Re T G Cummins & Anor v Ex parte Harris, E.g.

BANKRUPTCY - whether payment a preference priority or advantage

in favour of a creditor	- meaning of "in good faith" - meaning o€
"in the ordinary course	of business" - Bankruptcv Act 1966,
ss.122, 124.

Bankruptcv Act 1966, s s . 1 2 2 ,

124, 231.

Re Bird (as Trustee of the Estate of Arcadiou); ex parte

M. & G.

Casabene & Sons (1979) 39 F.L.R. 281

Brittain; Ex parte Barnes (1984) 2 F.C.R.

Re K. & R. Fabrlcations (O'ld.)Pty.Ltd. (In Liquidation) (1980)

32 A.L.R. 183

Re Lee Furniture Pty.Ltd.

(In Liq.)

8 A.C.L.R.

2 5 1

T.G. CUMMINS & ANOR.; EX PARTE E.G. HARRIS & ANOR. and

REFRIGERATION PARTS (OLD) PTY.LTD. \ , . . J \ , . . ' ' _ ' '

I .

Part X Nos. 4 & 5 of 1984

, \

CORAM:	Spender J.
Brisbane

3 July 1985

"BANKRUPTCY ACT,

1966"

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION

Part X NOS.4 & 5 of 1984

BANKRUPTCY DISTRICT

OF THE

Re: THOMAS GEORGE CUMMINS

SOUTHERN DISTRICT

OF THE

and JILL IMELDA CUMMINS

STATE OF OUEENSLAND

trading under the style

firm name of "NAM

CONSTRUCTIONS"

(Debtors)

Ex parte: ERNEST GEORGE

HARRIS and WILSON JOSEPH

WILDE

(Trustees/Applicants)

a:	REFRIGERATION PARTS

(OLD) PTY.LTD.

(Respondent)

MINUTE OF ORDER

JUIXE MAKING ORDER:	Spender J.
DATE OF ORDER:	3 July 1985
WHERE MADE:	Brisbane
THE COURT ORDERS THAT:

(1) the payment made by the debtors

to the respondent

of $10,169.17 on 6 October 1983, is void as against

the applicants;

(2) the respondent pay to the applicants the

sum of

$10,169.17 together with their costs

of and

Incidental to the application, such costs to be

taxed if not

agreed;

(3) liberty to apply to either party.

Note: -

Settlement and entry

of orders I s dealt with in

Order 36

of the Federal Court

Rules.

"BANKRUPTCY ACT, 1966"

IN THE FEDERAL COURT OF

PJJSTPALIA

GENERAL DIVISION

Part X Nos.4 & 5 of 1984

BANKRUPTCY DISTRICT

OF THE

Re: THOMAS GEORGE CTJMMINS

SOUTHERN DISTRICT

OF THE

and JILL 11-ELDA

CUMM-

STATE OF oIJEENSLAND

trading under the style or

firm name of "NAM

CONSTRUCTIONS"

(Debtors)

Ex parte : ERNEST GEORGE

HARRIS and WILSON JOSEPH

(Trustees/Applicants)

e:	REFRIGEEhTION PARTS

ULD) PTY .LTD.

(Respondent

SPENDER J.

3 JULY 1985.

REASONS FOR JUDGMENT

This application is brought by Ernest George Harris and

Wilson Joseph Wilde, the trustees

of the property of Thomas

George Cummins and Jill Imelda Cummins, appointed under deeds

assigrment executed on

17 February 1984. The trustees claim that

payment of

$10,169.17 made in October 1983 to Refrigeration

Parts

(Qld) Pty.Ltd. by Nam Constructions, which was the firm

name under which Thomas George Cummins and Jill Imelda Cummins traded constituted a preference within the meaning of s.122 of

the Bankruptcy Act

1966.

They seek

a declaration to that effect and an order

requiring the respondent to pay to the trustees the money it has

received. Refrigeration Parts

(Qld) Pty.Ltd., the respondent,

opposes the

making of such a declaration on the ground that

h-e

payment was received in good faith and for valuable consideration

in the ordinary course of business.

Section

1 2 2 ( 1 ) of

the Bankruptcv Act provides that

paynent made by a person who is unable to pay

his debts as they

become due from his

own money in favour of

a creditor, having the

effect

giving

that

creditor

a preference,'

priority

advantage over other creditors, being

conveyance within six

months before the presentation of which the debtor becomes

bankrupt, is void as against the trustee

in bankruptcy.

Section 231

of the Bankruptcy Act makes applicable to

the

administration

arrangements

with

creditors

without

sequestration, under

Part X, many of the provisions of the Act

which are applicable

to the administration

of bankrupt estates in

relation to which sequestration orders have been made. These

provisions

include

s.122

relating

preferences.

the

application of

this section, the date of the special resolution

requiring the execution of

deed of assignment is to be treated

as if it were the

date upon which a creditor's petititon had been

presented and the date

of execution

of the deed is to be treated

as if it were the date of a sequestration order. The trustee of

the deed is to be treated as if he were the trustee in the

bankruptcy.

The date of the special resolution requiring the debtors

to execute the respective deeds	of assignment was	17 February
1984.

It is not disputed before me that each

of the elements

required under s.122(1) is met in the circumstances

of this case.

For the respondent, it is claimed that the payment was

made in good faith and for valuable consideration, and in the ordinary course of business and, therefore, is preserved by

virtue of s.122(2).

The burden of proof of establishing that the

payment was made in good faith and for valuable consideration in

the ordinary course of business lies on the respondent:	s .122(3)
of the Act. Section 122(4)(c) provides:-

"For the purposes of this section

...

(c)

a creditor shall be deemed not to be

purchaser, payee

encumbrancer in good faith

the

conveyance,

transfer,

charge,

payment

obligation was executed, made

incurred under

such clrcumstances as to lead to the inference

that the creditor

hew, or had reason to suspect

(i) that the debtor was unable to

pay his debts

as they became due Zrom his own money; and

(ii)	charge, payment or obllqation would be to

that the effect of the conveyance, transfer, over other creditors."

The two issues in this case

re:-

(1) whether the payment of the sum

of $10,169.17 was made

in good faith, and

( 2 ) whether such payment was made in the ordinary course

business.

It is necessary

to look to the circumstances in which

this payment came to be made.

On 17 February 1984, both Mr. & Mrs. Cummins executed

authority under s.198 of the Bankruptcy Act

1966 authorising the

trustees to call a meeting

of their respective creditors

for the

purpose of Part

X of that Act and

to take control of their

respective property in accordance with that Part.

The trustees

called meetings of creditors of each of the debtors. At each

meeting it was resolved that the debtor be required to execute

deed of assignment under

Part I1 of the Bankruptcy P.ct and that

the trustees be appointed trustees. Deeds of assiqnmcnt in the usual form were executed by each of the debtors

on that same day.

The statement of affairs

of each of Mr. & Mrs. Cummins shows a

total deficiency,

as at 1 5 February 1984, of $1,877,690.00

The debtors, under the firm name

of Nam Constructions,

carried on business on a large scale

as a building contractor and

had numerous contracts principally in central Queensland.	The
respondent supplied parts to Nam Constructions.

The debtors commenced trading with the respondent in

May 1982, and in that month received

a number of items totalling

$3,211.18.

Further parts were supplied in June and no payments

were made, and the amount outstanding

as at the end of June

was

$4,971.80.

In July, further items were supplied and credit was

given in respect of one item but

no payments

wer'e made and as at

31 July 1982, the amount outstanding

was $7,035.48. In August,

further items were supplied,

a credit note €or a small amount was

given in that month and, at

the end of August, the amount

outstanding was $5,319.15. On

6 September 1984, 9ayment was

received in the sum of $3,211.18 which was the amount of the Map- account. Further items were received in September and, at the end of September, the amount outstanding was $5,775.71, no

payments being made in that month. During October, further items

were supplied and payments of $1,760.69, $2,029.23 and $33.88

wers made and an amount credited.

As at the end

of October, the

amount outstanding was $5,540.98.

In November, further items were

supplied and payment was received

of $1,414.85, leaving the

amount outstanding at $7.535.96. Further items were supplied in

December and payment was received

of $456.56. At the end

December, the balance due was

$10,372.22. In January 1983,

payment was made of $3,449.82, a small amount was credited by way

of adjustment, further items were supplied and, at the end

January, the amount outstanding was

$7,811.96.

In respect of that history, David John Elkins, the manager of the respondent, swore an affidavit in which he said:-

"... the debtors often being three or more months

in arrears

with

payment.

'R.2

debtors

had

reputation in the trade for being slow payers but

were not considered to

be a bad risk as they were

known to be involved in large scale contracts in

the mining industry and to have substantial work

in progress.

Each of the monthly statements by the respondent to the

debtors have printed at the foot thereof

"Terms': Strictly net 30

days

'I.

In	February, further goods had been supplied, credit

given for one item and the amount due as

at 28 February 1983, was

$11,011.51.

Typed on to that statement at the foot were thes6

words :

“Please

note.

Our

terms

are

30 days net.

Any

amount in excess	of this period is now due and
payable”

This typing also appears on

all subsequent monthly statements.

Impressed on the account is an OVERDUE highlighting sticker with the words:-

“OVERDUE. In fairness to

us and in iustice to

yourself,

you

should no longer

ignore

this

important matter.

PLEASE REMIT!”

In the statement for the period ending

31 March, payment

of $3,489.83 is shown with

a reminder sticker.

For April, with further goods supplied and

no payments

made, the balance at that time

was $12,368.83, again with the

typed reinforcing

of the 30 day terms and with

an overdue

sticker. In

May, further goods were supplied, no

payments were

made and the amount as at the end of May was $13,559.03. In June, two payments, one of $3,248.65 and one of $1,059.31. were made, goods were supplied and credit for some items was given. The

balance at

the end

of that month was $10,169.17, which is the

amount the subject

these proceedings. That account has an

overdue sticker as well as the typed reminder as to

30 days

I .

terms. In the period ending 31st July, 1983, two small amounts for cash were received, one item was supplied, balance due was

slightly in excess of $10,000.00, but on that account was

different

sticker:-

"Final Notice. Ide regret having to take this step,

but	your continued inattention to this overdue

account will compel us to place the matter in

outside hands unless payment is received

... AT

ONCE

! "

On 12 July, Mr. Elkins, on behalf of 'the respondent,

forwarded a telex to	Mr.	Close, the then manager	of the debtors,
in these terms:-

"Pls advise when we

can

expect next payment.

Matter now urgent.

1 August,

a "final notice" was given to the

debtors by White Mercantile Agency Pty.Ltd.

on behalf of the

respondent	for	the	amount	of	$10.169.17. That	notice
included -

"FINAL NOTICE.

Full payment of the above amount

should be remitted DIRECT

TO OUR CLIENT by return

post, if you are to save yourself the added cost

of legal proceedings.

This notice, which goes to you on instructions

received from our client, is final.

The White Mercantile Agency Pty.Ltd."

On 17

August, 1983, Mr. Elkins telexed the debtors in

these terms:-

8 .

"Re account and returns. we advise the following:

Outstanding orders have been cancelled.

Cheques referred to have not been recd by us. We

in	fact have instructed our debt collectors to

proceed with collection from your company for all

monies outstand. To avoid U iurther expense

U may

wish to forward chq by return. Total outstanding	.-
$10,169.17 as at 30.6.83.. We have taken this

action

with regret but after

a great number of

requests to your office.

David Elkins"

Mr.	Close, the then manager of Nam Constructions, says

thet in respect of this telex the bell insignias printed on the

message denote urgency and indicate that the receiver would be

obliged tdo attend to the telex machine immediately and to tear

off

the

message

received,

otherwise

the

telex

would

ring

continuously.

Then, on 9 September, 1983, the respondent caused

a writ

to be

issued

directed

Nam

Constructions (Qld) Pty.Ltd.,

trading as

Nam

Constructions. That writ claimed the sum

$10,169.17 for

goods sold and delivered by the plaintiff

to the

defendant, The writ was specially endorsed. Notwithstanding that

the writ

was addressed to

a company, the respondent to this

application

admits

the

correctness

paragraph

l8 of an

affidavit sworn by

Mr. Harris in these terms:-

"On the

6th October, 1983 by cheque number 812120

the firm

paid the respondent the said amount

claimed in	such writ of	summons in an	amount of
$10,169.17."

The respondent requested

a special clearance of that

cheque. In

answer to an interrogatory, the respondent says that

prior to the

10 October

1983, it had never requested a special

clearance by its bank

of any cheque drawn by or on behalf

o Nam

Constructins and banked by the respondent. In answer to another

interrogatory, the respondent admits that

it instructed White

Mercantile Agency Pty.Ltd.

to issue the notice of demand and CO

take recovery action with respect to the sum

of $10.169.17.

Except with

respect to that instance, the respondent had never

engaged the services of a

mercantile agency for the purpose of

collecting or assisting in the collection	of any s u m owing by Nam
Constructions to the responricnt.

Mr. Elkins says that

he caused the cheque the subject

these proceedings to be specially cleared because the respondent

was then

in urgent need of funds in order to pay its

own

creditors and, as a result of the clearance

of the debtor's

cheque, he caused a large number of smallish payments to be made

to creditors of the respondent.

Ye says

that he instructed the

White Mercantile Agency Pty.Ltd.

collect the debt owing

because

the desperate need for funds at that time by the

respondent. He says that

at no

stage was any cheque of the

debtors dishonoured and that, from January 1982 until the time

the writ was issued on

September 1983, the White Mercantile

Gazette showed that Raymor Industries had issued

a Supreme Court

writ against Nam Constructions (Qld.) Pty.Ltd. and against the

debtors in 1982 and that, in August 1982, John Simpson Thiele had

issued

Supreme Court writ claiming $58,187.00 against the

debtors.

The Gazette also shows

that; in July 1983, the male

debtor granted a Bill of Sale

securing

$1,000,000

City

National, and in July 1983, the Department	of' Works accepted a
tender of $63,422.00 from the debtors.

10.

I accept that, under s.122(3) of the

Act, the burden of

proof is on the respondent and that in considering whether

creditor had “reason to

suspect”

insolvency and preferential

treatment under s.l22(4)(c) of the Act, an objective test must be

used.

It was

submitted on behalf of the respondent that this

payment was received in good faith. It was submitted on its

behalf that the k7hOle history

of the dealings between the debtors

and the respondent indicated that they were slow payers and that

the unique circumstances of the use of a debt collection agency

and specially clearing the cheque received were not because o€

any fear as to the solvency of the debtors but due	to the urgent
need for funds by the respondent.

This state

of mind, it was said, was reinforced by the

fact that the respondent had never received from the debtors any

cheque which was dishonoured. The manager of the respondent had never had any dealings either in person or by phone with either

of	the debtors personally and had never visited the debtors’

principal place

of business in Rockhampton or place of business

at Blackwater

in Queensland to which all goods ordered by the

debtors from the respondent had been delivered; the evidence

clearly established that the creditor had no knowledge of the

insolvency of the debtors at the time of payment.

11.

The material

obtained

from

considering

the

White

Mercantile Gazette was that the only court proceedings referred

to therein was

Supreme Court writ some 21 months before the

impugned payment and another Supreme Court writ some

14 months

before the impugned payment.

other Proceedings

were noted

affectmg the

question

the

debtors’ solvency. It

was

therefore submitted that the payment was received in good faith,

the circumstances attending the payment being consistent with the

debtors being

slow payers but without amounting to

a suspicion of

insolvency.

Further,

was

submitted

that

the

payment

was

received in the ordinary course of business.

I accept that, when one is concerned with payment made

after the threat of legal proceedings or after the issue of the

initiating proceedings, little assistance can be gained from the

cases where payments are made subsequent to

a notice under 5.364

of the Companies Code. InRe K. & R. Fabrications (Old.)Ptv.Ltd.(In Liquidation) (1980) 32 A.L.R. 183, Connolly J. said at 186:-

“It may be

conceded

that

there

are

areas

difficulty

this

field

where

the

creditor

receives payment

as a result of demands even

coupled with a threat of litigation or the commencement of litigation: see, for example, the observatlons of Lord Mansfield cited by Taylor J.

In Tavlor v.

White C(1964) 110 C.L.R.1297 at 151.

But of course

a transaction that amounts to

preference in fact

is not to be seen only from one

aspect when the application

of 5.122 is under

consideration.

It must be seen in the liqht

all

the circumstances: see per Wyndeyer

Tavlor v. White at 161. What, however, is clear

1 2 .

to my mind at

least, is that except in the most

unusual circumstances, it will not be possible to

describe a

payment made in response to

a notice

under s . 2 2 2

of the Companies Act

as one which

man might make or receive without the

msolvency

of the debtor being in view."

respectfully agree with that observation.

I accept

that there is

a clear distinction between payment made subsequent

to such a notice and payment made after the threat or, indeed,

the initiation of legal proceedings.

Dealing with the question of "in the ordinary course of

business" first, in Tavlor v. White

(1963-64) 110 C.L.R.129, in

a well known passage, Dixon

C.J. at 136 said:-

do not doubt that 'in the ordinary course

business'

refers

'business'

a general

conception and is not restricted to the conduct of

any

particular

business

such

the

business

carried on in a shop or

merchant's office or the

like, but is referrlng to the transaction of

business

as a known

and

recognised

activity

pursued by anybody engaged in

an attempt to win or

earn or 'make' money, or a living in a systematic

or regular way

...

The time-honoured phrase 'in

the ordinary course of business' is meant to refer

transactions

regularly

taking

place

sustained course of activity or some usual process

naturally passing without examination."

And Menzies J. said at p.159:-

"The authorities

... show that the payments here

question

occurred

the

ordinary

course

business if there were nothing about them that

was

unusual

according

rdinary

business

standards.

In other words,

the payments were in

the ordinary course of business

if (the creditor

and the debtor) were, with regard to them, acting

accordance with the standards of

honesty and

fairness whlch are ordinarily accepted by the

business community."

13.

In	Downs Djstributinq Co.Pty.Ltd. v. Associated Blue

Star Stores Pty.Ltd.

(In Liquidation) (1948) 76 C.L.R.

463 at

- -

477, Rich

J. said:-

It means that the transaction must fall into place

part of the undistinguished common

flow

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."

Against the background

these general statements,

reference may be made to several factual conclusions.In all of

these cases,

the payments were not held to

be preferences.

The

factual circumstances in each case should	not, of	course, be
elevated into propositions of law.

In Pueensland

Bacon

Pty.Ltd.

(1966) l15

C.L.R.

266, it was held that a payment made after a cheque had been dishonoured was not necessarily fatal to a claim that a later

payment was made in the ordinary course of business. Similarly, in Re Bird (as Trustee of the Estate of Arcadiou);

Ex parte M. &

G. Casabene & Sons (1979) 39 F.L.R. 281, C.A. Sweeney

J. was

satisfied that a payment of $4,000.00 made bp a bankrupt to the respondent in that case after a threat earlier expressed to him that no more work would be done for him "until such time as a

substantial payment had been received" was held to be

a payment

made in good

faith and in the ordinary course of business.

Brittain;

parte

Barnes (1984) 2 F.C.R. 35,

Woodward J. said at 39-40:-

"The ordinary course of business does not mean the

ideal course of business. Late payments, two weeks

of cheques marked 'present aqaln', tke collection

of cheques by hand to

keep the debtor to its

promises, and a reference to solicitors in the	- -
context of a telephoned demand for payment are

not, in

my view, either

separately

taken

together, outside the ordinary course

of business

when a trader 1 s gomg through a dlfficult period

and stocks are hard to move.

The question is of

course one of degree and of general impression."

With respect to Woodward	J.,	not everyone would share his
conclusion.

In Re Lee Furniture Ptv.L-td. (In Liq.) 8 A.C.L.R. 251,

Thomas J. held that the

making of a payment quite promptly after

legal proceedings had been Issued was not necessarily to be

regarded as outside the ordinary course of business. Having put

to one side the decisions concerning payment made after

statutory demand, such	as the then s.222(2)(a) notice, he said at
254: -

"...it

has been held in

a number of cases that

payments made after demands by

solicitor and

aiter

the

commencement

ordinary

civil

litigation are not payments in the ordinary course

business. The list

includes Re Bailev; Ex

parte Law v. Austin (1952) 15 A.B.C.

80 (Clyne

J.);

Re Hoare:

Commins

v. I. & R. Sples

Investments Pty.Ltd. C19721 A.L.R.

1134 (Sweeney

J.); three of

the five decisions delivered on the

same day by

C.A. Sweeney J. in 1979 in Re Bird

(as

trustee of the estate

Arcadiou)

reported

respectively

(1979) 39 F.L.R.

at 277,295 and

307; and Re

K & R Fabrications (Old) Pty Ltd (in

liq) (1980) 5 A.C.L.R.

115 (Matthews

J)."

15.

It is, of course, trite

to say that whether

a payment is

in the ordinary course of business depends on the circumstances

which

that

particular

payment

made.

reference

"payments made in the ordinary course of business" implies that

some payments occurring in

business context are not in the

ordinary course of business. Recourse

frequently made to

collection agencies in an attempt to secure the payment of long

outstanding debts, yet the commonness of that course in my

opinion does not mean that the payment of a

debt secured after

recourse

to such

a procedure is in the ordinary course of

business .

As Thomas J. observed in Re Lee Furniture Pty.Ltd.

(in lis.) (supra) at pp.256-257:-

"The circumstances

of the issue oi a writ does not

indicate

any

clear

picture

the

business

situation between a plaintiff and a defendant. It

is	true that it is relatively uncommon if one

looks at the whole field of debt collection. But that does not automatically place it outside the

ordinary course of buslness.

writ or a plaint

can become necessary because

a defendant believes

that he has a good defence, from ambiguity or misunderstanding as to the nature of the claim,

from

disinclination

pay

(for

relevant

irrelevant reasons).

as well as for reasons of

insolvency or financial stringency."

It may be open

to conclude that payment after the

mer issue of a

writ does not mean that that payment was outside the ordinary

course

of business. Nonetheless it is

indicia in my view

requiring a careful	consideration	of	the	other	attendant
circumstances.

16.

In	the circumstances of this case, payment is made

notwithstanding repeated reminders that the terms

on which goods

were supplied was

a 30 day net basis; that payment of the June

account was made

in October

in respect of goods, some of whic'rr

were supplied in February and the balance of which were supplied

in March-June inclusive; after the demand containeci in the telex

of 12 July 1983, claiming that the matter was now urgent; after

the demand contained in the final notice issued on

1 August 1983

by the White Mercantile Agency Pty.Ltd.; and particularly, after

the telex accompanied

with the ringing reminder

of the 17 August,

1983; and after the issue of the specially indorsed Supreme Court

writ issued on 9 September. The payment on 6 October, 1983, was

specially cleared.

On that material, I am not satisfied that the

payment was made in the ordinary course of business.

If that payment were properly to be regarded as in the ordinary course of business,

find it difficult to see what

payments could properly be characterised	as outside the ordinary
course of business.

As to the question of whether the payment was made in

good faith, that requirement is additional to or cumulative upon

the requirement that the payment be

"in the ordinary course of

business", although,

in many cases, of which this is one, the

relevant considerations will substantially overlap.

I accept that

the respondent has established that there was

no knowledge that

the debtors were unable to pay their debts as they became due and

that the effect

the payment would be

to give a preference,

priority or advantage over otheL creditors.

17.

necessary

therefore

consider

whether

the

creditor

has

established that the payment was not made in

circumstances as to lead to the inference that it had reason to

suspect the debtors were unable to pay their debts as they became

due from their obm monies and the effect of the payment would be

to give a preference, priority or advantage over other creditors.

In Re Bird

(as Trustee of the Estate of Arcadiou);

parte M. G. G. Casabene & Sons (supra), C.A. Sweeney J. made a detailed review of the authorities and concluded that, on a

proper construction

of 5.122 of the Act, sub-s.4(c) does not

displace or qualify the application

f the burden

of proof on the

creditor imposed by sub-s.(2).	I respectfully agree with his
conclusion at p.286 that:-

“The burden

of proof cast upon the payee remains

upon him in all matters relevant to the issue of

his being a payee in good faith, and, if he is to

succeed, his proof must be such as to negative the

inference set out in sub-s.(4)(c).”

I similarly respectfully agree that the observation by

Barwick C.J.

in Queensland Bacon Ptv:Ltd. v. (supra)

at 286

to the effect that there is

no such onus

is inconsistent with the

authorities tc which

C . A . Sweeney J.

refers: cf. Barwick

J. in

gueensland

Bacon

Ptv.Ltd. v.

(supra)

at 287.

Concerning the phrase

"the creditor has reason to

suspect", in

Downs Distributinq Co.Ptv.Ltd.

v. Associated Blue

Star Stores Ptv.(ln Liq.),

(1948) 76 C.L.R. 463, Latham C.J. at

p.475-6 said:-

"It was argued that the words

'the

creditor had

reason to suspect' meant that the creditor had

his

mind some knowledge or belief

which

to him

amounted to reason to suspect;

in other words,

that

the

test

was

a subjective

test.

opinion there is

reason for interpreting the

words

of the section in thls

way, and there is

every reason €or Interpreting them as referring to

an objective

test. The

sub-section

refers

'such circumstances as to lead to' one or other

two inferences; either first, that the creditor

knew certain facts; or secondly, Chat the creditor

had	reason to suspect the existence of certain

facts. The provision as to the creditor "knowing"

adopts

aubjective

criterion

applied

inference made by the court.

The other provlsion

as to the circumstances leading to

an inference

that the creditor had 'reason to suspect' relates

in my opinion

to what may,

by way

of cnmparlson,

be described as

an objective test.

It is intended

t o deal with circumstances such that

an inference

can fairly be drawn by

court that there was

reason to suspect, whether or not in fact the mind

the

creditor

consciously

adverted

the

significance

with

respect

the

financial

position of the debtor

of the matters mentioned in

the sub-section.

my opinion a transaction

falls within sub-s.(4), s o , that a creditor is

excluded from the category of a creditor dealing

in good faith under sub-s.(Z)(b), if, whatever the

creditor may thmk

or believe with respect to the

circumstances

transaction,

h se

circumstances are such as to lead to an infeience by the court that there was reason to suspect

according

the

standards

ordinary

reasonable man that the debtor was unable to pay

his debts as

they became due, and that

the effect

of the transaction would be to give the creditor	a
preference over other creditors."

In gueensland Bacon Ptv.Ltd.

v. m, (supra), Kltto J.

said at pp.303-304:-

19.

' I . . . the precise force of the word 'suspect' needs

to be noticed.

A suspicion that something exists

is more than

a mere Idle wonderrnq whether it

exists or not; it is a positlve feeling

of actual

apprehension or mistrust, amounting to 'a slight

oprnion,

but

without

sufflcient

evldence',

Chambers's Dictimary expresses it. Consequently,

a	reason to suspect that a fact exists is more

than

reason

consider

look

into

the

possibility of its

existence. The notion which

'reason to suspect' expresses in sub-s.(4) is,

think, of somethlng which in all the circumstances

would create In the mind of a reasonable person jn

the position of the payee an actual apprehension

or fear that the situation of the payer 1s in

actual fact that which the sub-sectlon describes

a mistrust of the payer's ability to

pay Lis debts

as they

become

due

and

the

effect

which

acceptance of the payment would have 'as between

the payee and the other creditors."

The question thus posed by the sub-section is to

be answered in the present cases as

the time

when each of the relevant payments was about to

accepted. It is an ob~ective question. What the payee or anyone else inferred at the time is not to be treated as decisive, though the Court may be assisted in reaching its own conclusion by seeing

how business

men

fact

reacted

the

circumstances. The character of the circurnsta.nces is what has to be decided: were they such as to lead to the specified inference? The inference is that the payee had cause to suspect the existence

of two states of fact. A s to the first, the word 'unable' must be given its full force. The second

goes further: it is that the payer's affairs are

in such

a state that acceptance of the payment

(assuming that it

would be allowed to stand) would

put the payee in a better position vis-a-vis the other creditors than he would be in if the payer

were bankrupt or, in the case of a company, were in liquidation. If the proper inference from the

circumstances

that

there

was

a sufficient

reason for the payee to form an actual suspicion

a real

apprehension

though

with

insufficlent

warrant for a positive conclusion

that the

situation had both these features, he is debarred

sub-s.(4) from being deemed

a payee in good

faith.

This

view

contrasted

with

the

observations by Barwick C.J. in the same case, where he says at

pp.291-292:-

2 0 .

"In the first place

... the circumstances of the

voided payment must be such

to lead to the

inZerence that the creditor knew or had reason to

suspect the fact

of the debtor's insolvency. It

is not enough that the circumstances are such as

to	lead to the inference that the creditor had

reason

susppct

that

the

debtor

might

insolvent.

The words of the sub-section, to

mind, are quite clear that it is the fact

actual insolvency which

must

known

suspected. To be insolvent, the debtor must be unable, as distinct €rom being merely unwilling, to pay his debts as they fall due. It is one

thing to suspect

a man's solvency in the sense

that

one

doubts

whether

he is solvent or

insolvent. It

is another thlnq to suspect that he

is in fact insolvent."

I, respect€ully, have difficulty in accepting the correctness of the distinction in the last two sentehces.

Accepting, of course, that insolvency means being unable

to pay one's debts

as they fall due, if a person entertains a

genuine doubt in the sense

of being uncertain whether a person is

insolvent or solvent (as opposed

being

ignorant

his

financial circumstances), in

my opini'on, that person

has real

apprehension as to his solvency and the suspicion referred to in

the sub-section exists.

In this case, in

my opinion, the payment was made

such circumstances as to lead objectively to the inference that

the respondent had reason to suspect that the debtors were unable

to pay their debts

as they became due and that the effect

of the

payment would be to give the respondent preference, priority

advantage over other creditors. More precisely; having regard to

the burden of proof, the respondent has not established that the

Q-

* %

21.

payment was made in circumstances which were not such that the

respondent had reason to suspect each

those matters. In this

deemed sense,

the payment is not made in good

faith and, for this

reason

also, in my

view, the respondent is not able to brinq

himself within the protective provisions of

s . 1 2 2 ( 2 ) .

I therefore declare that the payment made

by the debtors

to the respondent of $10.169.17

on 6 October, 1983,

is void a s

against the applicants.

I order that the respondent pay to the

applicants the sum of

$10,169.17 together with their costs

of and

incidental

to the application, such costs

be taxed if not

agreed; liberty to apply to either party.

[1985] FCA 309

3 Jul 1985