Re Brittain, Michael Guy & Anor Ex Parte John Craven Barnes (the trustee of the estate of Michael Guy Brittain and Margaret Mary Brittain) Simon Kessel International Pty ltd
[1984] FCA 85
•10 APRIL 1984
RE: MICHAEL GUY BRITTAIN and MARGARET MARY BRITTAIN
EX PARTE: JOHN CRAVEN BARNES (the trustee of the Bankrupt Estate of MICHAEL
GUY BRITTAIN and MARGARET MARY BRITTAIN)
And: SIMON KESSEL INTERNATIONAL PTY. LTD.
No. 398 of 1983
Bankruptcy
2 FCR 35
COURT
IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
Woodward J.(1)
CATCHWORDS
Bankruptcy - preference - validity of payment - good faith - ordinary course of business - cheques not met - threat to refer matter to solicitors.
Bankruptcy Act 1966 s.122
Bankruptcy - Preference - Validity of payment - Good faith - Ordinary course of business - Cheques not met - Threat to refer matter to solicitors - Bankruptcy Act 1966 (Cth), ss 115, 122, 122(3), 122(4)(c).
HEADNOTE
The applicant trustee of the bankrupt estates of two bankrupts applied to have four payments made by the bankrupts to the respondent set aside as void against the trustee.
Between 19 November 1982 and 22 December 1982, the bankrupts made four payments, totalling $1,300 by cheques, to the respondent, a wholesale supplier company to the bankrupts' retail menswear business. The first payment was an amount of $500 by a cheque given on 19 November 1982, presented and met that day; the second of $200 by a cheque dated 2 December 1982, presented on 2, 7 and 20 December 1982, and met on 20 December 1982; (a cheque dated 6 December 1982, for $200 was given and presented on 6 December 1982, and re-presented on 9 December 1982, and finally dishonoured in January 1983); the third of $300 by a cheque dated 13 December 1982, presented on 13 and 17 December 1982 and met on 17 December; and the fourth of $300 by a cheque given on 22 December 1982, and presented and met on that day.
The bankrupts had been slow in paying their debts to the respondent, having paid by May 1982, belatedly and in irregular instalments, for goods delivered between July and October 1982, and having failed to make any payments, until the subject four payments, for goods worth $2,490 supplied in May and September 1982.
The respondent sent accounts for the outstanding moneys to the bankrupts, at the end of July, September and November 1982, such accounts bearing reminder stickers drafted in terms of varying severity. The September account reminder sticker required payment within seven days, and in default thereof threatened legal action.
The respondent did not suspect that the bankrupts were insolvent, although it knew the bankrupts were having financial difficulties. The respondent was no more concerned about the bankrupts' overdue account than about other accounts. The respondent did not know of any debts of the bankrupts to any other traders. Upon learning that another creditor had commenced legal proceedings, in February 1983, the respondent also commenced proceedings.
Held: (1) The burden of proof was on the respondent, by s. 122(3) of the Bankruptcy Act 1966 (Cth).
(2) An objective test must be used in applying s. 122(4)(c) of the Act.
(3) The test to be applied is whether, objectively, the payments were not made in circumstances such as to lead to the inference that the respondent had reason to suspect the bankrupts were unable to pay their debts as they became due, from their own moneys.
Queensland Bacon Pty Ltd v. Rees (1966) 115 C.L.R. 266, applied.
(4) The respondent had discharged the burden of proof that it had received all the moneys in question in good faith, in accordance with s. 122 of the Bankruptcy Act 1966 (Cth) in all the circumstances, including the following circumstances: (a) knowledge of the bankrupts' stock; (b) general poor state of liquidity in the trade at that time: (c) lack of knowledge of any other debts; (d) cheques marked "present again" and "return to drawer" would not cause a reasonable person in the respondent's position to suspect that the bankrupts were in fact insolvent, although doubts might well have arisen in such a person's mind; (e) if the respondent had asked itself the question, the respondent would have concluded that if the bankrupts had been put to the test they could have paid every creditor in full; (f) the respondents commenced legal proceedings in February 1983, on the faith of the bankrupts' solvency.
(5) The respondent had also discharged the burden of proof that it had received all moneys in question in the ordinary course of business, in accordance with s. 122 of the Bankruptcy Act 1966 (Cth), in all the circumstances, including the following circumstances: (a) the ordinary course of business does not mean the ideal course of business; (b) late payments, the re-presenting of cheques, the collection of cheques by hand, and a threat to refer matters to solicitors in making a telephone demand for payment, are not, either separately or taken together, outside the ordinary course of business; (c) to threaten legal diligence, if there be no collusion, is not outside the ordinary course of business - dictum of Lord Blackburn, cited in Robertson v. Grigg (1932) 47 C.L.R. 257 at 267, and in Taylor v. White (1964) 110 C.L.R. 129 at 152, approved; although a solicitor's demand may be outside the ordinary course of business - Re Bailey; Ex parte Law v. Austin (1952) 16 A.B.C. 80 at 85; and Re Bird; Ex parte Azzopardi (1979) 39 F.L.R. 277, referred to.
The question is one of degree and of general impression.
A dishonoured cheque is not necessarily fatal to a claim that a later payment is made in the ordinary course of business: Queensland Bacon Pty Ltd v. Rees (1966) 115 C.L.R. 266.
HEARING
Melbourne, 1984, April 4, 10. #DATE 10:4:1984
APPLICATION.
Application under the Bankrupcy Act 1966 (Cth), by the trustee of bankrupt estates, to set aside payments.
T. Irlicht, for the applicant trustee.
B. B. Braun, for the respondent.
No appearance for the two bankrupts.
Cur. adv. vult.
Solicitors for the applicant: Irlicht & Broberg.
Solicitors for the respondent: Meerkin & Apel.
J.D.B.
ORDER
The application be dismissed with costs.
Application dismissed with costs.
JUDGE1
This case raises difficult questions as to whether certain payments made by the bankrupts to the respondent amounted to a preference within the meaning of s.122 of the Bankruptcy Act 1966. The application also raises questions of relation back, but as the case has developed these have been effectively subsumed by the question of preference.
Concessions have been made by both parties which enable me to make the following findings:
(a) The bankrupts, who ran a business known as Buccaneer Menswear ("Buccaneer") committed an act of bankruptcy on 3 November 1982. They were made bankrupt on their own petition, presented on 29 April 1983.
(b) Between 19 November and 22 December 1982 they made four payments to the respondent, who was one of their wholesale suppliers, totalling $1300. At the time they made those payments they were unable to pay their debts as they became due from their own monies.
(c) The payments of $1300, although received for valuable consideration, are void as against the trustee in bankruptcy, either as a preference under s.122 of the Bankruptcy Act 1966 ('the Act') or because the bankruptcy is deemed, by s.115 of the Act to relate back to 3 November 1982, unless the respondent can satisfy the Court that the payments were made in good faith and in the ordinary course of business. As both counsel said, that is the only issue in this case.
The evidence is in a fairly narrow compass and there has only been a noticeable conflict in that evidence on one comparatively minor matter. I make the following findings of fact:
The respondent delivered goods to Buccaneer between July and October 1981, which were paid for belatedly and in irregular instalments by May 1982.
Further goods were supplied in May and September 1982 to a total value of $2490. No payments had been made by the end of October in spite of firm assurances given in August and early October.
The retail clothing industry was going through a difficult time in the second half of 1982, because of the serious down-turn in the economy generally, and many stores, including Buccaneer, had financial problems because they could not sell their stock on hand.
The officer of the respondent responsible for outstanding accounts, Mr. G.T. Bradley, caused accounts to be sent to Buccaneer at the end of July, September and November 1982. Stickers were attached, on his instructions, which read respectively
July -"Our terms are strictly nett 30 days. A cheque within 7 days please] Over due"
September - "Final Notice Payment within 7 days or legal action
will be taken."
November - "A friendly reminder
Your account is overdue."
It was explained that the last sticker was more moderate in tone because $500 had been paid on 19 November and further payments were expected. This expectation arose because Mr. Bradley had told the first-named bankrupt, Mr. Brittain, who ran Buccaneer, that unless payments were made in reduction of the account he would have to put the matter into the hands of the respondent's solicitors. Mr. Brittain had agreed to make regular payments, though amounts were not specified.
After the cheque for $500 on 19 November 1982, which was honoured without difficulty, the next three cheques presented ran into trouble. The first, dated 2 December for $200, had to be presented three times (2, 7 and 20 December) before it was met; the second, of 6 December for $200, was presented on that day and again on 9 December and finally dishonoured in January 1983; the third, dated 13 December, was presented then and again on 17 December when it was met. The last cheque, for $300, was given, presented and met on 22 December.
The conflict in evidence, referred to earlier, was whether the first four cheques were posted to the respondent or collected by an employee. The last was certainly collected and then cashed at Buccaneer's bank. I am unable to decide the truth of the earlier payments, as to which there was, I believe, an honest difference of opinion and recollection between Mr. Brittain and Mr. Bradley. Bearing in mind the burden of proof cast on the respondent by s.122(3) of the Act, I think I should decide the case on the basis that some at least of those four cheques were collected by an employee of the respondent.
Mr. Bradley explained his state of mind at this time by saying, in substance, that he believed from his experience the previous year that Mr. Brittain was a slow payer who needed to be pressed. Buccaneer obviously had some liquidity problems. Mr. Bradley knew that Buccaneer held reasonable stocks, and believed that the Christmas selling period would alleviate its problems and enable it to make the necessary payments. He knew of no debts to any other traders and had no reason to think Buccaneer was insolvent.
Bearing in mind the previous year's transactions, the honouring of the $500 cheque on 19 November and the 'friendly reminder' sent at the end of that month, I have no difficulty in accepting Mr. Bradley's evidence up to that time. I am entirely satisfied that the payment of $500 on 19 November 1982 was received in good faith and in the ordinary course of business.
The position becomes more complicated between 2 December and 22 December. Thus on 2, 6, 7, 9 and 13 December three cheques for either $200 or $300 were presented or represented, marked 'present again' or 'refer to drawer', and were not met. However on 17 and 20 December two of them were met and a further cheque for $300 was met on 22 December.
Mr. Bradley must have been concerned about this overdue account between 2 and 17 December and he concedes that he was - but no more concerned than about other accounts. Having heard his evidence on the matter, I accept his statement that he did not in fact suspect that Buccaneer was insolvent, although he knew it was having financial difficulties.
That, of course, is not the end of the matter. For purposes of s.122(4)(c) of the Act, the respondent has to go further and satisfy me that, looked at objectively, the payments were not made under such circumstances as to lead to the inference that Mr. Bradley had reason to suspect that Buccaneer was unable to pay its debts as they became due from its proprietors' own monies.
In approaching this issue I adopt, with respect, the words used by Barwick C.J. in Queensland Bacon Pty. Ltd. v. Rees (1966) 115 CLR 266 @ 219-2
"In the first place ........ . the circumstances of the voided payment must be such as to lead to the inference that the creditor knew or had reason to suspect the fact of the debtor's insolvency. It is not enough that the circumstances are such as to lead to the inference that the creditor had reason to suspect that the debtor might be insolvent. The words of the sub-section, to my mind, are quite clear that it is the fact of actual insolvency which must be known or suspected. To be insolvent, the debtor must be unable, as distinct from being merely unwilling, to pay his debts as they fall due. It is one thing to suspect a man's solvency in the sense that one doubts whether he is solvent or insolvent. It is another thing to suspect that he is in fact insolvent."
With regard to the facts of another application dealt with in the same judgment, his Honour said, at p.296-7,
"I have come to the conclusion that, with the knowledge and belief of the extent of the stock in trade and with no circumstance to suggest it was in any significant degree "dead" stock, the reasonable business man ought not to suspect actual insolvency, though the circumstances demonstrated a serious and perhaps a dangerous lack of liquidity."
In the same case Kitto J. said, at p.302,
"In many situations, of course, the dishonour of a cheque, unless otherwise explained, carries a strong suggestion of insolvency; but in others it may indicate, to those who are constantly dealing with the drawer and know the general course he is pursuing in his business, no more than a policy of wringing the last ounce of credit out of everyone who can be fobbed off with promises."
Later, in relation to yet another application dealt with in the same appeal, Kitto J. said at p.312,
"As in the other three cases, there is great need to keep steadily in view what the precise inference is to which sub-s.(4) refers. It is an inference which the Court draws from the circumstances known to the creditor at the time when he accepted the payment. It is an inference that the creditor at that time had reason for an actual suspicion of a particular state of facts, that is to say a ground which a reasonable man in his position would have considered sufficient to raise in his mind a real suspicion that the state of facts existed. I venture to repeat that the state of facts consists of two elements. The first is an actual inability on the part of the payer to pay his debts as they became due, as distinguished from a reluctance to accommodate his wider purposes to the limitations of his resources. The second is that the effect of the payment, i.e. its ultimate, substantial effect, would be that the payee would be in a better position vis-a-vis the other creditors than he would have been if the company's assets had been converted and distributed amongst all the creditors in a due course of winding up."
I do not suggest that the situations their Honours were considering in the passages cited were the same as the situation I have to consider, but those passages encourage me in the view I had tentatively formed that, given Buccaneer's past record of payment, Mr. Bradley's knowledge of the firm's stock and the generally poor state of liquidity in the trade at that time, and his lack of knowledge of any other debts of the firm, fourteen days of cheques marked "present again" or "refer to drawer" would not cause a reasonable person in his position to suspect that Buccaneer was in fact insolvent, although doubts might well have arisen in such a person's mind. I believe, rather, that if he had asked himself the question, he would have concluded that if the firm had been put to the test, it could have paid every creditor in full.
In passing, I note that the view actually taken by Mr. Bradley is illustrated by his causing legal proceedings to be taken against Buccaneer in February 1983 when he learned that another creditor had done so. Even then he apparently had faith in Buccaneer's solvency.
For the reasons I have given, I am satisfied that the respondent received all monies in question in good faith. The final question to be determined is whether they were received in the ordinary course of business.
The ordinary course of business does not mean the ideal course of business. Late payments, two weeks of cheques marked "present again", the collection of cheques by hand to keep the debtor to its promises, and a reference to solicitors in the context of a telephoned demand for payment, are not, in my view, either separately or taken together, outside the ordinary course of business when a trade is going through a difficult period and stocks are hard to move. The question is of course one of degree and of general impression.
I am supported in the view I take by the words of Lord Mansfield, who said that it was a fair advantage and in the course of trade "if a creditor threatens legal diligence, and there is no collusion". Lord Blackburn, in a similar vein, referred to the case of a man struggling on and making payments to keep his business going. These statements were quoted in Robertson v Grigg (1932) 47 CLR 257 @ 267 and Taylor v White (1964) 110 CLR 129 @ 151-2. Although they reflect the early law on the subject, they should not be overlooked (Windeyer J. in Taylor v White at p.161).
Queensland Bacon v Rees (above) is authority for the proposition that dishonoured cheques are not necessarily fatal to a claim that a later payment is made in the ordinary course of business. And although a solicitor's demand may be outside that ordinary course (Re Bailey ex p. Law v Austin (1952) 16 ABC 80 @ 85; Re Bird ex p Azzopardi (1979) 39 FLR 277), I do not believe that a threat to refer a matter to solicitors is outside it.
As Kitto J. said in his dissenting judgment in Taylor v White (above) at p.146,
"There is many a company in the community known to be having financial difficulties. To hold that a creditor of such a company who knows that fact but knows nothing more cannot be a payee of his debt in the ordinary course of business would surely be out of the question".
I find that the payments made in December 1982, as well as that made in November, were in the ordinary course of business. Since the issues for decision have been resolved in favour of the respondent the application will be dismissed with costs.
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