clear that what was paid was treated on both sides as being paid by way of discharge or reduction of amounts ensuing; no bounty was intended or understood to be involved.

My conclusion is that the respondent was, within the meaning of s.122(2)(a) a purchaser or payee in good faith and for valuable consideration. The payments were received, after requests extending over more than a year, in discharge of obligations, and without knowledge or suspicion, or, for that matter, substantial grounds for suspicion, of actual or threatened insolvency. This view of the facts also negatives the application of s.120.

It remains to consider the further requirement that the payments were in the "ordinary course of business". This phrase has not been construed according to what might be thought to be its natural meaning. The test expressed in the joint judgment of Gavan Duffy C.J. and Starke J. in Robertson v. Grigg (1932) 47 C.L.R. 257, at p.267, when dealing with the Act of 1924, was whether it is "a fair transaction, and what a man might do without having any bankruptcy in view".

In Taylor v. White (1964) 110 C.L.R. 129, Dixon C.J. dealt with the test posed by s.95(2) of the Bankruptcy Act of 1924 in relation to the situation before the Court. He said (at p.136):

"But this seems to me to have been a family transaction in which a son-in-law, with the help of his wife, decided to borrow money from his mother-in-law for his company and then to effect its repayment in the face of approaching disaster. The time-honoured phrase 'in the ordinary course of business' is meant to refer to transactions regularly taking place in in a sustained course of activity or some usual process naturally passing without examination."

It was emphasised in that case that a person may be a payee for valuable consideration and in good faith, and yet not have received payment in the ordinary course of business. It is not a matter of simply examining the situation from the viewpoint of the payee or of the debtor. The majority of the Court in Taylor v. White declined to accept the opinion of Kitto J., who said that the situation was to be looked at from the point of view of the payee. The test is not related to any special business carried on by the debtor or creditor, but is concerned with "the character of the impeached transaction itself". Taylor J. (at pp.152-153) cited the judgment of Rich J. in Downs Distributing Co. Pty. Ltd. and Blue Star Stores Pty. Ltd. (in liquidation), and said:

"In the latest of these cases Rich J. carried the matter a little further when, after quoting from the earlier cases to show that the expression 'does not require an investigation of the course pursued in any particular trade or vocation and it does not refer to what is normal or usual in the business of the debtor or that of the creditor' ((1948) 76 C.L.R., at p.476), went on to emphasize that 'it is an additional requirement and is cumulative upon good faith and valuable consideration' ((1948) 76 C.L.R., at pp.476, 477). 'It is therefore', he said, '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 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.'"

I cannot say what the ordinary course of business between Mr. and Mrs. Hedditch was, or would be. It can be doubted, following the view expressed by Dixon C.J. in Taylor's Case (at p.136), that there was any discernible ordinary course of business between them. Influenced by the relationship between them, Mrs. Hedditch made loans to the debtor, and made them in a quite informal manner. She had asked to be repaid and repayment, or an approximation to repayment, was eventually effected. However, several features appear prominently: (a) although Mrs. Hedditch had been pressing for payment for two years, no payments had been made until those in question were made: (b) the payments were made within two months before the deed of assignment was executed; (c) the manner of payment was unusual, and did not follow any ordinary course of dealing; (d) in relation to the first payment, that of $77,734.68, Mrs. Hedditch herself could not understand why it was effected in the strange way it was; and (e), having in mind that the statement of affairs signed by the debtor on 5 October 1982 disclosed assets of $286,351 and liabilities of $1,590,317, the inference is inescapable that he was at the time not only insolvent but in hopeless business difficulties. The conclusion must be that the payments were not in the ordinary course of business. Certainly, I cannot conclude positively that they were.

I must therefore uphold the trustee's claim under s.122 of the Act. I will make declarations accordingly. An order for repayment will be made, but I will hear the parties, if they wish, about time and manner of repayment. In this connection I have not heard argument concerning the relevant consequences, if any, of the fact that out of the monies received, Mrs. Hedditch paid a number of the debtor's creditors. On the evidence as it stands, which refers to a mortgagee's sale of the property in Beatty Street, Southport, it would not seem correct to make any order in respect of it. I will hear the parties, if they wish, on this aspect. The respondent should pay the applicant's costs of the application.