Re Lucas, Phillip William Ex parte Peake, Russell Graeme
[1996] FCA 623
•17 JULY 1996
CATCHWORDS
BANKRUPTCY - preference payment - payment to solicitor for money outstanding for several years - payment deducted from proceeds of sale of client's house - whether in good faith - whether in ordinary course of business
Alderson v Temple (1768) 4 Burr 2235
Downs Distributing Company Pty Ltd v Associated Blue Star Stores Pty Limited (in liquidation) (1948) 76 CLR 463
Re Cook; Ex parte Official Trustee in Bankruptcy v Miller Bros Melbourne Tankworks Pty Ltd (1985) 4 FCR 398
Re Weiss; Ex parte White v John Vicars & Co Ltd [1970] Arg 654
Robertson v Grigg (1932) 47 CLR 257
Rust v Cooper (1777) Cowp 629
Taylor v White (1964) 110 CLR 129
re: Phillip William Lucas; Ex parte Russell Graeme Peake
(No. VX 179 of 1994)
Judge: Heerey J
Date: 17 July 1996
Place: Melbourne
IN THE FEDERAL COURT OF AUSTRALIA )
)
BANKRUPTCY DISTRICT OF THE )
) VX 179 of 1994
STATE OF VICTORIA )
)
BANKRUPTCY DIVISION )
RE: PHILLIP WILLIAM LUCAS
A Debtor
EX PARTE: RUSSELL GRAEME PEAKE
(As trustee of the property of
Philip William Lucas, a debtor)
Applicant
ANTHONY DOYLE
PHILLIP CONSIDINE
HUGH McKENZIE
PETER LUNDBERG
Respondent
JUDGE: Heerey J
DATE: 17 July 1996
PLACE: Melbourne
MINUTES OF ORDER
The Court orders that:
Application dismissed.
Applicant pay the respondent's costs, including reserved costs.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules
IN THE FEDERAL COURT OF AUSTRALIA )
)
BANKRUPTCY DISTRICT OF THE )
) VX 179 of 1994
STATE OF VICTORIA )
)
BANKRUPTCY DIVISION )
RE: PHILLIP WILLIAM LUCAS
A Debtor
EX PARTE: RUSSELL GRAEME PEAKE
(As trustee of the property of
Philip William Lucas, a debtor)
Applicant
ANTHONY DOYLE
PHILLIP CONSIDINE
HUGH McKENZIE
PETER LUNDBERG
Respondent
JUDGE: Heerey J
DATE: 17 July 1996
PLACE: Melbourne
REASONS FOR JUDGMENT
The applicant is the trustee under Part X of the Bankruptcy Act 1966 (Cth) (the Act) of a deed of assignment made by the debtor Phillip William Lucas (Mr Lucas) on 28 July 1994. The applicant applies under s 122 of the Act to set aside a payment which was made to the respondents who are the partners in a firm of solicitors carrying on a practice at Geelong as Doyle Considine. That payment was an amount of $11,978.37, which was effectively made on 11 May 1994 by deduction from the proceeds of the sale of a house, the respondents acting as solicitors for Mr Lucas as vendor.
That amount was the total of five accounts rendered by the respondents for professional services as follows: (i) 28
September 1988: $429.20, acting in connection with the proposed purchase of premises at 2 Ballarat Street, North Geelong, and in particular negotiations with a co-purchaser in relation to a lease and non-conforming use. The purchase did not proceed. (ii) 10 March 1989: $755, acting in relation to a lease of 2 Ballarat Road. (iii) 12 April 1989: $1391, acting for Mr Lucas as defendant to a County Court proceeding claiming approximately $8000, brought by a company in relation to the use of a name. The matter was settled. (iv) 25 May 1989: $574, acting in connection with a lease of premises for business. (v) 29 April 1993: $8829.17, acting in defending a Supreme Court action brought by partners in Mr Lucas' business and arranging a purchase of the plaintiff's interest in that business and investment by a relative of Mr Lucas.
The respondents had acted as solicitors for Mr Lucas for a substantial period of time extending back to the mid-1980s. The partner principally responsible was Mr Phillip Considine. Mr Lucas carried on business in a partnership under the name Geelong Shower Screens. He was a partner, together with his wife, with another family, a Mr and Mrs Corica, through their company Matlaw Pty Limited. In 1992 a substantial dispute broke out between the Coricas on the one hand, and Mr and Mrs Lucas on the other, which, as noted, resulted in the issue of a Supreme Court proceedings by the Coricas. There were accusations on both sides of failure to account properly for profits.
In the course of negotiations about this matter, a firm of
accountants, Messrs Day, Nielsen, Jenkins and Johns, carried out an investigation of the books of the business. On 13 August 1992, that firm sent to Mr Considine a document, stamped "Draft for Discussion Purposes Only", which was a detailed report about the accounts of the business. It is clear from Mr Considine's evidence, which I might say I accept without hesitation in relation to this matter generally, that the document was for negotiating purposes. The figures, or at least some of them, were in Mr Considine's words, "hotly disputed". Although counsel for the applicant sought to place some reliance on it, the document in terms does not say or imply that the business was then insolvent. It certainly does show a decline in the fortunes of the business between the financial years 1991 and 1992. For example, the trading account went from a profit of $107,925 to a loss of $86,148, and the net assets went from a positive $138,379 to a negative $58,426. There was also an increase in the provision for bad debts from nil to $44,369.
But in any event the problems were resolved in about October 1992 by the intervention of the brother-in-law of Mr Lucas, a Mr Lincoln Weddell. The evidence as to the terms of the settlement was not entirely satisfactory. All the applicant produced was a draft agreement. In substance however, it appears Mr Weddell invested some $100,000 in the business which was used to pay out the Coricas. Mr Lucas agreed to take over responsibility for existing trade creditors, which were of the order of $150,000. From the time of the settlement onwards, the business was carried on by a company called Charnley Vale Pty Limited, as trustee as
to 50 per cent for Mr Weddell, as to 25 per cent for Mr Andrew Lucas, the brother of Mr Lucas, and as to 25 per cent for Mr Lucas. The respective interests were held through the medium of family trusts.
The business continued to trade, and as I am informed is still trading. Mr Considine said in evidence, and I accept, that he took comfort from the intervention of Mr Weddell, who was a wealthy and successful businessman who would protect the interests of his sister and brother-in-law.
The respondents' bills extending back to September 1988 had been the subject of accounts rendered, but there was no other form of active collection. The firm would review its accounts approximately every year, and write off those which appeared to be bad, but no such step was taken in relation to Mr Lucas. Although there was no direct evidence as to this, I think it is reasonable to draw the inference that Mr Lucas and Mr Considine dealt with each other on friendly and informal terms.
Mr Considine became aware of the sale of Mr Lucas' house in March 1994 when the selling agent wrote to his firm and asked it to act for the vendor. Mr Considine wrote to the ANZ Bank on 8 April requesting the provision of discharges of mortgage for settlement, which was due on 11 May. Further enquiries by a clerk of Mr Considine elicited the information that the net amount available at settlement to the bank would be approximately $141,000, which would be sufficient to clear all bank debts. On
29 April, Mr Considine wrote to Mr Lucas advising that settlement was due on 11 May and stating:
We assume that you have no objection to our office deducting from the proceeds of sale, costs outstanding to our firm in the sum of $11,978.97, some of which have been outstanding since 1988, together with the normal conveyancing costs on this file of approximately $685.
Should you have any queries, please do not hesitate to contact the writer, Mr Philip Considine of our office, in this regard.
There was no response to this letter. The matter was subsequently settled on 11 May, and after paying out the bank and deducting the costs referred to in Mr Considine's letter, there was a cash balance of approximately $55,000 due to Mr Lucas.
Mr Considine did not turn his mind to the question whether there were any existing creditors of the business unpaid. By this stage, that is, April - May 1994, some 18 months had passed since the settlement and the intervention of Mr Weddell, and the evidence does not disclose anything that might have indicated to Mr Considine that the business had become insolvent or was about to become so in the meantime.
The relevant provisions of the Act are:
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.
Nothing in this section affects:
(a)the rights of a purchaser, payee or encumbrancer in good faith and for valuable consideration and in the ordinary course of business;
The burden of proving the matters referred to in subsection (2) lies upon the person claiming to have the benefit of that subsection.
For the purposes of this section
(c)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.
It was accepted in argument that s 122(1) applied, but that the impugned payment was for valuable consideration. The contested issues therefore were whether the payee took in good faith and in the ordinary course of business.
Turning first to the question of good faith, it now seems to be accepted as the better view that, notwithstanding the general burden imposed by s 122(3), the onus is on the applicant trustee to make out the circumstances with bring s 122(4)(c) into operation: Re Weiss; Ex parte White v John Vicars & Co Ltd [1970] Arg 654 at 665, Re Cook; Ex parte Official Trustee in Bankruptcy (1985) 4 FCR 398 at 409-410.
In any event, I am satisfied on the evidence that the respondents
have established that the payment was made in good faith. It did not result from the application of pressure by the creditor. On the contrary, the sale of the house appeared to be a fortuitous circumstance which came to Mr Considine's notice at the initiative of Mr Lucas through the estate agent. The circumstances as to the refinancing of Mr Lucas' interest in the business and the intervention of his brother-in-law and in particular, the fact that the business had traded without any apparent major problems in the meantime, justified Mr Considine in not putting in train any enquiries as to the position of creditors of the business.
This was the more so since Mr Considine had, as he was required professionally to do, specifically notified his client of his intention to deduct costs from the monies in hand. As counsel for the respondents put it, there could not be in law an obligation on a solicitor in these circumstances to undertake some kind of audit as to the position of his client's creditors before a payment could be deducted. There is the question of the long delay in payment and, to put it mildly, the absence of forceful attempts to recover payment of the accounts. But on the issue of good faith, I think that is explicable by the way Mr Considine is accustomed to carry on his practice, albeit, as he admits, a rather old-fashioned approach.
Turning to the question of the ordinary course of business, I was helpfully referred by counsel to the authorities on this subject. Probably the best known of these are Downs Distributing Company
Pty Ltd v Associated Blue Star Stores Pty Limited (in liquidation) (1948) 76 CLR 463 and Taylor v White (1964) 110 CLR 129. In Downs, in a characteristically terse judgment, Rich J, speaking of the phrase "ordinary course of business" said (at 476):
This last expression it was said "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". It is an additional requirement, and is cumulative upon good faith and valuable consideration. It is, therefore, not so much a question of fairness and absence of symptoms of bankruptcy as of the every day usual or normal character or 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 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.
In Taylor, the judgment of Kitto J, although dissenting on the particular result, dealt in detail with the history of the provision in terms which have long been accepted as authoritative. His Honour, after referring to the test in Robertson v Grigg (1932) 47 CLR 257 at 267 (which in turn come from Lord Mansfield in Alderson v Temple (1768) 4 Burr 2235 at 2240, 98 ER 165 at 168 and Rust v Cooper (1777) Cowp 629 at 634, 98 ER 1277 at 1280) namely "whether it is a fair transaction or what a man might do without having any bankruptcy in view" continued (at 142):
It is, I think, a misreading of the judgments to gather from these words, or from the judgments generally, that the expression looks at the payment from the debtor's point of view. The words quoted surely mean that if the payee is to be protected by s 95(2) [the equivalent of the present s 122(2)(a)], the payment must have presented itself to him as a fair payment to accept, and what a debtor might offer who was uninfluenced by any
prospect of bankruptcy. What is required, in my opinion, is the quality of ordinariness from a business point of view in the acceptance of the payment. After all, s 95(2) does not describe the payment. It describes the payee. He is required to be a person receiving the payment in good faith; receiving it for valuable consideration; receiving it in the ordinary course of business.
Later his Honour said (at 146):
The payee must have taken the money, not only in good faith - at the least without knowing, and without having reason to suspect, that the payer was unable to pay his debts as they became due and that the effect of the payment would be to give him an advantage over the other creditors - but also without there being, in his taking it, anything unusual or remarkable to make it other than an ordinary business transaction.
In the present case, if the transaction is looked at from Mr Considine's point of view, it is simply a case of a solicitor, being undoubtedly owed money for work done for a client, finding himself in the position where he is to handle money on behalf of the client. He notifies his client that he will deduct the amount due, the client does not object, and the money is deducted. That strikes me as very much in the ordinary course of business of a solicitor. Solicitors as part of the ordinary course of their business hold money on behalf of clients and deduct from such money amounts due to themselves for professional costs and disbursements. If there be any factor arguably unusual in the present case, it is only the fact that the accounts have been outstanding for a long time. But for the reasons already mentioned in relation to the good faith issue, I do not think that alters the end result.
The application will be dismissed. The applicant is to pay the respondent's costs, including reserved costs.
I certify that this and the preceding nine (9) pages are a true copy of the reasons for judgment of his Honour Justice Heerey.
Dated:
Associate
Appearances
Counsel for the applicant: Mr M D Dean
Solicitor for the applicant: Harwood Andrews
Counsel for the respondent: Dr K P Hanscombe
Solicitor for the respondent: Bullards
Date of hearing: 17 July 1996
3
4
0