Re Kitts, D.W. Ex parte Putnin, B. v Advance Commercial Finance Ltd

[1992] FCA 796

Re: DOUGLAS WILLMOTT KITTS
Ex Parte: BERNARD PUTNIN and ADVANCE COMMERCIAL FINANCE LIMITED
No. W B376 of 1989
FED No. 796
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
GENERAL DIVISION
French J.(1)

CATCHWORDS

Bankruptcy - preference - payment to creditors - part of payment borrowed from friend - balance made available by other friends - insufficient evidence to find the balance of property of the bankrupt - preference declared as to borrowed portion.

Bankruptcy Act 1966 s.122

Restraint of Debtors Act 1984

Richardson v. The Commercial Banking Company of Sydney Limited (1952) 85 CLR 110

HEARING

PERTH

#DATE 10:9:1992

Counsel for the Applicant: Mr D.F. Van Zalm

Solicitors for the Applicant: Robertsons

Counsel for the Respondent: Mr C.W. Sanderson

Solicitors for the Respondent: Claudio Shaw

ORDER

It is declared that $3,500 of the sum of $6007.10 paid to the respondent's solicitors on 13 April 1989 was a void payment as against the applicant.

The respondent pay to the applicant the sum of $3,500.

The respondent pay to the applicant the sum of $500 by way of pre-judgment interest pursuant to s.51A of the Federal Court of Australia Act.

The respondent pay the applicant's costs of the application fixed at $1,000.
Note: Settlement and entry of Orders is dealt with in Rule 124 of the Bankruptcy Rules.

JUDGE1

FRENCH J. This is an application under s.122 of the Bankruptcy Act 1966 seeking a declaration that a payment of $6,007.70 made to the respondent, Advance Commercial Finance Limited, on 13 April 1989 to discharge a debt owed to that company by Douglas Willmott Kitts who later became bankrupt was void as against the trustee of his bankrupt estate.

1. The evidence in this matter on both sides of the argument is somewhat less than satisfactory. It rests entirely upon untested affidavits which in certain respects are in conflict although in other respects they are a little like ships passing in the night. The basic facts, extracted from the affidavits, are as follows. On 4 July 1989 Douglas Willmott Kitts became a bankrupt. In early April 1989, he had intended to travel to Thailand. At the time he owed some $6,007.70 under a credit agreement to UCL Finance Limited which is now known as Advance Commercial Finance Limited and is the respondent in these proceedings. It is not in dispute that at that time he was unable to pay his debts as they became due from his own money. He was prevented from leaving the country to travel to Thailand by reason of a warrant for his arrest issued on 4 April 1989 under the Restraint of Debtors Act 1984. According to Mr Kitts' affidavit, which was filed on behalf of the trustee in these proceedings, he raised the necessary moneys to pay the finance company by borrowing from friends. In respect of some of his friends, he collected the moneys himself, while others came to him and gave him their contribution personally. These, he said, were all moneys that were lent and it was intended by him to repay the loans. He collected these sums in the form of cash, counted it to check that the correct amount was there and, on finding the correct amount, put it into an envelope and arranged for it to be delivered to the solicitors for Advance Commercial Finance, Messrs. Claudio Russo Shaw. Mr Kitts had given evidence in a public examination, under s.81 of the Bankruptcy Act which suggested that part of the money used to pay off Advance Commercial Finance had been derived from the sale of a Toyota motor vehicle. However, his testimony in the public examination was vague. He said:
   

"I think I sold the car and got some money off that. This is all."

1. In his affidavit he said that he could not now recollect whether the money from the sale of the motor vehicle was included in the sum forwarded to Messrs. Claudio Russo Shaw. The principal contributor to this fundraising effort was Kenneth Graham King, who also swore an affidavit which was filed on behalf of Advance Commercial Ltd. He describes himself as a friend of the bankrupt and says that in or about April 1988 Mr Kitts was being prevented from flying to Thailand because he owed money to a client of Claudio Russo Shaw. He remembers speaking to Mr Peter Bates of that firm concerning the money owed by Mr Kitts., As a result of what Mr Bates told him, according to King, he understood that Mr Kitts required approximately $6,000 to satisfy his indebtedness and that he contributed some of that sum himself and collected the balance from other friends of Mr Kitts. The money, he says, was sent to Mr Bates in cash by Red Hot Couriers. Because of the passage of time Mr King says he cannot remember the exact details of what took place but does recall these facts. His affidavit does not address the question whether the money which he contributed to Mr Kitts was lent or handed over to him by way of a gift. It is not, I note, inconsistent with the evidence of Mr Kitts as to the means of collection and subsequent transmission to Red Hot Couriers.

2. In addition, there is before the Court an affidavit of Peter Bates who is a solicitor and at the relevant time was working at Claudio Russo Shaw. He deposed to the way in which the debt due to Advance Commercial Finance Ltd, which was a client of his firm, arose. It was by way of a shortfall arising out of the balance owing under a lease of semi-trailers following the sale of some of the leased property and the loss of part of it. Following proceedings in the District Court on 30 March 1989, a bankruptcy notice was issued by Advance Commercial Finance Ltd through Claudio Russo Shaw against Mr Kitts claiming a sum of $5,128.41.

3. On 4 April, Mr Bates was instructed by his client's then state manager that Mr Kitts intended to leave the country on 8 April on Thai Airways Flight TG 490. Accordingly, he applied for a warrant for Mr Kitt's arrest pursuant to the Restraint of Debtors Act 1984 and, as I have already noted, that warrant was issued. Following the issue of the warrant he received a telephone call from Mr King who told him that he was a friend of Mr Kitts. Mr King said he wanted Mr Kitts to be able to go to Thailand and that he and other friends wanted to help him out and were going to have a collection for him. He asked how much Mr Bates required. Mr Bates told Mr King that the total sum required was $6007.70 inclusive of the costs of his firm to that point. Later that day Mr King rang him again and said that he and friends of Mr Kitts had collected the money together and that he would sent it on to him. Later on the same day a courier arrived with an envelope containing $6,007.70 in cash. The money was paid into the trust account of the firm in favour of Advance Commercial Finance Ltd and a computerised receipt was forwarded to Mr Kitt's address.

4. There is a statement from Mr Bates that he believes that the $6,007.70 in dispute was never in the possession of Mr Kitts and was never available for distribution by him to other persons. The money, he says, was paid to Advance Commercial Finance Ltd by persons other than Mr Kitts to enable Mr Kitts to leave for Thailand and he knew of no facts which would indicate that the money would have been available for distribution to other creditors had Mr Kitts' friends not wished to assist him to leave the country. Some of that and some of what follows in his affidavit is of an argumentative character rather than evidence and I disregard it.

5. Subsequently Mr King did prove in the bankrupt estate of Mr Kitts and this is referred to in an affidavit of Mr Putnin, the trustee, sworn on 15 October 1990. It appears from that affidavit and in particular Exhibit BP1, that on 27 September 1989 Mr King submitted a proof of debt in the estate in which he set out a number of amounts of money against particular dates representing what was described in the proof of debt as:
   

"A true account of moneys lent to D. Kitts from March 88 to June 89."

1. The sums there set out included a figure of $3,500 on 5 April 1989, the day after the warrant was issued. An earlier proof submitted on 16 August 1989 set out simply a global figure of $45,547.00. No doubt, the September proof represents a break-up of that global figure into the detail required for proper consideration of the claiMs Under the heading "statement of account", Mr King, wrote:
   

"Moneys were lent to pay off debts and trips to overseas from March 88 to May 89."

1. In a sense that evidence is less than fully satisfactory because it is simply evidence of an assertion made by Mr King by way of a claim which was lodged some months after the transaction in question. However, it is not objected to and I think shows that there was a number of payments made which he now says he treated as loans. The nature of the debt in each case is described as a loan. This together with Mr Kitts' evidence that he borrowed the money, although that has some conclusionary elements in it, I think, justifies the inference that, on the balance of probabilities, the sum of $3,500 said to have been advanced on 5 April 1989 by Mr King did in truth constitute a loan to Mr Kitts.

2. So far as the balance of the money is concerned, I do not have enough evidence as to the basis upon which it was advanced. There is no satisfactory evidence from which I could conclude that any part of the proceeds of the sale of the car was used to make up this money. I am left to the conclusion as a matter of probability that, of the sum of $6,007.70 paid to the solicitors for the respondent in April 1989, $3,500 was obtained by way of loan in respect of which the lender has subsequently proved in the estate.

3. Section 122 of the Bankruptcy Act 1966 provides:
   

"122(1) A conveyance or transfer of property, a charge on property, or a payment made, or an obligation incurred by a person who is unable to pay his debts as they become due from his own money (in this section referred to as "the debtor"), in favour of a creditor, having the effect of giving that creditor a preference, priority or advantage over other creditors, being a conveyance, transfer, charge, payment or obligation executed, made or incurred-

(a) within 6 months before the presentation of a petition on which, or by virtue of the presentation of which, the debtor becomes a bankrupt; or

(b) on or after the day on which the petition on which, or by virtue of presentation of which, the debtor becomes a bankrupt is presented and before the day on which the debtor becomes a bankrupt;

is void as against the trustee in the bankruptcy."

Mr Kitts became bankrupt on 4 July 1989. The payment was made in April 1989 and plainly falls within the six month period referred to in paragraph (a) of sub-s.122(1). As already indicated, it was a payment made at a time when Mr Kitts was unable to pay his debts as they became due from his own money. It is plain also and not in dispute, that it was in favour of a creditor. The question is whether the payment had the effect of giving that creditor a preference priority or advantage over other creditors. In this case that turns simply on the question whether it was made out of moneys lent to Mr Kitts and therefore forming part of his estate, or whether it was made by third parties, passing through his hands in a mechanical sense, but not forming part of his estate and therefore not having the effect of giving a creditor who received that money a preference, priority or advantage over other creditors. In that regard I have been referred to Richardson v. The Commercial Banking Company of Sydney Limited (1952) 85 CLR 110, which involved payment to a bank of money fraudulently obtained from a third party and which was said therefore never to have been part of the property of the bankrupt. It was important in that judgment however, that the person defrauded by the activity of the bankrupt was in a position to prove against the estate in due course and therefore the bank preferred by the payment was preferred because other creditors were left to compete with the defrauded owner of the money. This appears from a passage in the joint judgment of Dixon, Williams and Fullagar JJ. at 136, where they said:

"On the whole it appears to us that the payment of a cheque representing trust funds into the office account, were it otherwise to operate to give a preference to the bank, would be within s.95. It is within s.95 because, although the same moneys could never but for the misappropriation have been available to the bankrupt's creditors, there would be a preference, priority or advantage effected in favour of the bank as a creditor, in making a payment to it, when other creditors must prove and other creditors suffer the disadvantage of being exposed to the competition upon the assets of the proof of the defrauded owner of the funds". (emphasis added)

And earlier at p 136 their Honours observed that:

"It if has been Price's own money, the effect would have been to give a preference to the respondent bank over other creditors. The question whether such a use of other people's money is within s.95 is not easy."

1. In my opinion when the payment made is simply by way of a payment to the creditor by third parties through the hands of the bankrupt, then those circumstances do not arise. If the payment were, in truth, a gift to the bankrupt made by third parties and then used to pay a creditor, a preference would arguably arise because the gift would have formed part of the property of the bankrupt which would otherwise be available for distribution to all creditors. In this case, beyond the sum of $3,500 in respect of which I am satisfied on the balance of probabilities that there was a loan, I am in no position to make a finding as to the basis upon which the balance of the money was made available for payment to the creditor. In the circumstances I am prepared to make the declaration sought in respect of the sum of $3,500 and consequential orders.