Re Michael Robert Cooke Ex Parte Official Trustee in Bankruptcy v Miller Bros Melbourne Tankworks Pty Ltd

CATCHWORD2

Bankruptcy - preference

- s.127,(1) of the Bankruptcy Act 1966

-. amendment of s.122 in Act No. 12 of 1980 - applicatlon of s.122 to payment of joint debt by one jolnt debtor who later becomes bankrupt - effect of s.122(4)(c) - onus of proof.

Eankruntcy Act 1966 - ss.122(1), (2). ( 4 ) ( c ) and 153(4)

Partnership Act 1958 s.13

MICHAEL

ROBERT COOKE Ex Parte the Official

Trustee

Bankruptcy (as trustee

of the estare of Mlchael Eobert Cooke,

a bankrupt) v. MILLER BROS. MELEOUENE TANKWORKS	?W. LTD.
NO. 181 of 1978
Smithers J.
18 February 1 9 8 6
Melbourne.

IN THE FEDERAL COURT OF AUSTRALIA )

)

DIVISION

GENERAL

)

EANKRUFTCY DISTRICT OF THE

) NO. 181 OF 1978

)

STATE @F VICTOFIA

)

IN THE MATTER of the

Bankruptcy Act 1966

E:	MICHAEL FOBERT COOKE Ex Parte the

Official Trustee in

Bankruptcy (as

- trustee of the

estate of Mlchael

Robert Cooke, a

bankrupt)

(Applicant)

MILLER BROS.

MELBOUFNE TANKWORKS

PTY. LTD.

(Respondent)

Judqe Makinq Order: Smithers J.

Date of Order:	18 February 1985
Where Made:	Melbourne.

O R D E R

THE COURT ORDERS THAT:

1. The application be dismissed.

2 .

The applicant

pay

the

respondent's

c o s t s

and

incidental to this application.

IN THE FEDERAL COIJRT OF AUSTRALIA )

)

GENERAL DIVISION

BANICRUFTCY DISTRICT OF THE	)	NO. 181 OF 1978
)
STATE OF VICTORIA	)

IN THE MATTER of the

Bankruptcy Act 1966

p.E:	MICHAEL R O B B
Ex Parte the Official Trustee In Bankruptcy (a5

- trustee of the

esr;ate of Mlchael

Rohert Cooke, a

bankrupt)

(Applicant)

AND :

MILLER EROS.

MELBOURNE TANKWnFKS

KTY. LTT!.

(Respondent)

W: Smithers J.

Date:

18 February 1985

REASONS FOR JUDGMENT

This is an application by the trustee of the bankrupt estate of Michael Robert Cooke

(the trustee) for declarations:

1. that

the

payment

of the

sum of $15,000 made on 18

November 1977 by the bankrupt

to Mlller Bros. Melbourne

Tankworks Pty. Ltd.

(the respondent) is void as agalnst

the trustee as

bemg a payment havlng the effect

giving

the

respondent

a preference,

priority

advantage over other creditors within the meaninq

5.122 of the Bankruptcv Act 1966

(the Act)

and orders that:

(a)	the respondent pay to the trustee the	sum
of $15,000;

(b)

the respondent pay to the trustee his taxed costs of and incidental to the appllcatlon;

(C)

such further or other orders as the Court

see flt.

A claim by the trustee

for relief pursuant to 5.115 of the Act

was not pursued at trial.

The facts shortly are that Michael Cooke had been a

partner in a real estate firm in Ballarat in Vlctoria known

Cooke & Co. (the firm).

The other partner was hls father

Davld Cooke.

The flrm had been established since 1866 and it

is undisputed that

It had a good reputation in the community.

Gorden Albert Peters (Mr. Peters) was

n alternate director

the respondent and was the husband

of one

of the directors.

He had worked for the firm

from 1970 untll 11

June 1977 and

between 1971 and 1977 the respondent lent various amounts

totalling $60,000 to the firm. At the time

Mr. Peters left the

flrm It was	stated that the respondent was owed approximately
$52,000.

On 11 June 1977 the respondent sent a letter to the firm

addressed to Michael

Cooke, inter alia, requestlng payment of

the sum of $21,000 by 8 August 1977. No money was received by that date and at that stage the flrm stopped making lnterest

payments on the amounts owlng by It

to the respondent. It

appears that Mr. Peters often made telephonic requests of Cooke f o r the $21,000 and on 26 October 1977 Cooke gave to Mr. Peters $4,000.10 comprising $1,350 In cash and a cheque for

$2,650.10

drawn by the Hotham Permanent Euilding Soclety.

Cooke stated that

he would pay the

remainder In a f ew days.

Further pressure was exerted upon November 1977 he gave Mr. Peters a cheque for $15,000 drawn	Cooke and	on	18
on

the trust account of the firm of Lintcmn R. Lethlean	& Co. a
firm of solicitors In Eallarat.

On 3	May 1978 Cooke's estate was sequestrated upon the

presentation of his own petltlon.

It is the case for the trustee that withln the meanlng

of s.122(1) of

the Act the payment

of $15,000 was a payment

made by the bankrupt within six months

of the presentation of

the petition on which he was made bankrupt, that it was made

in favour of

a creditor of his when the he was unable to pay

his debts as

they became due from

his own

money and that the

effect of the

payment

was

give

to that

creditor a

preference over other creditors. As	such it was void	as
against the trustee.

It was, the payment was not, within the meaning

inter alia,

the case for the respondent that

of s.122(1), a payment

made by a

person deslgnated therein. It was

put that, ab at

18 November 1977, section 1 2 2 ( 1 ) dld not apply to a payment

made by a firm or a partner of a flrm of whlch only one partner subsequently became bankrupt, or to a payment made, by whomsoever, to discharge a debt of a flrm a partner of whlch

was made bankrupt wlthin

SIX months, or to a payment made by a

debtor out of moneys of the debtor and another person. And

was the submission of the respondent that the payment made on - l8 November 1977 was a payment which falls into one or more of those speclfied categories. The respondent further contended

that if

the payment was within the scope

of s . 1 2 2 ( 1 ) the

provlsions thereof did not affect the rlghts

of the respondent

because it conslderation in the ordinary course

was

payee

qood

falth and for

valuable

of business withln the

meaning of s.122(2) of the Act.

The scope of s . 1 2 2 ( 1 )

as it stood on 18 November 1977

Mr.

Sharp,

for the respondent, argued that before the

enactment of 5.57 of the

Bankruptcy

Amendment

Act

1980,

s . 1 2 2 ( 1 ) of the Act did not apply to any payment of the kind

speclfled

s.57(l)(b)

of that

Act.

was

provlded

s . 5 7 ( 1 ) of

the Act of

1980 that 5.122

of the Act should

amended as follows, namely,

57. (1) Section 122 of the

Principal

Act

amended -

(a) ...

(b) by

Inserting

after

sub-sectlon

(1) the

followlrlg sub-section:

"(1A) Sub-sectlon (1)

applles in relation to

a conveyance or transfer of property, a

charge on property or a payment made, or an obllgation incurred, by the debtor In favour

of a credltor -

whether or not the liabillty of

the debtor to the creditor is

his

separate

llabllity

liabillty with

another person or

other persons ~olntly;	and
whether or not -

the

property

conveyed,

trans-

ferred or charged 1 s his own property or is the property of

the debtor and

of other persons

or other persons;

the payment is made o u t of his own moneys or out. of moneys oi the debtor and another person or other persons; or

the

obllgation

Incurred

the debtor on his own account only or on account of hlmself and another person or other Fersons,

as the case requires.

...

It was also provided by s . 5 7 ( 2 ) that,

" ( 2 )

Notwlthstandlng the amendments

of 5.122

the Principal Act made by sub-section

(1) of

this

section, the provisions

of that section

of the

Principal

Act

continue

apply, after

the

commencement of this section, in relatlon to a bankrupt, and the estate of a bankrupt who became

a bankrupt before the commencement

of this section

as if those amendments had not been made."

Mr. Sharp submitted that

s . 5 7 ( 1 )

was deslgned by

Parliament to

alter the law by extending the application	of s.122(1) to
payments of the klnds specified In s.57(l)(b	to wnich it did

not formerly apply. He	relied, of course on	the mere passage
of the Act.

No doubt s.122(1) must be interpreted as expressinu that

which is consldered in the context of

conveyed

by the

natural

meanlng

of its

terms

the sectlon. But that does not,

thlnk, mean that the passage

s.51(l)(b) may not be

consldered In relatlon to its interpretation. That It may he so considered galns some support from the observations of

Dixon J, as he then was, In Graln Elevators Board (Victoria) v. Fresldent, Councillors and Ratepavers

the

Shlre

Dunmunkle (1946)

7 3 CLR 70.

In that case a question arose as

to the effect of a statute

of 1942, exempting the land of the

Board used exclusively for receiving, storlng

or forwarding

wheat, from liability as

rateable property under any Act. It

had been contended by the Board that

statute of

1534 by

whlch it was created had constituted the Board

an agency of

the Crown and thereby conferred

upon it an unlimlted exemptlon

from liabllity to be rated.

Re~ecting

thls contentlon partly

by reference to the provislons of the 1542 Act	Dixon J., as he
then was, said at p.86:-

"Although the provision

was passed too late to

apply to the present case, I think that it may be

considered on the question of interpretatlon. It

would be a strange result if we were to Interpret

the prior leglslation as glving a wider exemptlon

than that conferred by the provision so that the

express exemption It makes would prove unnecessary

and the

qualificatlons

places

upon

that

exemption would

be futlle."

my mlnd it would be strange that Parliament should

mlsunderstand the meaning and scope

of s.122(1)

it sLood

before the amendment of 1980 that It

would by that amendment

enact

something which it

regarded as

clear and

major

alteration of

the law

if the law accordlng to

that sectlon

already was that whlch

enacted in the amendment.

The

notion that	In 1980 Parliament was concerned only to declare
the effect	of s.122(1) before the amendment was made is

excluded by

the provisions of s . 5 7 ( 2 ) to the effect that the

provlsions

of s.122 as they operated before the amendment

should continue to apply In relation

to a bankrupt, and the

estate of a bankrupt, who became commencement of s .57 as if the amendments In

bankrupt

before

the

5.57 had not been

made.

It seems clear that Parllament considered that

It was

altering the creditors where such persons became bankrupt after the passing

law

respect

of payments

persons

the

amendment.

And

may

mentioned

that

explanatory paper relatlng

to the proposal

to enact 5.57

referred to it as "a proposal to alter the law".

Interpretation of s.122	without reference to 5.57 of Act No.
12 of 1980

Mr. Sharp, the amending Act of 1980 s.122(1) did not apply to a payment

for the respondent, contended that prior to

of a liability of the debtor jointly wlth another person who was not made bankrupt, or to a payment made out of moneys of the debtor and another person who does not become bankrupt.

He said that

on the proper constructlon of s.122(1) the only

payments which

it rendered void

as agamst the trustee were

payments made by

a person

who

becomes bankrupt withln the

prescrlbed period out of hls own money of a	debt owed by him
separately, see s.lZZ(l)(a) and (b).

It would appear that if the reference In s.122(1) to a payment by a person 1 s a reference to a payment by two or more

persons then in

a case where

the payment

1s made by two or

more persons, for instance partners, neither

of the condltlons

(a) or (b) of

the sub-sectlon would

be satisfied with respect

to the payment unless

all

the partners became bankrupt.

the payment be

made by two or more persons, only one of whom

becomes bankrupt and the section

1s Interpreted In the plural

It would only apply where each

of the persons making the

payment was unable to pay

his

debts as they become due out

his own

moneys. The section is not

concerned with payments

made by prescrlbed time or at all.

persons

who do not

become

bankrupt

within

the

It assumes that the payment is In

respect of a debt of the	person or persons	who	become
bankrupt.

When only one of a number of joint debtors becomes

bankrupt and a payment has been made by him the payment is not

strictly in respect

of a debt of that person but in respect

a debt jointly owed.

To descrlbe a payment made by

a person

in respect

of a debt jointly owed by the person

who pald It

and another, as a payment by a person of a debt

of his to a

creditor of his 1s to fall adequately to describe the payment.

The payment,

because of the nature of a ~olnt

dcbt,

1 s

inevltably made on behalf of

the loint debtors.

In this case

the debt that was pald was

a partnership debt. Section 13 of

the Partnership Act 1958

(Victoria) provides:-

"13. Every partner in

a firm is llable ~ointly

with the

other

partners

for

all

debts and

obligations of the firm incurred while he is a partner, and after hls death hls estate is also severally liable in a due course of administration for such debts and obllgatlons so far as they

remain

unsatlsfied

but

sublect

the

prlor

payment of his separate debts.

In Kendall v. Hamilton

(1878-79) 4 AC 504 two partners, having

been sued, had ~udqment

entered agalnst them

and

been made

bankrupt on a partnershlp debt.

The credltor sought to sue a

subsequently discovered thlrd partner, there havlng been only

a small dividend on

the bankruptcy. It was held that the

action was not maintainable. At	pp.516	and 517	Earl Cairns
L.C. said,

"There is no doubt

hat

many

cases

and

text-books we find the

expression

that

partnership debt is in Equlty joint and several.

This, however, is only a

compendious expression,

which must

be interpreted with reference to what

were the functions of the Court

of Ecjulty

as to

partnership debts.

The only lnterposition of a

Court of Equity with regard to partnershlp

debts,

took place in the administration of the assets, either of the partnership or of a deceased member

Equity was admlnistering the assets of a deceased

of the partnership. ... If, therefore, a Court of

partner, it would, in order to clear his estate,

ascertain his

liabilities to the partnership and

for	this purpose would ascertain the debts due

from the co-partnership at his death.

From this

10.

the transition was easy to giving the credltors

the partnershlp a

direct rlght, and not merely an

indlrect rlght, through the survlvlng partners, to

come for payment agalnst

the assets of

the

deceased partner; and

from

thls

again

the

transltlon was easy to the expresslon whlch sald that partnership debts, in the eye of a Court of

Equity, were jolnt

and

several

- not

thereby

meaning that a Court of Equity altered or changed a legal contract, but merely that the Court, In order, before distributing assets, to administer all the equitles existing wlth regard to them,

would go behlnd the

legal

doctrine that

partnershlp debt survived as a

clalm against the

survivlng

partners

only,

and

would

give

the

creditor the benefit

of the equlty

which the

surviving partners might

have inslsted on."

And at pp.539 and

540 Lord Selborne said:--

"My concluslon is that in the present case there is

no equity

upon

whlch

the

Appellants

can

entitled to be relieved from the

legal effect of

the

judgment obtained by them against

Wilson,

McLay, & Co.,

if, (as the

equitable

argument

assumes,)

that

judgment

had the

effect

extingulshing, In the

lifetime

of all the

partners, the legal liability of the Respondent as

a partner for the debts previously due from the

partnership of whlch he was a member. There is no

questlon here of jus

accrescendi; the questlon

relates

slmply

the

constltution

the

Appellants'

debt.

Before

the action

was

~olnt

debt;

but by the result of

the action (if

the declsion in King v. Hoare

13M.

& W.

4 9 4

rlght; and is appllcable to this case), It became

the separate debt of Wilson, McLay, & Co. only.

If the joint debt, for whlch alone the Respondent

was ever liable, was merged and extlngulshed at

Law by this judgment (on which the Respondent 1 s

clearly not

liable, either at Law

or in Equity),

to should, on that ground, raise

to be lmpossible

that

Equlty

seems

or imply against

him, out liabllity to the Appellants from

of the origlnal contract, a separate

whlch he is free

at Law,

whatever may be the rights, by way of of

contribution,

Indemnity,

otherwise,

which

Wilson, McLay,

& Co. may possess against him In

respect of this judgment.

The effect of the judgment

In Kendall v.

Hamilton has

been modified in England and Victorla.

But

on the nature of

11.

a partnership debt what	1 s sald therein	1s stlll apposlte in
the current problem.

It would seem that judgment and executlon in respect

if one

~olnt

debtor be pursued to

of hls llablllty for a debt

jolntly owed It is always the jolnt debt that is the subject of the pursuit. Once it is seen that the payment was made in respect of a liabllity resting on the payer jomtly wlth

another or others, conslderations arlse which complicate the

notion of that payment being

a preference either agalnst

credltors of

the payer's separate estate or creditors

of the

payer and the person or

persons ~ointly

llable wlth hlm. The

payment is non

preferential as against the separate credltorz

unless It appears that the payment

had the effect of reducing

the separate estate. And

that, It would only

do, ~f

dissolution of the partnership

and a taklng of accounts, there

was a deficlency of assets to reimburse the bankrupt the

amount of the payment. So far as creditors of the goint

debtors are concerned there wlll

be a preference against them

only If

the assets of the partnership together

with the

unllmited liability

of each partner are not adequate to pay

those creditors.

In the case of

a payment by

a partner, who

becomes bankrupt the payment

will have improved his credit

position in the firm so that on the

accounts being taken the

balance in hls favour may Include the amount of

the payment.

The nature of the transmlssible interest of a partner in the partnership assets is explained by the observations

Mason

S. In United Builders Ptv. Ltd.

Mutual Acceptance

12.

Ltd. (1980)

1 4 4 CLR 673 at p.687 and 688 which concerned the

effect

a mortgage by a partner of

hls

interest In a

partnership:-

"The vital question

is:

What

rights

passed

Mutual by virtue

the charge over Unlted's

rlght, title and Interest in the partnershlp? The answer to this question is that, according to the long established princlple, a mortgage or charge

over a partner's

hare

interests

the

partnership does not

vest any interest In the

assets of the

partnership

agalnst

other

partners. What the mortgage

or charge does is to

confer an entltlement on the holder on dissolutlon

of	the partnet-shlp in relatlon to- the partner's

share of

the partnership assets. Section

34 of

The Partnershlp Act specifically provides

that a

mortgagee 1s

on dlssolution entitled to receive

the mortgaqor's share of the asset5 and that, for the put-pose of ascertaining that share, he 1 s

entltled to an

account from the other partners as

from the date

of dissolutlon,.

Thls

princlple does not ln

my opinion deny the

existence

of a partner's beneficial interest In

each of the partnership assets, but thls lnterest is of a special and non-specitic k m d (Canny

Gabriel Castle Jackson Advertising Pty.

Ltd. v.

Volume Scales (Finance) Pty. Ltd.

(1974) 131 CLR

pp.327-328; Federal Commissioner of Taxation v. Everett (1980) 143 CLR 440, at pp.446-447. In Helmore v . Smlth (1887) 35 Ch.D.

321 at

436 it was

recognized that a sheriff under a writ

of fi. fa. could sell	a partner's chattel interest
in the partnershlp.	But, as Lindley L.J. pointed

out the purchaser "has to find out what he has really had assigned to him, and that he can only do by a partnershlp account" (1887) 35 CH.D. at pp.447-449. Thls in itself will vlrtually ensure

a dlssolutlon of partnershlp. It 1s signiflcant

that The Partnershlp Act now provides that a writ

of execution

shall

not

issue

agalnst

any

partnership property except on a judgment against

the firm (s.26(1)) and that the court may by order

charge a partner's

interest

and his share of

profits

with payment of

judgment debt and by

subsequent

order

appoint

a receiver

that

partner's share of proflts and of any other money which may be coming to him from the partnership

(s.26(2))

. "

It is to be noted that the payment struck at by

s.122(1)

is rendered void

as agalnst the trustee.

It 1s not vold as

against any bankruptcy and being

other

person.

The payment belrlq made

before

a payment of a joint debt operates at law

as a discharge of all the ~oint

debtors. If,

by virtue

s , . 1 2 2 the payee were required to repay the sum to the trustee

the discharge

of the joint

debtors which was effectuated by

the payment would

not be affected. The discharge of the joint

debtors’ liability

would

persist

notwlthstandlng

the

bankruptcy and the repayment to the trustee.

Thus the payee

would be

deprived of

his right of action agalnst the other

Ioint debtors. payment mlght reasonably be imposed upon

While

the

consequence

of a

preferentlal

a payee who upon

repayment to the Trustee would be

entltled to prove

In the

bankruptcy, there would

be an element of hardship In the loss

his rlghts to recover the debt from

the other

~olnt

debtors.

the

absence

of express provlsion, and

partlcularly

havlng

regard

the

express

provision

s.153(4) of the Act that the dlscharge

of the bankrupt does

not release from any liablllty a person who was a partner of the bankrupt or jointly bound with hlm, one would not expect such a situation to be created. It is to be noted that

although

s.122(5)

preserves

to a creditor who makes

repayment

pursuant

5.122 a right

prove

the

bankruptcy, there is	no corresponding preservation of hls
rights agalnst those	~ointly llable with the bankrupt in

respect

of the debt. Presumably

it was

thought that the

section was not applicable	t o the payment In respect	of a debt
jolntly awed by several.

14.

Counsel for the trustee has referred me to the views

expressed in the report

of the Commlttee appointed

by the

Attorney-General of the Commonwealth to revlew the Bankruptcy

law of the

Commonwealth under the chairmanship

of Mr. Justice

Clyne dated 14 December

1 9 6 2 .

Whlle recognizing that

it was

reasonable to regard,

as an in~ustice,

the loss suffered by a

creditor who loses his

rlghts against a surety of his debtor,

where he

1 s required to

repay the trustee under what

1 s now

s .122 of the Act, the amount recelved by him from

his debtor,

the Committee considered that no provlslon should be made by

the legislature to remedy that sltuation.

In coming to that

concluslon the Committee had regard to

the difficulties that

would

arise in restoring all the parties to thelr former

position many months after the payment

In questlon had been

made. It credltor who took a security to stlpulate that the surety

a lso

took into account that it was open to a

would remain llable If payment of the debt was set aslde as	a
preference.

However, I

do not gain assistance from the Commlttee's

conclusion. Where guaranteed debt the debt which is paid

what

involved

1s a

payment

1s essentially the debt

the bankrupt

or bankrupts concerned and

of him or them

alone. A partner's liabillty for a partnership debt is of a dlfferent order. It is the debt of all the partners as much as

it is

the debt

a partner who mlght subsequently become

bankrupt.

In addltlon, unlike the case of

a surety It would

be unusual in the extreme that a person dolng business

with a

firm would stipulate for

an acknowledgement by the partners

15.

that they should remain liable for the debt if payment thereof was set aside under 5.122 of the Act on the bankruptcy of one of them.

If the liability becomes bankrupt were a llablllty glving rise to the operatlon

of one of

several jolnt debtors who

of 5 . 1 2 2

In respect

of the joint

debt, problems similar to

those consldered by the Committee in relatlon to the liabllity of a surety would exlst and one might have expected that the

Commlttee would have discussed them.

The absence of any such

discussion would indicate that

was not

felt that the

problem existed in relatlon to the llabllity of a ~oint debtor. And of course It did not exist if the section dld not operate in respect of a ]olnt debt where only one of the ~oint debtors is made bankrupt.

If the money used to pay the debt In question is money

not only of

the person who becomes bankrupt but

him and

another jointly and the payee is required

to repay the amount

received by him

to the trustee, then, there has been an

appropriation for the beneflt

of the creditors generally

of an

interest in property

a thlrd person not connected

with the

financial relatlonship relevant to

any question of preference

between the creditors

of the bankrupt and who had no intention

of beneflting anybody other than the payee. In the absence	of
express statement one would not infer that the leglslature

intended such a result.

this

connection

may

observed that the object

of 5.122, certainly

as it stood

before Act

No. 12 of

1980, is to preserve for the credltors

16.

generally the assets

of the person who

becomes bankrupt.

It had operated to incorporate into the estate of the bankrupt

a property interest of a third person the section would have

gone beyond this object.

Havlnq concluslon that, as at 18 November 1977, s.122(1) was not

regard

the

foregoing I am led to

the

applicable to

a payment of a joint debt by ~olnt

debtors who

dld not all become bankrupt

by a 3oint debtor who alone of

debtors

payment made wlth money lointly owned by the payer and another

who is not made bankrupt.

subsequently

became

bankrupt,

or to

the

joint

The payment as related

to a llabilitv of a firm

It 1 s necessary in the llqht of the above conclusion to

enquire whether

when Mlchael Cooke handed the cheque for

$15,000 to Mr. Peters he did so in his

personal capacity or in

his capacity as a partner

of the firm. Clearly it was

payment of

the flrm's debt and thus pro

tanto released both

partners from liability.

The payment made was in respect

money lent

to the flrm

by the respondent.

The total amount

lent by the respondent to the firm was	$60,000.	It	was
comprised of six separate loans as follows:

1.10.72

$5,500

3.10.72	8,500
-. 10.72	6,000

9.3.74	25,000
2.4.76	10,000

6.9.76

5,000

Total

: 60,000

17.

There were repayments of capital as follows:-

7.11.73 9,000

8.6.74	1,000
1.6.76	5,000
8.12.76	1,000
6.10.77	4,000

18.11.77 15,000

Total

: 35,000

In respect of the repayment of 7 November 1973, 1 June 1976

and

R December 1976 there are

In evidence coverlnq letters

from the firm advislng the respondent of such repayments by the firm. The only loan in respect of whlch the instrument of

loan is

in evldence is that relating to thP sum

of $25,000

lent on 9 March 1974 and

the parties to that were

the firm as

borrower and the respondent

lender. IntErest

on all the

loans had always

been paid by the

firm and I

am satlsfied that

all the loans were made to

the firm.

It was In the course of

the business of the firm

to receive deposlts of money on loan

from persons generally. That respondent followed from the circumstance that Mr.

the

loans were made by the

Peters was

from 1970 untll

June 1977 an employee of the flrm In a

clerical

capacity

and

that

Mr.

Peters was an alternate

director of the respondent representing his wlfe and that the

respondent had moneys to invest. After Mr. Peters ceased to

be employed in the flrm, a good relationship between him and

his wife and the Cookes contlnued. But by the cessation of

employment the closeness of the connection was reduced. Mr.

Peters became involved in the respondent's Ballarat boutique

18.

buslness managed by

his wife. Structural alterations to the

shop were undertaken and a bank overdraft in the reglon	of
$20,000 was incurred in relation to these alterations.	To

meet this the respondent made

a request by letter to the firm

on the day

Mr. Peters left to repay

$21,000 of the outstanding

loans by

8 August

1977.

In the same letter the respondent

indicated that it was

willing for

the balance to be repaid

over the next twelve months. The actual terms of the letter which was addressed to Mlchael Cooke, Cooke & Co., Ballarat, are of slgnlflcance. They were as follows:-

'' At a meeting

of the Board of Dlrectors held

today, I was instructed to write to

you to request

the sum of $21,000 (advanced to you previously) by

August 8 , 1977 . I was further instructed to

request the balance of funds within twelve months

that date, preferably

three

payments,

November, 1977, April, 1978 and August, 1978.

As you are aware the company is commltted to

Bulldlng extensions which are already under way, hence our request. Should you wish to repay the balance prior to the above dates the Board will be

happy to accede to such a request.

I take this opportunlty

to thank you for the

asslstance

you have rendered the company to

our

mutual benefit over the past 314

years and trust

that a continulng relatlonship wlll continue to

exist so that buslness lnvestments are presented for the Board's future consideration."

It was not unnatural that,

Mr. Peters' buslness association

wlth the firm having come to

an end, the desire to leave funds

with it should cease. But other

than for a request for the

amount of money needed to dlscharge thelr overdraft there

was

immedlate requirement for repayment. On

October 1977

$4,000 was repaid. About that time, but unknown to the respondent, creditors of Michael Cooke and of the firm had

19.

taken actlon against him and agalnst the flrm.

The ma~orlty

of the debts due In legal proceedings pendlnq at the time were

debts of the firm. It was withln Mlchael Cooke's authorlty as

a partner to pay those debts. To meet the claims so made and

the respondent's claim Mlchael Cooke decided to obtain money

on loan by the use of the credit of hlmself and his wife. The

loan was obtalned through Messrs Llnton Lethlean

& Co. and was

made to Mr. & Mrs. Cooke ~ointly. Mrs. Cook authorised the

solicltor In whose trust account the moneys ~olntly borrowed

by Mr. and Mrs. Cooke was placed in their joint names to make

the payments of the firm's debts. When Michael Cooke pald the

cheque for $15,000 to Mr. Peters on

18 November 1977, the

intentlon to

be ascribed to him was that he was discharging

the firm's debt. The payment by Cooke was thus either a loan to the partnershlp, which is a difflcult concept, or a Fayment

made by him

as a partner wlth the consequence of discharging

the debt of r;he

firm and of creatlng a

credit In hls capital

account In the partnership.

He certainly had no authority as

a partner to make

his co-partner llable to

him as on a loan to

the

partnership.

would

be within his authority as a

partner to pay

a firm's debt and

to galn thereby a credit in

the partnershlp accounts. It would therefore seem that the

proper inference is that

he paid the money in dlscharqe

of the

firm's debt in his capacity as a partner.

The Source of the money used to make the pavment

The source

of the money which was paid by the bankrupt

to Mr. Peters on

18 November 1977 was money in the trust

2 0

account of Messrs Linton Lethlean & Co. ,

solicltors. It stood

in thelr trust account In the name of

Mlchael Cooke and Mrs.

Cooke, his wife. The inference from the evidence 1s that the money in the trust account was borrowed by Mr. and Mrs. Cooke

from a client of

the solicitors on the security of assets,

some being assets

of Mr.

Cooke and some of Mrs. Cooke. Mrs.

Cooke attended the office of Messrs Linton Lethlean & Co. at

her

husband's

request. sollcltor was not explained by him to her. On her arrlval Mr.

The purpose of her

vlslt

the

Paulson, the solicitor's clerk

handling

the

transaction

informed Mrs. Cooke that her

husband's creditors were pressing

for

payment and It

was desirable that

she

loin

the

borrowing of money debts. It was indicated either expressly

to be

used by

hlm in dlscharging those

or by

impllcation

that the relevant

credltors

were

those

of Michael

Cooke

personally and

of the firm. Mrs. Cooke sald she was wllling

to do what was necessary.

Mr. Paulson presented her with the

relevant document whlch she signed.

It provided that Mr. and

Mrs. Cooke borrowers both

borrowed

$100,000 from

the

lender

as joint

being liable to repay the money.

The ~oint

aspect of

the transaction was reflected in the trust account

of the solicitors.

It was reflected also in that the cheque

for $15,000 paid to the respondent

on 18 November

1977 was

drawn on

that trust account, no doubt on the instructions of

Michael Cooke.

The implication from the short conversation

between Mr. Paulson and Mrs. Cooke was that Messrs Linton

Lethlean & Co. were to have her authority to draw on the money

borrowed as requested by Michael

Cooke for payment of his

liabilities including

his own private debts and the debts of

21.

the firm.

It was said Mr. & Mrs. Cooke	for the trustee that the money borrowed by
jointly was the subject of a separate

transaction of loan from Mrs.

Cooke to Michael Cocke.

It was

sald that by this transaction the money borrowed became

hls

money

and

her

interest

therein

was

transformed

Into

liability of Michael Cooke to her In respect of money lent by her to hlm. Havlng seen Mrs. Cooke and heard het- evidence I

am satlsfied that there is no basis for thls. Clearly enough

if Michael Cooke had put such a proposltion to his wlfe she would have concurred therein but it W ~ E lust never put.

Mlchael

Cooke swore In an affldavit that

Mrs. Cooke

"had

agreed to advance and lend to me her share of

the moneys".

Mrs. Cooke sald that she was asked by her husband to

go to the

solicitor's office. But

she said that before she arrlved at

the solicitor's office nothing

was sald to her

as to the

purpose of the vlslt or the nature of what was llkely to occur

at It.

She only ascertained that she was to join in a loan,

and what Its purpose

was, from Mr. Paulson. There was clearly

no conversation between her and her husband in

which she lent

to hlm her share

of the money borrowed. Mrs.

Cooke, sald at

the end of the evidence, in a hopeless sort

of way, "I lent it

to him - gave it to hlm".

I have no doubt that thls was not a

statement

that she actually

entered

into

elther

of such

transactions.

It was

cri de coeur reflecting her attitude of

willingness to	have done whatever she mlght have been asked	to
do.

2 2 .

In the light affidavits to the effect that there was a transaction of loan

of what actually occurred statements

In the

between Mr. and Mrs.

Cooke have to be treated rather as

representing the concept

of the draughtsman of the affidavits.

The

result is that

when

Michael Cooke paid the cheque for

$15.000 to Mr. Peters he paid to it with money belonging

jointly to himself and Mrs. Cooke.

In the llght of all the foregoing It is my vlew that on the proper interpretation of s.122(1) as It stood the payment

was not one to which that section applied.

Section

122(1) if applicable: - The

Debtor’s financlal

posit Ion

If, however, to the payment in question It is necessary to conslder whether

s.122(1) should be

regarded as applicable

the debtor at the time of the payment

was unable to pay his

debts a5 they became due out of his own money, and whether

the

payment

gave a preference to the

respondent

over

other

credltors.

The onus

of proof in these respects is on the trustee.

There

is evidence that in May 1978 Michael

Cooke’s

total

llabllities far exceeded

his assets. Michael Cooke said that

in November 1977

when he borrowed the money to pay those

creditors, some being his

and some being debts

of the

firm

then pressing for payment, there were other creditors

to whom

money was

due and that whether he could survive flnancially

2 3 .

depended on

those credltors refralnlng from actlon for some

unspecified but material tlme.

Those credltors dld not

refraln wlth

the result that In a few months bankruptcy was

Inevitable.

Mr. Sharp did

not argue that on the evldence the

Court should not be satisfled that

at l€? hTovember 1977

Michael Cooke was unable to

pay his debts as they became due.

In the clrcumstances, I think, I should be so satlsfied. Simllarly havlng regard to the evidence of Mr. Watson I thlnk

I should be satlsfied

that, in fact, the payment of the

$15,000 did glve a preference to the respondent.

Section 127(4)(c) - On whom does the onus

of proof-?

The respondent submltted that even if

the payment were

one which was otherwlse void against the trustee s.122(1) dld

not apply

to it

because the respondent was

a payee in good

faith, for valuable conslderation and in the ordlnary course of business: see s.122(2). The trustee polnted out, however, that by virtue of s.l22(4)(c) the respondent 1 s deemed not to

be a payee in good falth clrcumstances as to lead to the inference that the respondent

If the payment was made under

such

knew or

had reason to suspect that the debtor was unable to

pay his debts as they became due from hls own money and the respondent knew or had reason to suspect that the effect of the payment would be to give the respondent a preference over other creditors.

There was of payment. But whether

course valuable consideration for the

the respondent may be regarded

as a

24.

payee in good

faith depends in the first lnstance on the

provislons of s.l22(4)(c). If

the conditions of sub-section

4(c) are

fulfilled then the respondent is deemed not to be a

payee m

good falth and cannot escape the avoidance

of the

payment In favour

the trustee although

by the operation of

s.122(2) it might otherwise

do so.

A question

has arisen as to which party bears the onus

of proof that the clrcumstances under whlch the payment under

challenqe was made were such

as to lead to the specified

inferences.

To my

m m d s.l22(4)(c) is intended to operate in

a situat~on

where the payee mlght be

able

to prove to the

satisfaction of the

Court that

sub~ectlvely

he received the

payment In good

faith

but nevertheless the circumstances

dlsclose that that

sub~ective

state of mlnd must

have been the

result of naivete or

Inattention to relevant factors. If the

circumstances, objectively looked at, would lead the Court to

draw the inferences specified

in 5.122(4)(c)(l) and

(ii),

then, whatever the sub~ectlve state of the payee he must not be regarded as having recelved the payment in good faith. To ascertain the Intention of the legislature as to the party upon whom the onus of proof lies It is helpful to conslder the

observations of the High Court in Vines v. Diordievitch	(1955)
91 CLR 512 at 519 as fOllOW5:-

"'There is a technical

distinction between

proviso

and

an exception,

which

is well

understood. All the cases say, that if there be negatived: but if there be a separate provlso, it need not' - per Abbott J. in Steel v. Smith (1817) 1 B & Ald 94 at p.99 C106 ER 35, at p.377. The distinction has perhaps cone to be applied in a

an exceptlon

in the enacting clause, it must be

25.

less technical manner, and now depends not

50 much

upon form as

upon substantlal conslderatlons.

the	end, of course, ~t 1s a matter of the

intention that ought,

in the case of a particular

enactment, to be ascrlbed to the leglslature and

therefore the manner In whch the leglslature has

expressed its wlll must remain of importance. But

whether the form

1 s

that of

a provlso or

of an

exceptlon,

the

lntrlnsic

character

the

provlslon that the provlso makes and Its real

effect

cannot be put

out

conslderatlon

determinlng where the burden

of proof lles. When

an enactment is stating the grounds of some liability that It is Imposing or the conditlons glvlng rlse to some right that it is creating, it is possible that In deflnlng the elements formlng

the

tltle to the

right or

the

basis

the

llablllty

the

Frovi

S 1 on

may

rely

upon

qualifications exceptions or provisos and It may employ negative as well as posltlve expressions.

Yet	it may be sufficlently clear that the whole

amounts to a statement of the complete

factual

situation whlch must be found to exlst before

anybody obtalns a rlght or Incurs a llabillty

under the provision. In other words it may embody

the principle whlch the leglslature seeks to apply

generally.

On the other hand It may

the

purpose of the enactment

lay

down

some

principle of llability which it means to apply generally and then to provide for some speclal grounds of excuse, justification or exculpation

depending upon new or additlonal facts. In the

same way where conditions

general appllcatlon

giving rise

to a right are laid down, addltional

facts of a special nature

may be made a ground for

defeating

excluding

the

right.

For

such

purpose the use of a proviso is natural. But in whatever form the enactment is cast, If it expresses an exculpation, justification, excuse,

ground of defeasance or exclusion which assumes

the existence

of the general or primary grounds

from which the llability or right

arises

but

denies the right or liability In a partlrular case

by reason of

additional or special facts, then it

is evldent

hat

such

an enactment

supplles

considerations of substance

for placing the burden

proof

the party seeking to rely upon the

addltlonal or speclal matter."

To my mlnd s.l22(4)(c)

"assumes the existence of the

general or primary ground from

which the right", namely,

immunity from s.122(1), "arises, but denies that right in a

particular case by reason of additional or speclal facts".

26.

And the condltional form

words used In s.l22(4)(c) would

seem to

be in harmony

wlth thls approach. Applylng this to

the present case the onus is cast on the trustee to

prove that

although the respondent might have received the payment in

good faith the

circumstances of

the

payment

fell

within

sub-section 4(c).

This departs from the view expressed by

Sweeney J. and from views expressed In some of the cases referred to by him in Re: Bird as Trustee of the Estate of

Arcadlou ex parte Casabene (1979) 39

FLR

281. His Honour

recognized that the view adopted by

hlm was

contrary to the

conclusion

of Barwick

C.J. in Pueensland Bacon Pty Ltd. v.

(196E) 115 CLR.

But of course that concluslon was in

conflict with the observations of the learned Chlef

Justice in

Eees v Bank of N.S.W.

(1964) 111 CLR 210 at 216-217.

The

observations of Rich and Dlxon JJ. in S.

Rlchards & Co. Ltd.

v. L l o a

(1933) 49 CLR at p.60, of

Rich, Dixon and McTlernan

JJ In Burns

v. McFarlane (1940) 64 CLR at p.60, and of Gibbs

J. (as he

then was)

at first instance in Pueensland Bacon

Pty

Ltd. v. Rees (supra) at p.280 are nothing was said by Kitto or Menzies JJ. who sat with the

In point. Nevertheless

Chlef Justice

indicate any reservation as to what was there sald by the

Chief Judge.

Queensland

Eacon

Pty.

Ltd.

v. Rees

In 1983 Domenico Castellucci Ex Parte:

the question came before Fisher

J. in Re:

Kevin

Michael

Pipkin

and

Michael Gamma and

Rosa Gamma 11 March 1983 in

No. S.A. 648 of

1981. He referred to the observations of Gibbs C.J. in R e

Welss (1970) ALR 654 which

were not before Sweeney

J. when he

27.

decided In Re Blrd (supra). His Honour

concluded that the

onus of proof lay on the party alleging that the

circumstances

of the payment fall within	sub-section 4(c) of s.122.	His
Honour said at p. 9:-

The provisions of s.122(4) of the Act do not

impose any onus on the respondents.

The effect of

the subsection 1 s . as stated bv Glbbs J. in re Weiss, Ex parte White v. John Vlcars & Co. Ltd. C19707 ALE 654 at 665

' . . .that, If the Court

posltlvely

satisfled that the circumstances of the payment ~ustlfy the inference by it that the

credltors knew	or had reason -to suspect the
insolvency and	the preference, the Court is

precluded-from finding good falth (pueensland

Sacon Pty. Ltd. v.

Rees at p.

2 8 7 ) . '

The passaqe quoted above from the reasons

Glbbs J.

(as he

then was) in Re: Weiss (supra) was

Introduced by the

words "This sub-section casts

no onus on the credltor".

In the

liqht of the

foregolng

I am led t n the

conclusion that I should accept the

view that the onus of

proof under s.l22(4)(c) lies upon the trustee.

Clrcumstances of the payment

For the conslderation arislng under this heading It 1s

useful to have regard agaln to the reasons

of Flsher J. in Re:

Castcllucci

(supra) at pp.10 and 11, namely:-

Gibbs J.

went on to indicate, by reference to

extracts from the

reasoning in that case, certaln

other

matters

which

are

quired

to be

established. He said on the same page

of re Weiss

2 6 .

To satlsfy the subsectlon, 'it 1 s not enough that the circumstances are such as to lead to the Inference that the creditor had reason to

suspect that the debtor mlght be insolvent.

The words of

the subsection, to

my mind, are

quite clear that it

1s the fact

of actual

lnsolvency which must be known or suspected. To be insolvent, the debtor must be unable as distlnct from being merely unwllling, 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

Insolvent. It

1 s

another thlng to suspect

that he 1 s in fact insolvent. It is of the latter suspicion that s.94(4), in my oplnion speaks' (Weensland Bacon Ptv. Ltd. v. Rees,

supra at pp.291-2, per Barwlck,

C.J.)

'The

notion whlch "reason to suspect'' expresses In subsection ( g ) , 15, I think, of something which In all the circumstance? would create

the mind

of a reasonable person in the

positlon of the payee an actual apprehension or fear that the situatlon of the payer 1 s in

actual fact that which the

subsectlon

descrlbes - a mlstrust of the payer's ablllty

to pay

hls debts as they become due and

the effect which acceptance

the payment

would have as between the payee and the other

credltors' (p.303, per Kitto, J).'

The words whlch I have enphasised In the last

mentioned extract from the reasons

Kltto J ,

namely "a reasonable person in the positlon

f the

payee", support my view that I am required to take

into

accounr; the knowledge and clrcumstances

the respondents in decldlng whether I should draw

the inference that they had reason to suspect.

also draw attention to the

dlstinctlon

made

between doubting whether a person is solvent and

suspecting

that

fact

insolvent.

Mr.

Gamma was the only respondent to give evidence and

it	was not suggested that the respondents' case

was defectlve by reason

the absence

of Mrs.

Gamma, who, her

husband said, had only

been

included as a mortgageee to cover the eventuality

of his death."

The shareholders of the respondent were Mrs. Peters and

her

sister

Mrs.

Barry.

Mr.

Peters

and Mr.

Barry were

alternate directors for their respective wives and Mr. Barry was also the company secretary. He was a qualified accountant

2 9 .

working a s an employee in a

flrm of accountants. The

relationship between

Mr. Peters and

hls wife with the bankrupt

had developed over the

years to one of genuine friendship. As

indicated above the

actlve business of the flrm had been

handled by the bankrupt during

Mr. Feters' assoclation wlth

the firm.

Mr. Davld Cooke attended the offlce regularly and

attended mostly to

the clerical and admlnistratlve side

of the

business.

He was always, in a sense, "there", and

was

regarded by Mr.

Peters as

a man of integrlty and of undoubted

financial

resources.

was

reasonably

understood

by Mr.

Peters and

Mr. Barry that the firm

was the owner

of the

building In which the business was carried on and that

the

firm

or Mr.

Davld Cooke had substantlal interests in other

real estate.

The firm had been in bus~ness in Ballarat for

over one hundred years and it enjoyed it	hlgh reputation for
integrity and financial strength.

Included in its business operatlons was the acceptance

of money from private persons

on interest hearing deposit for

fixed or indeflnite terms. Mr. Peters was unaware of the mode of Investment of those moneys by the flrm. He belleved that

some of the moneys were invested

In the Berklee group

companles. That group was financlally sound and Mlchael Cooke

was understood to have a substantial investment in that group.

Throughout his employment with the firm Mr.

and M r s .

Peters remained on good terms with Michael Cooke and his wife. The associatlon of Mr. and Mrs. Barry with elther of the Cookes was peripheral.

30.

Mr. Braun f o r the trustee contended that

it was apparent

that %he circumstances

of the payment of le November 1977 were

such as to

lead to the inference, not that the respondent

knew, but that it had reason to suspect each of the speclfied matters referred to In s.l22(4)(c). He relied In particular

on the failure

of the flrm to pay Interest due

on the

respondent's loans to it from the end of July 1977, the

payment of $4,000 only on 6 October 1977, the form in which

that payment was made, namely a Hotham Building Society cheque

and $1,350 cash, the form

In whlch the $15,000 was pald on 18

November 1977,

namely a cheque drawn on a sollcltor's trust

account, and the fact that payment of that

amount still left

outetandlng $ 2 , 0 0 0 of

the $21,000 of which the respondent had

requlred payment.

He stressed that between June 1977 and

November 1977 Mr.

Peters had repeatedly pressed Michael Cooke

to pay the $21,000 and the bankrupt

had repeatedly stated

Inability

to do so until

some

unspecifled,

although

not

remote, time later. He polnted out that Mr. Barry had made a speclal trip to Ballarat to urge Mlchael Cooke to make prompt payment of the amount requested.

The question whether at the time

of the payment on

November 1977 the respondent had reason to suspect that

"the

debtor" was

unable to pay

hls debts

as they became due and

that the effect of

the payment was to give

it a preference

over other creditors must

be decided by reference to the whole

of the circumstances known to the respondent

18 November

1977. The relevant mind of the respondent would be the mlnds

3 1 .

of Mr.

Peters and Mr. Barry.

I think the

critical mlnd was

that of between Mr. Peters and Mlchael Cooke

Mr.

Peters.

Because

the personal relatlonship

and the fact that the

money which had been lent to the firm to

which Mr. Peterr; was

the closer, Mr. Barry was inclined to leave, prlmarlly to Mr.

Peters, the matter

of the recovery

of the moneys lent.

think that at the relevant tlme he would reasonably leave to Mr. Peters the assessment of the ultlmate flnanclal soundness of the firm.

Mr. Peters had knowledge of the firm's business

practices and

in the years gone by he had obvlously had

confidence in permitted the respondent, wlth money

Its

solvency

and

flnanclal

skllls.

He had

ultimately beneflclally

belonging to his wife and slster, to lend money

in substantial

amounts

to the firm. Nothing

1 s shown

in the evidence to

indicate

when hls bellef

this

matter

was

shaken.

consider that on 18

November 1977 lie firmly belleved that the

flrm was

solvent and that Mr. Davld Cooke had the financlal

resources to

meet its liabilities should there

be unsettled

debts. The questlon has been asked, "Why when Mlchael Cooke was slow in paying the money

required by the respondent the

matter was not taken up with Mr. Davld Cooke?"

The answer

seems to be,

as well as I can Interpret it, that one dld not

bother Mr. David Cooke on the ordinary business of the firm. And going on past practices, the payments

due were,

m the

relevant sense, part of the ordinary business.

Thls aspect

has a double bearing because

if Mr. Peters or Mr. Barry

had

thought that the firm was really in financlal difficulty they

3 2 .

would certainly have approached Mr. David Cooke personally and

flrmly and called

up the balance of the debt due to the

respondent. It

is clear that

In June 1977 the respondent had

no doubts as to the financlal stability

of the

firm. Its

letter of June 1977 1 s proof of thls.

It completely disposes

of the notion that in June 1977, at any

rate, the respondent

was apprehenslve, to any	degree, about the solvency	of the
firm.

It represented a subtle approach to salvage somethlng, at

was

put to

me that the proposal

in this letter

least,

from the wreck of a crlppled ship.

I re~ect

this. To my mind

It qulte mistakes the situation, apart from attributing

degree of subtlety in Mr.

Peters and

Mr. Barry of

whlch

neither was

capable. And on this point

I believe them both.

I do not overlook the

fact that Mr. Barry expressed some

reservations as to

the reliabillty of Michael Cooke. But I do

not think they had

bearing upon the

questlor! of the solvency

of the firm. circumstance was that Mr. Peters and

Accordingly, on 18 November

1977

one

Mr. Barry both belleved

that the firm was solvent. There

was, therefore, no reason

for them

suspect that the payment would glve them a

preference

over

other

creditors

of the

flrm or separate

creditors of Michael Cooke.

Mr. Braun urged that when Michael Cooke made the payment

of $4,000 in October

by handing to Mr. Peters

a Hotham

Building Soclety cheque together with $1,350

in cash it must

have been clear that Michael Cooke was paying

w th money which

3 3 .

would normally pass through the firm’s bank account.

He sald

that the inference to be drawn was that

if it had gone

lnto

the bank account It would have ceased to

be avallable to pay

to the respondent.

Mr. Braun also submltted that payment

the $15,000 In November 1977 by a cheque drawn on the trust account of the solicitors Messrs Linton Lethlean	&	Co.	gave
rise to the same sort of Inference.

To my mind the inference said to arlse from the October payment was certainly open. But

I think the situation 1s

somewhat different in relatlon to the

trusr; account chEqrlc

paid In November.

The

cheque was drawn In Mr. reters’ favour

on an account to whlch presumably, the firm had access

and all

proper records would be available. There would

be nothlng

surprising about the

flrm havlng some

of Its

moneys in

sollcitor’s trust account.

It is to be noted that all the ma

.tters re

lied on by Mr.

Braun concern Inferences

which

might be drawn as to the state

of finances of the flrm.

The person with respect to whom the

inferences referred to in s.l22(4)(c) relate is undoubtedly

Mlchael Cooke.

He is the only bankrupt. In respect of the

issues arising under s.l22(4)(c) it

has to be remembered that

the attention of the respondent was at all tlmes on the firm

rather than on Michael Cooke.

In relation to the issues arislng under s.l22(4)(c)

refer to the observations of Kltto J. in Queensland Bacon Pty.

Ltd. v. Rees (supra) at p.312:-

34.

"As in the other three cases, there

1 s great need

to keep steadlly

in view what

precise

inference is to which sub-s.(4) refers. It is an inference whlch the Court draws from the

clrcurnstances

known to the creditor at the tlme

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 I

hls positlon would

have consldered sufflcient 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 lnabllity on the part

of the

payer to pay

his debts as they became

due, as

distlngulshed from a reluctance to accommodate

hls

wider

purposes

tohe

limitations

of hls

resources.

The second is that the effect

of the

payment, i.e. its ultimate, substantial effect,

would be that the payee would be in

better

position

VIS-a-vis the other creditors than he

would have been if the company's assets had been converted and distrlbuted amcmgst all the creditors in a due course of windlng up".

I refer	also to what was said by Kitto	J.	In that case at
p.303:-

"In the first place, the precise force

of the word

"suspect" needs

to be noticed.

A suspicion that

something

exlsts

than

a mere

idle

wondering

whether it

exists

not; it 1s a

positlve

feeling

of actual

apprehension

mistrust,

amountlng

"a slight

oplnlon, but

wlthout

sufficient

evidence", as Chambers's

Dictionary expresses it. Consequently,

a reason

to suspect chat

a fact exists

1 s more than

reason to conslder

or look into the possibillty

its existence. The notion whlch "reason to suspect'' expresses in sub-S. (4) is, I think, of

something

which in all the circumstances would

create in the mind of a reasonable person In the posltion of the payee an actual apprehension or fear that the situation of the payer is in actual

fact that whlch the sub-sectlon describes - a mlstrust of the payer's abllity to pay his debts

as they

become due and

the

effect

which

acceptance of the payment would

have

as between

the payee and the other creditors."

35.

Again in Re Smlth Ex	parte Official Receiver (1929) 1 ABC 186
at 188 it was said:

"In considerlng a man's financial position

so as to

ascertain whether

he IS 80 financially embarrassed

as to be regarded as a person unable to pay his

debts as the same becomes due, one has to look at all the surroundmy circumstances of the case, the

nature of his trade or business, the manner

method of payment of debts

that

trade

o r

business, the tlme when the proceeds of such trade

or business will be forthcomlng, the manner or

method of obtalnlnq credlt, and the nature of the

assets, and perhaps several other

matters":

Looking flrst at question IS whether a

the affairs of the

firm the first

reasonable man of business In the shoes

of the respondent would have suspected as at 1A November 1977

that It

was unable to pay its debts

as they

became due.

would have

been necessary for him to have taken into account

the

dlstinction

between

actual

inability

pay

and "a

reluctance on the part of the payer

to accommodate his wlder

purposes to the limitations of his resources", by wh~ch I understand, a reluctance to dispose of assets exlsting I n some

particular or

permanent form to meet immediate demands. And

the issue 1 s to be declded by reference to the mind of a reasonable man with all the knowledge which the person whose

mind is in question

had of the

flrm, the nature

of its

business and its history.

mether

the reasonable man should

be consldered as having any

of the beliefs of the payee which

would be relevant to the assessment of the specified matters he should, no doubt, be taken to have had before

him the facts

which may

have given rise to such beliefs.

If the formation

of those beliefs on those facts was reasonable, the reasonable

36.

man may be reqarded as conclusion. Those concluslons wlll, If relevant to the

likely to have come to the same

generatlon of suspicion or otherwlse,

taken

Into

consideration

the

Court

on the

issue

whether

the

circumstances	led	tohe	inferences	referred	to	I n
s.l22(4)(c).

In this case the reasonable man would

have

noted the

matters relied on by Mr. Braun.

He would

a l so be treated as

knowing that It was part

of the buslness of the firm to borrow

money on deposit repayable ir! all probability, as was the case

of the

loans from the respondent, on short notice.

He would

not have had information as to the precise purpozes to which those loans were put by the flrm.

It would not be lmprobablc

that they would have been Invested In transactions from whlch

they could not be readily extracted or

s o extracted only at a

loss.

He might have known that some

of the money was invested

in shares in the Berklee Group of companies whlch were subject to controls on selllng and which Michael Cooke was having

difflculty in realising

at a price regarded by him

as falr and

reasonable. Being in the shoes of the payee

he would have had

the experience of Mr. Peters as an employee of the firm during

his employment

it. If during that employment he acquired

lnformatlon expressly or lmpliedly otherwise as to the financial reputatlon

from

the

partners

of the flrm, Its

resources and

the resources

of the partners, the reasonable

man would have that information.

He would not believe it

because Mr. assessment of that information by reasonable standards would

Peters

belleved

It, but

far

the

lead to conclusions or bellef, the reasonable man would have regard to those concluslons and that belief. He would not

ignore the long standing reputation

of the firm. And when

questlons of susplcion

of solvency are Involved the influencc

of reputatlon 1 s inevitably of slgnlficance.

It 1s common

knowledge that the reputatlon of the recently falled Trustees

Executors &

Agency Co. Ltd. was such as to prevent susplclon

arlsing when susplcion

of impending disaster would otherwise

have been more than lustifled. Peters had acqulred from his experience and deallngs with the

The information which Mr.

firm reasonably led hlm vlablllty was

conclude

that

Its flnancial

beyond questlon and that

Mr. navid Cooke was a

man

of conslderable persons1 resources.

T h a t this

was the

position at least

up to June 1977 1 s undoubted. It war

E U C ~

as to Induce hlm to make the loans referred to above

wlthnut

security and also to propose repayment of the

balance 2ue to

the respondent over another twelve months. Apart from the

express or implied statement by Mr. David

Cooke as

to the

ownership of real estate the whole tenor

f the flrm's conduct

proceeded on an Implied assertion

integrity were beyond questlon. In the light of history that

was dlstinctly credible.

that its stability and

So far as tanglble evidence of resources of the flrm or

Mr. David Cooke were concerned

Mr. Peters had seen the tltles

to various properties which he was told by

Mr. Davld Cooke

were

unencumbered.

The questlon

what

extent

reasonable man In Mr. Peters' shoes would

have had regard to

the firm's long

standing

reputatlon

for stability and

38.

integrity, the nature

of lts business, and would have accepted

the assertions

financial stabillty and formed the same

vlews as he did, and whether against that background

he would

have suspected the existence

the matters specifled in

s.l22(4)(c)

respect

the firm, is a matter

for

decision. But even if

the reasonable man had regard to the

Implied assertions by the

firm that

it and Mr.

David Cooke

were more than good for their commitments

he would have had to

make an assessment

of the question whether the non-payment

interest from July

1977 the delay in payment

of capltal and

the mode of payment of the

$4,000 In October constituted

reason, in November

1977, to suspect thelr validlty.

Having

regard

all

the

clrcumstances

I am

not

satisfied

that

the

reasonable

man

the

shoes of the

respondent would have so

suspected. He would have known that

the firm's business mlght well have

involved borrowing short

term and investing long term. Reluctance

the part of

Michael Cooke to realise on investments mlght

well

lead to

periods of

liquidity dlfficultles. Mlchael

Cooke in deallng

with people

with whom he had essentially friendly

relations

mlght, if

liquidity were tight, choose to keep them waiting.

There were reasons

wonder whether the liquidity problems

mlght be fundamentally serious but not

to have "an actual

feeling of apprehension

amounting to slight

opinlon

but

without sufficient consistent with the

evidence".

The circumstances

were

situation

that

Mlchael

Cooke as the

relevant partner would not rather

than

that the firm could

not, make the effort to pay. Of course at this stage it would

. . .

39.

seem that,

in November 1977,

the flrm actually was mortally

wounded, but that would not

have been known to the reasonable

man in the shoes

of the respondent. I do not belleve that

Mlchael Cooke ever told

Mr.

Peters that he or

the firm were

being sued by varlous persons.

But it may

be that the correct

n e w 1 s that as

at 18

November 1977 the

reasonable

man

the

shoes

of the

respondent would have had reason to suspect that the firm was

unable to pay its debts as they fell due.

s o , one must

turn to the question whether there was reason for hlm

suspect that the payment would give	a	preference to	the
respondent over other creditors.

It must be that the creditors referred to In s.122(4)(c)

are the

credltors of the

person

who

actually

comes

bankrupt. Were that person is estate and joint estate, separate debts and

a member of

a flrm separate

~oint debts are

Inevitably Involved.

It is a

prlnciple of admlnistratlon in

bankruptcy that where such estates and debts are Involved the

joint estate

1s approprlated to meet flrst the joint

debts,

and

the

s parate

estate

with llmlted

xceptions

appropriated to meet

first

the

separate

debts.

Thus the

separate creditors will only suffer by reason

of a payment if

that payment reduced

a possible surplus In the joint estate

which might

have ultimately gone to the separate creditors.

Where the money used to make

th payment in question came from

the separate funds

of the partner

who was made bankrupt,

a s

opposed to the funds of the firm, such a deficlency may result

40.

from the payment. But where the payment is made from the

funds of the firm that will not occur. The debt in respect

which the payment in question

IS this case

was made was

already a liability against those funds. On a taklnq of accounts whether paid or unpaid It reduced the amount of any posslble surplus of joint assets whlch the members of the flrm

might have recelved on taking of accounts. When Mr. Peters

recelved

the

cheque

for

$15,000

18 November

1 9 7 7 he

recelved

discharge

of the

liabillty of the flrm.

Fresumably as far as

the respondent was concerned it

was pald

from the assets of the flrm. It could have come from those assets, it could have constltuted an Infusion of capltal into the firm by either partner or it could have come from a thlrd

party .

But there was

no reason to favour one of these

possibillties

2 s agalnst the notion that it came from the

assets of the flrm. Mlchael Cooke had asserted that the debt, the firm's debt, would shortly be pald and here was a payment.

There was no reason to doubt that some lnvestment

of the firm

had been realised or

some other ad~ustment

made In the firm's

affairs.

The reasonable man would know

no more than Mr.

Peters as to the source of the money. Treating

it naturally,

as a payment by the

firm, out of assets of the

firm there

would be no reason to suspect that the payment would

have the

effect of

giving the respondent a preference agalnst any

the separate creditors

either of the partners.

And the

reasonable man in the shoes of the respondent would have had

no reason to so suspect.

relevant

consider

the

possibility

41.

suspiclon that

preference against other creditors of the firm, it would have

been necessary for the reasonable man to take into account

the

payment

would

glve

thc respondent

that to meet the claims

of the crecitors

of the

firm there

would be recourse, not only

to the assets of the flrm, but to

the unlimlted personal liabllity

of each partner.

In the

cllmate of November 1977 that conslderation would	have been
material.

far as relevance to the question whether the inferences speclfied in

the matters relied upon by

Mr. Eraun had

s.122(4)(c) arose with respect to the separate flnances

either of the partners, they did 80 only through tke posslble

effect of those matters on their separate estates.

It was only

in that way that the payment had

signiflcance in relation to

the separate estate

of Michael Cooke.

the result therefore,

I am not satisfled that the

circumstances of the payment

In question were such

as to lead

to the inference that there

was

reason to suspect

that the

firm or either of the partners was unable to pay Its or their

debts as they became

would give to the respondent a preference over other creditors

either of the flrm or either of the partners.

due or that the

effecr: of the payment

Credlbllltv

At the hearing credlbility of Mr.

I formed a favourable opinion of the

Peters.

was in the witness box for a

42 .

long perlod and subject

to lengthy observation. It wds sald

that on the questlon of the firm having

been a slow payer he

contradicted evldence given by him at

the hearing before the

Reglstrar in Bankruptcy.

that

evldence

sald

substance that the firm

had, for practical purposes,

paid

clients on due

dates, but

sometimes delayed for quite short

periods.

In hls evidence at thls hearing the thrust

of hls

evidence was

that Michael Cooke repeatedly delayed in making

payments to clients

of the firm. If the evldence before me

was correct

it did not accord wlth what was

said before the

Registrar.

It is

said that the contradictlons mlght have been due

to the circumstance that It 1s In his Interests at this stage to emphaslse the propensity of the firm to delay its payments

and that

accordingly his credlbility

this

matter

1 s

serlously impaired. There

1s force in this, and I have taken

It into account. I have to declde whether, amongst all other consideratlons, I should regard the matter as throwing a dark shadow over either the whole of his evldence, or his assertion

at the hearing that the firm dld

on occasion fail to pay their

clients on the due dates moneys due to them. I do not so regard it. The demeanour of Mr. Peters throughout was, in my ludgment, qulte satisfactory. I observed that when challenged to state with particularlty Instances of late payments to clients, he responded wlthout hesitatlon and indeed with

spontaneity.

I am of the belief that Michael Cooke did from

time to tlme keep cllents waitlng for at the question wlth hindsight this 1 s probable.

their moneys. Looking

I thmk he

43.

had the personality which enabled without shaking their basic confldence.

him

to put people off

Mr. Barry was not

an lmpresslve wltness. Ncvertherless

I do not doubt that as at November 1 9 7 7

he had confidence In

the financlal viability of the firm.

Certainly the terms of

his letter of

June 1 9 7 7 in whlch only

$21,000 was sought and

the respondent suggested that the balance be pald over twelve months lndlcates his bellef at that time that the firm was In

no danger of collapsing.

Even if thereafter,

there was

reason for him to wonder about the firm's soundness,

I do not

thlnk he had reason to suspect that a paysent

of $15,000 on l8

November 1 9 7 7 would glve a preference to the respondent.

Mr. David Cooke

As to the actual state

of finances of Mr. David Cooke no

dlrect

evidence

was placed before

the

Court

these

proceedings.

The trustee appears to have assumed that he was

without funds, but there 1 s really no

evidence on the point.

There 1 s no evldence as to whether any person includlng the respondent has sued Mr. Cooke and what the result	has been. I
make no assumption on the pcint.
Good faith and ordinary course of business

The question arises therefore whether the respondent

has

satisfied me that it, the payment

the $15,000 on 18

November 1 9 7 7 was a payment in good falth and in the ordinary

- ,' "

44 .

course of

buslness. On the matter

of good falth I refer to

the foregoing observations. As

to the ordinary course

business it

is my opinion that the respondent was a payee In

the ordinary course of business.

It is in the ordinary course

of buslness for a creditor to be pald a debt due to him.

The

payment was in respect of such

a debt. It was said that it

would not be in the ordinary course of

buslness for the flrm

to pay by a cheque drawn think this proceeds from a misconception

on a sollcltor's trust account.

of the concept of the

ordmary course of busmess.

It was not, for instance, a case

where a debt payable

In future had been brBught forward out

the ordmary

course of

buslness. It was for the debtor to

declde in whlch manner, cash or cheque, payment of a debt due

for payment would be pald.

Accordlngly I payee of the $15,000 received on 18 November 1977 in good

satlsfied that the respondent was a

faith

and for valuable consideration and in the ordlnary

course of business.

[1985] FCA 689

18 Feb 1985