Rees v Bank of New South Wales

[1964] HCA 47

HIGH COURT OF AUSTRALIA

Barwick C.J., Kitto and Taylor JJ.

REES v. BANK OF NEW SOUTH WALES

(1964) 111 CLR 210

14 August 1964

Company

Company—Liquidation—Preference, priority or advantage—Avoidance—Protection of payments made in good faith and for valuable consideration and in the ordinary course of business—Unable to pay debts as they become due from own moneys—Company's account with bank overdrawn—Arrangement that whole of takings of company's business be paid into account and that a determined sum be applied each month in permanent reduction of overdraft—Bank obtaining preference to the extent of the amount of permanent reduction—Transactions in ordinary course of business—Valuable consideration—Bank having reason to suspect company was unable to pay its debts as they became due and that the effect of the arrangement was to give it a preference, priority or advantage over the other creditors—Whether payee in good faith—Whether good faith to be tested in relation to each payment into the overdrawn account or on the general effect of the whole series of payments into the account and payments out of it within the statutory period—Winding up of company within six months—Avoidance of payments applied in permanent reduction of the overdraft—"Unable to pay his debts as they become due from his own money"—The Companies Acts, 1931 to 1960 (Q.), s. 275—Bankruptcy Act 1924- 1960 (Cth), s. 95.

Decisions

August 14.
The following written judgments were delivered:-
BARWICK C.J. The appellant, liquidator of Hennessy's Self Service Stores Pty. Ltd. (the company) sought of the Supreme Court of Queensland an order that a sum of money, "representing moneys of the company paid to the respondent bank" (the bank) "by deposit to the overdrawn account of the company between 1st December 1960 and the commencement of the liquidation, 10th February 1961, to the extent that they were not disbursed by the Bank in that period in honouring cheques of the company drawn on that account, constituted a preference, priority or advantage" within the meaning, and void by reason, of The Companies Acts, 1931 to 1960 of the State of Queensland, and for consequential orders for payment of such sum by the bank to the liquidator. (at p216)

2. Section 275 of The Companies Acts, 1931 to 1960, which because of s. 2 of The Companies Act of 1961 of the State of Queensland and the date of the presentation of the petition, still governs the matter, requires that the question be determined in accordance with the provisions of s. 95 of the Bankruptcy Act 1924-1960 (Cth), the date of the presentation of the petition being taken to correspond with the presentation of a bankruptcy petition for the purposes of applying that section. (at p217)

3. The Supreme Court refused the order which the appellant sought. The primary judge found that deposits and withdrawals had taken place between 1st December 1960 and 8th February 1961 to the extent necessary to effect an overall reduction in the company's overdrawn account to the claimed extent: that throughout the period of these operations the company was unable to pay its debts as they became due: that to the extent of the reduction in the account in the period the bank obtained a preference, priority or advantage: that the transactions (meaning the payments in and withdrawals) took place in the ordinary course of business. (at p217)

4. As the challanged transactions took place within six months of the presentation of the petition to wind up the company, the primary judge entered on the question whether the transactions were in good faith, properly regarding the bank as bearing the onus of proof in this respect. No express finding was made that there was valuable consideration for the transactions, apparently this being assumed by the parties and by the judge ; and I think, in this case, rightly so. His Honour accepted the view that the bank had been bona fide in receiving and applying the payments in question and accordingly refused the liquidator's application. (at p217)

5. The material facts of the matter are recited in the judgment of my brother Taylor and I have no need to repeat them in any detail. It would appear that his Honour the primary judge accepted the view that the bank, through the officers concerned, genuinely believed throughout the period that the company was carrying trading stocks well in excess of the amount of its liabilities, that the company's current financial difficulties were associated with seasonal requirements of its business, the slow movement of some parts of its stocks, and the incautious and accelerated rate of the expansion of its business. (at p217)

6. His Honour makes no reference in his reasons for judgment to the imperative provisions of sub-s. (4) of s. 95 of the Bankruptcy Act (Cth). But for that sub-section, I would not disturb his Honour's finding of bona fides in the bank in connexion with the transactions in question. But in my opinion the inference that the bank at least had reason to suspect that the company throughout the period of the payments was unable to pay its debts and that the effect of the payments, as they were to be applied by the bank, would be to give the bank a preference, priority or advantage over the other creditors is inevitable. That the bank bears the onus of negativing such an inference makes the result of this appeal even more certain. (at p218)

7. The respondent's counsel submitted that, because the bank held the beliefs, which the primary judge accepted it did hold, as to the extent of the company's trading stock and of the causes of its current embarrassments, it could not be said either to know or to have reason to suspect the company's insolvency - its inability to meet its debts as they became due. But this submission springs from a basic misconception and is not borne out by the judgments of this Court to which my brother Taylor refers. It is quite true that a trader, to remain solvent, does not need to have ready cash by him to cover his commitments as they fall for payment, and that in determining whether he can pay his debts as they become due regard must be had to his realizable assets. The extent to which their existence will prevent a conclusion of insolvency will depend on a number of surrounding circumstances, one of which must be the nature of the assets and in the case of a trader, the nature of his business. Here the company's business was the sale of foodstuffs through a number of retail outlets. The asset whose value was said to negative a conclusion of insolvency, or at any rate to obviate the suspicion of it, was its trading stock of foodstuffs. In the ordinary course of the company's business this asset was not available to be realized except by means of retail sales through its various shops. It is possible, of course, in a business such as that of the company for excess stocks to be realized otherwise than through the channels of the company's retail business : but, although there had been an abortive negotiation for a total takeover of the company's business, no proposal to realize surplus stock by some bulk disposal for cash was in contemplation. The bank was not contemplating that the company intended to liquidate its business but to carry it on. Indeed the bank with a degree of sympathy was assisting the company to carry on the business. The stock in trade was clearly not an asset which was available to be realized to meet current debts except in the ordinary course of the company's business, a course which had proved itself inadequate. In this connexion, the test applied by Lindley L.J. in Ex parte Russell ; Re Butterworth (1882) 19 Ch D 588 , in determining whether a voluntary settlement by a trader was made at a time when he was able to pay his debts without the aid of the settled property, namely, that the trader should be able to pay his debts in the way he is proposing to pay them, i.e. in the ordinary course of his business, if he is intending to continue it, is instructive. (at p219)

8. The bank in this case knew that the company was overtrading, that its only source of money to meet its current trading debts was the takings of its shops, that the whole of the takings were being deposited to the overdrawn account, and that the company's trading debts were not being currently met. However acceptable the motive of the bank in endeavouring to keep the company afloat, by proving its belief that the company had an excess of trading stock over those debts of which the bank was aware, it cannot escape the conclusion that, at the least, it had reason to believe that the company was insolvent. Clearly that stock, in the company's circumstances, was not within the category of realizable assets to which Isaacs J. refers in Bank of Australasia v. Hall (1907) 4 CLR 1514, at p 1543 . (at p219)

9. I agree with my brother Taylor in thinking that the proper inference from the facts is that there was an arrangement between the company and the bank, made at the end of November 1960 through Mr. Hennessy for the company and Mr. Connors for the bank, with at least the tacit approval of Mr. Barton, that the whole takings of the shops should be banked to the credit of the overdrawn account and that the bank should apply so much of the deposits as it determined up to a maximum of 7,000 pounds per month in permanent reduction of the company's indebtedness to the bank, the bank deciding, no doubt after consultation with the company, which of the cheques drawn by the company in payment of its trading debts should be met from the account. Such an arrangement with a company in this company's position, however beneficient it might prove to the interest of the company and to its other creditors, both in continuing to provide an outlet for their goods and in providing the company with time for recovery, could only be made with safety to the bank if made in consultation with the company's other creditors. To make and implement it without such consultation meant that if the company failed within the statutory time, the bank must be taken to have accepted the reduction of its overdraft with at least a suspicion, but I think with knowledge, of the insolvency of the company and that that reduction as it took place involved a preference, priority or advantage in favour of the bank over other creditors whose debts were not being met. That consequence follows in this case. (at p219)

10. Some reference was made in argument to the decision in Richardson v. The Commercial Banking Co. of Sydney Ltd. (1952) 85 CLR 110 which was sought to be used to support the submission that here, because the bank was honouring cheques drawn on the company's account during the period and doing so in consultation with the company, no part of the payments retained by the bank during the period were liable to attack as preferences. But in my opinion Price's Case (1952) 85 CLR 110 has no relevance to the resolution of this. In Price's Case (1952) 85 CLR 110 except for the receipt of the cheque of 390 pounds, the bank's indebtedness was not permanently reduced. In the judgment of the Court there appears this passage, both significant to the decision of that case and indicative of its irrelevance to this : "The burden of showing that a preference resulted is upon the Official Receiver, and we know that in the result there was none actually enjoyed by the bank. To infer that at a point the bank obtained one but that it was freely sacrificed by the spontaneous making of further advances by honouring cheques would we think be wrong. The true reading of the circumstances, we feel little doubt, is that the deposits were made on the footing that so far as the respective deposits would carry, the cheques coming in would be honoured, if it was not decided in consultation that to dishonour them was a safe and better course." (1952) 85 CLR, at p 135 . (at p220)

11. In this case the challenge is not to individual payments as was the case with the cheque for 390 pounds in Price's Case (1952) 85 CLR 110 nor was there an account in liquidation as in Docker's Case (1938) 10 ABC 198 . But at the time of the receipt of each deposit during the relevant period, the bank was able to retain at least some portion of it in permanent reduction of its account. What part it did retain can be determined by taking the total intake into the account during the period and deducting the outgo. It is unnecessary to endeavour to assign this remainder to particular deposits, for the position as to the bank's knowledge in relation to the company's solvency and in relation to the effect of any permanent reduction in the company's indebtedness to the bank was the same throughout the period. Nor is there any need to analyse the course of the overdrawn account during the period to determine whether a preference which had been obtained at one point of time was foregone by the making of further advances which for the time being may have exceeded the extent of the preference. It is sufficient in the circumstances of this case to take the overall effect of the deposits and the withdrawals in the period. (at p220)

12. It was also said in argument for the bank that it was not permissible for the liquidator to choose a date within the period of six months and to make a comparison of the state of the overdrawn account at that date and its state at the date of the commencement of the winding up. It was submitted that the proper comparison was between the debt in the account at the commencement of the statutory period of six months and the debit at the commencement of the liquidation - a comparison which in this case would result in a materially lesser figure than that reached by taking the liquidator's comparison. In my opinion the liquidator can choose any point during the statutory period in his endeavour to show that from that point on there was a preferential payment and I see no reason why he should not choose, as he did here, the point of the peak indebtedness of the account during the six months period. (at p221)

13. I am therefore of opinion that, accepting all the findings of the primary judge except his finding as to the bona fides of the bank, the deposits to the company's account during the period 1st December 1960 to 8th February 1961, to the extent that they were applied in permanent reduction of the bank's debt, were not received bona fide by the bank within the meaning of the statute because at the time of their receipt the bank had at least reason to suspect that the company was unable to pay its debts as they became due, and that the effect of the receipt of that money applied as the bank proposed to apply it would be to give the bank a preference, priority or advantage over other creditors. (at p221)

14. I would for these reasons allow this appeal. (at p221)

KITTO J. I am of the same opinion, and there is little that I wish to add. (at p221)

2. The liquidator attacked as a voidable preference each individual deposit made to the credit of the company's overdrawn bank account in a period of a little over two months before the presentation of the petition for winding-up, but only to the extent to which the deposit was represented in the excess of deposits over payments out made in that period. The application treated the case as within the reasoning of Richardson v. The Commercial Banking Company of Sydney Limited (1952) 85 CLR 110 ; that is to say the liquidator conceded that the arrangements made between the bank and the company from time to time during the period were such that by a common business purpose of the company and the bank each deposit was so connected with subsequent payments out that the question whether the deposit had the effect of giving the bank a preference was to be decided not by considering its immediate effect only but by considering what effect it ultimately produced in fact. (at p222)

3. That the ultimate effect of each deposit was to give the bank a preference to the extent to which the deposit contributed to the excess of deposits over payments out made in the period is clear. To that extent each deposit was void as against the liquidator (Bankruptcy Act (Cth), s. 95 (1)) unless the bank discharged the burden of proving that in respect of that deposit it was a payee in good faith and for valuable consideration and in the ordinary course of business : s. 95 (2) (b) and (3). But, even though the bank satisfied the learned primary judge that it was in a general sense a payee in good faith, it could not properly be deemed a payee in good faith for the purposes of the application in regard to any deposit if the circumstances under which that deposit was made were such as to lead to two inferences, first, that the bank knew or had reason to suspect that the company was unable to pay its debts as they became due, and secondly that the bank knew or had reason to suspect that the effect of its receiving the deposit would be to give it a preference, a priority or an advantage over the other creditors of the company : s. 95 (4). Unless both inferences arose, s. 95 (4) had nothing to say to the case : Burns v. McFarlane (1940) 64 CLR 108, at p 124 . I can come to no other conclusion on the evidence, however, than that the proved circumstances in respect of each of the deposits in question were such as to lead to both inferences. As to the first, it seems really beyond serious controversy that the bank had reason to suspect, and indeed that its officers who dealt with the company's affairs must, in fact, have understood, that the company was unable to pay its debts as they became due. As to the second, there is, perhaps, a preliminary question of construction. Richardson's Case (1952) 85 CLR 110 having decided that the effect referred to in sub-s. (1) is the ultimate effect in a case where the payment formed an integral step in a unified course of payments and counter-payments, the question is whether the same is true of the effect referred to in sub-s. (4). If it is, there is a difficulty in applying the words "knew or had reason to suspect" in such a case, for the payer could not have either knowledge or suspicion as to what the ultimate effect "would be", though he may have a suspicion as to what it was likely to be. I think the answer is that the effect referred to in sub-s. (4) is the immediate effect, so that a creditor who receives a payment from the debtor cannot be held to be a payee in good faith if, at the time of receiving it, he knows or has reason to suspect that the debtor is unable to pay his debts and that the payment, if allowed to stand, will place him in a better position vis-a-vis other creditors than he would occupy if the debtor became bankrupt with the amount unpaid. This is true, in my opinion, even in respect of a payment as to which it is impossible to say without looking to the result of a series of payments in and out whether it is caught by sub-s. (1) as having in fact the effect of giving a preference. Construing sub-s. (4) in the manner stated, I agree with the other members of the Court that the present case falls within the sub-section, and that therefore the general finding of good faith does not suffice to save the bank from the avoidance of the preference which in fact it obtained. (at p223)

4. I agree that the appeal should be allowed. (at p223)

TAYLOR J. This is an appeal from the dismissal of an application for an order declaring that the payment of certain moneys to the respondent by a company known as Hennessy's Self Service Stores Pty. Limited, between 1st December 1960 and 8th February 1961, constituted voidable preferences within the meaning of s. 275 of The Companies Acts, 1931 to 1960 (Q.). During the period in question the company paid into its bank account with the respondent the sum of 222,091 pounds 8s. 3d. and the total amount paid out of the account on the company's cheques, drafts and other authorities during the same period was 201,789 pounds 6s. 8d. and it is the amount of the difference - 20,302 pounds 1s. 7d. - which, in the circumstances of the case, is claimed to have been the subject of preferential payment. That amount is the amount by which it is said the company's overdraft was reduced during the period in question but exhibit 19 shows that the amount of the reduction between these two dates was 20,292 pounds. In the absence of any explanation for the slight disparity I propose to treat this amount as being the amount in question. (at p223)

2. The petition upon which the winding-up order was made was presented on 10th February 1961 so that all of the payments made during the specified period were made within six months prior to the commencement of the winding-up. But no specific payment is attacked; what is said, in substance, is that the respondent, with full knowledge that the takings of the company were and would continue to be paid to the credit of its account with the respondent at its Fortitude Valley branch, made an arrangement with the company which envisaged the retention by the respondent in permanent reduction of the company's overdraft of so much of the deposits to the credit of the account, not exceeding 7,000 pounds per month, as it should determine. It was pursuant to this arrangement that the reduction took place between 1st December 1960 and 8th February 1961 and it was claimed that the arrangement was made at a time when the company was unable to pay its debts as they became due from its own money and that the payments which resulted in this reduction were made under such circumstances as to lead to the inference that the respondent knew or had reason to suspect that the company was unable to pay its debts as they became due and that the effect of the payments, in the circumstances in which they were made, would be to give the respondent a preference, a priority or an advantage over other creditors. (at p224)

3. The learned judge of first instance was satisfied that an arrangement of the general character indicated was made, that the various transactions which produced the reduction in the overdraft occurred, that "contemporaneously with their occurrence the company was unable to pay its debts as they became due" and that as a result of those transactions the respondent obtained a preference, priority or advantage over other creditors. But upon consideration of the evidence he came to the conclusion that the respondent had discharged the onus of establishing that the transactions took place in good faith and for valuable consideration and in the ordinary course of business and, accordingly, he dismissed the application. (at p224)

4. One, John Joseph Hennessy, was the governing director of the company and it was said that prior to the formation of the company he had successfully carried on a grocery business under a firm name. That business was acquired by the company on its formation as a proprietary company in 1959 and it commenced trading on 7th July of that year. There is little evidence in the case as to the capital embarked in the company from time to time but it seems to be established that immediately after it commenced operations the company embarked upon a programme of expansion and that by the middle of 1960 it was operating eighteen self service stores. What its arrangements with the respondent for accommodation were do not clearly appear and there is no concrete evidence of the state of the company's account prior to March 1960. However, according to an entry in the respondent's day book, under date 11th March 1960, it was overdrawn to the extent of 17,230 pounds and a notation appears to the effect that "drawings presented for the 10th, if paid, would increase the debt to 20,863 pounds 13s. 10d." or, to 21,662 pounds 7s. 5d. if a further cheque for 798 pounds 13s. 7d. should be paid. There had been a "special request for (the) fate" of this cheque and it was not paid until after an interview had taken place between Hennessy and the respondent's chief manager for Queensland. The notation in the day book seems to suggest that the respondent was somewhat concerned at the state of the account at this stage but this is not of critical importance in the case. What is of some little importance is that it appears that "such a high debt had never been contemplated" by the respondent and it was desirous that steps should be taken to reduce it. There is little evidence as to what happened during the next few months but it appears that in June 1960 the company was operating with an overdraft limit of 20,000 pounds though this limit was of a temporary character. Nevertheless, this limit still applied when on 26th September 1960 the manager of the Fortitude Valley Branch, one Connors, addressed a memorandum to the chief manager. Prior to this date there had been negotiations between the company and another organization which was said to have held an option to purchase all the issued shares in the company. These negotiations continued for two or three months and during this period the respondent gave the company "some tolerance as to time" in that it "agreed not to force the issue" in the negotiations. But the negotiations were broken off prior to 26th September 1960 and the memorandum of this date reported that fact. The overdraft at this date was 19,233 pounds but this was the lowest figure at which it stood at any time during that month. On 16th September 1960 it had stood at 34,472 pounds and at the end of the month itwas 26,237 pounds. The memorandum of 26th September 1960 resulted in the issue of a written instruction, dated 30th September 1960, from the chief manager in the following terms:

"We did give Mr. Hennessy some tolerance as to time in that we agreed not to force the issue in his negotiations

with Thomas Brown &Sons Ltd. But it was implicit in the

arrangement that his debt was not to exceed 20,000 pounds at any time. The exuberant expansion being undertaken without any organized and planned financial programme, is too much for us. The following arrangements are to be implemented forthwith: Debt is to be held within 20,000 pounds. At 31/10/1960 this peak debt is to reduce by 3,000 pounds to 17,000 pounds. And thereafter 3,000 pounds reduction is to be enforced each month. Meantime, please supply us with copy of Balance Sheet and Accounts for 30/6/1960 together with Statement of Position of J. J. Hennessy. Prompt attention to this situation is desired".

The account was the subject of a further report by Connors to the chief manager on 11th October 1960. It made three main points. There had been a discussion, or discussions, between Connors and Hennessy and the chief manager's instruction concerning the necessity for a reduction of 3,000 pounds per month had been conveyed to him. Secondly, it was reported that Hennessy intended to seek further capital for the company and would endeavour "to obtain a further 10,000 pounds as quickly as possible". But it was pointed out that until "these funds are forthcoming" it would be difficult to hold the account at all times within a limit of 20,000 pounds during October as approximately seventy-five per cent of the company's weekly turnover figures "are received from end of the week trading when account reacts accordingly". Thirdly, it was said, that it was expected that the company's statement of accounts for the year ended 30th June 1960 would be in the branch manager's possession by the end of the month. "Until these figures are available" it was said, "it is not possible to compile with accuracy a statement of the position of J. J. Hennessy". (at p226)

5. The company's account was overdrawn to the extent of 14,143 pounds on the date of this memorandum but this was the lowest figure at which it stood during the month of October. On 1st October 1960 it was overdrawn to the extent of 22,095 pounds and at the end of the month it was slightly higher at 22,540 pounds, that is to say some 5,540 pounds in excess of the limit which the instruction of 30th September 1960 had stipulated should operate at that stage. (at p226)

6. By 21st November 1960 the overdraft had risen further to 28,533 pounds and a somewhat critical situation had arisen in relation to two drafts, for a total amount of nearly 14,000 pounds, which had been presented for payment. A memorandum of that date by Connors to the chief manager speaks eloquently of this situation:

"For the past three weeks we had been holding drafts of:- Lever Bros. 6,523 pounds 17s. 0d.

J. Kitchen &Sons Pty. Ltd. 7,436 pounds 5s. 8d.

and due to the position of account payment could not be made. Representatives of Lever's and Kitchen's saw J. J. Hennessy last Saturday morning and told him that if payment was not effected on Monday they intended to take legal action for recovery. Following their call, J. J. Hennessy rang me and advised the position. He stated that his Saturday takings would be approximately 6,000 pounds and by Tuesday next he expected a further capital subscription of 4,000 pounds to the Company. In view of these funds in sight he asked whether we could meet the drafts on Monday and he also mentioned his income should exceed outgo by at least 10,000 pounds this week. I told him on figures submitted his account would be too far out of line on Monday to meet the drafts. At 9.30 today Mr. Barton (Chief Manager) rang to say Hennessy had just left him. Hennessy outlined the position to Chief Manager as stated above and requested the Bank assist him meet the drafts today to stop the legal action pending. Mr. Barton stated that after listening to Hennessy's request he had sent him down to see us and provided we were satisfied that account would run as indicated by Hennessy, we could pay the drafts for him. However, I mentioned to Mr. Barton that approximately 80% of Hennessy's turnover occurred over the last three days of the week. On his intake of approximately 22,000 pounds per week, he would no doubt reduce the debt of 10,000 pounds this week, but such reduction would not eventuate until next Monday. Meanwhile incoming cheques could create a peak debt in the vicinity of 40,000 pounds. Mr. Barton replied that when we paid the drafts, we would have to follow the run of account for the week on the distinct understanding that Hennessy respected the arrangements entered into and reduced the debt accordingly by the next week".

The payment of these two drafts had the effect of increasing the company's indebtedness to the bank to 41,316 pounds. But Hennessy's expectation that the company's indebtedness to the respondent would be reduced by 10,000 pounds during the next week did not eventuate and by 1st December the company's indebtedness to the respondent had risen further to 44,694 pounds. It is admitted by an answer to an interrogatory that at or about 21st November 1960 the company was requested to reduce its overdraft "by 7,000 pounds per month during each of the next three months" and the company was informed by Connors that the respondent "would decline to honour drawings on the said account in excess of the amounts which would have stood as the overdraft of the said company had the said request been satisfied" but it is said that the respondent did not so decline except in isolated instances until the month of December 1960. (at p228)

7. During November the respondent had dishonoured a number of cheques drawn upon it by the company. These were as follows:

Date of dishonour Amount Notation 7th November 4,892 pounds 19s. 2d. Present again. 9th November 3,380 1s. 8d. Present again 14.11.60. 9th November 1,788 0s. 4d. Present again 12.11.60. 9th November 3,468 1s. 0d. Present again 12.11.60. 11th November 10,374 9s. 3d. Present again. 15th November 4,572 16s. 4d. Present again. 15th November 3,380 1s. 8d. Present again. 16th November 1,832 6s. 7d. Present again. 17th November 662 16s. 4d. Present again. 23rd November 1,832 6s. 7d. Present again. 24th November 915 11s. 3d. No arrangements. 26th November 1,083 5s. 5d. Present again in a few days.

29th November 3,800 0s. 0d. Present again. (at p228)

8. All but two of these cheques are said to have been paid subsequently on re-presentation but when they were paid does not appear. The dishonouring of these cheques was said to be due to the desire of the branch manager to keep the account "within the guarantee cover", that is to say, J. J. Hennessy's personal guarantee to the extent of 20,000 pounds. During December forty-two cheques and drafts for a total amount of approximately 78,000 pounds were dishonoured: in January the number of dishonoured cheques rose to sixty-one, the amount involved being approximately 72,000 pounds, whilst in February a further sixty-five cheques, representing approximately 60,000 pounds, were dishonoured. Unsecured debts to the amount of 275,000 pounds have been admitted to proof by the liquidator and the existing assets of the company are estimated to be sufficient only to pay a dividend of 2s. 6d. in the pound. (at p228)

9. It will be remembered that on 30th September 1960 the chief manager had asked to be supplied with a copy of the company's balance sheet and accounts as at 30th June 1960 and that Connors had replied that he expected to have these in his possession by the end of the month. However, they were not available until 16th December 1960. According to the profit and loss account then supplied a net profit of 5,017 pounds had been made in the year which ended at 30th June 1960 but there seems every reason for doubting the closing stock figure of 213,350 pounds. However examination of the books of the company now reveal that if it held this amount of stock at 30th June 1960 then in the period between that date and 13th February 1961 the company made a trading loss in excess of 200,000 pounds. Reference to the balance sheet shows that J. J. Hennessy's certificate as to the value of stock on hand had been accepted by the auditor and this item together with an amount of 50,000 pounds for goodwill made up 263,000 pounds of the total of 304,947 pounds on the assets side of the balance sheet. It is, to say the least, a most unimpressive document particularly when it is viewed in the light of earlier discussions as to the stock which the company carried and the respondent's attempts to obtain information with respect to the company's affairs. As early as May 1960 the respondent was seeking information with respect to the stock carried and on 31st May 1960 Hennessy informed Connors that stock had been taken at the eighteen stores over the previous week-end and that "the aggregate figure was 142,688 pounds". This was reported to the chief manager on 6th June 1960. On 22nd June 1960, when negotiations were proceeding for a takeover of the company's shares, Connors reported that the parties concerned felt that the balance sheet and accounts should be taken out promptly at 30th June 1960 and that he had been promised the figures by 15th July 1960. This promise was not fulfilled and the next mention of the accounts is Connor's statement in his memorandum of 11th October 1960 when he reported that he expected the balance sheet and accounts to be in his hands by the end of the month. Yet for some reason or other they were not made available until 16th December 1960. (at p229)

10. It was contended before us on the appeal, although somewhat faintly, that we should differ from the learned judge of first instance and hold that it has not been established that at the material time, which I take to be on and after 1st December 1960, the company was unable to pay its debts as they became due. But, in my view, the conclusion to which his Honour came on this point is inescapable and it is unnecessary to discuss it separately from the main point in the case. (at p229)

11. On this point I commence by referring to the case of Bank of Australasia v. Hall (1907) 4 CLR 1514 where the question arose whether the evidence established that at the time when the debtor had given a security to his creditor he was unable to pay his debts as they became due from his own moneys. On this question Griffith C.J. said : "It was suggested, but the argument was not pressed, that the debtor's affairs should be regarded from the point of view of a balance sheet of assets and liabilities. This is not what the Statute says. It has always been interpreted in Queensland to mean what it says, and the only English reported case on the point, In re Washington Diamond Mining Co. (1893) 3 Ch 95 , is to the same effect. The question is not whether the debtor would be able, if time were given him, to pay his debts out of his assets, but whether he is presently able to do so with moneys actually available. The most favourable construction that can be put on the words 'his own moneys' is that they include any moneys of which the debtor can obtain immediate command by sale or pledge of his assets" (1907) 4 CLR, at p 1528 . (at p230)

12. With this statement Barton J. entirely agreed whilst Isaacs J. said : "The Act requires the debtor to be able to pay his debts as they become due. This does not mean that he is always bound to keep by him in cash a sum sufficient to meet all his outstanding indebtedness however distant the date of payment may be. If at the time he makes the assignment, the debtor's position is such that he has property either in the form of assets in possession or of debts, which if realized would produce sufficient money to pay all his indebtedness, and if that property is in such a position as to title and otherwise that it could be realized in time to meet the indebtedness as the claims mature, with money thus belonging to the debtor, he cannot be said to be unable to pay his debts as they become due from his own moneys. In other words, if the debtor can, by sale or mortgage of property which he owns at the time of the assignment, change the form of the property into cash wholly or partly but sufficient for the purpose of paying his debts as they become due, that requirement of the section is satisfied" (1907) 4 CLR, at p 1543 . In the light of these pronouncements it was, to my mind, clearly proved that the company was at all material times unable to pay its debts as they became due. Indeed, for some time prior to 1st December 1960 its own transactions plainly demonstrated that fact and, indeed, it is virtually conceded in Connor's report of 5th April 1961 that the company was insolvent in the second half of 1960. In this report he points out that on figures supplied by Hennessy both in June and December 1960 the company had an excess of assets over liabilities of approximately 60,000 pounds. But he goes on to point out that Hennessy had overstated the company's stock position and that he had grossly understated its trade debts. In particular, he mentions two debts of which the respondent was said to have been unaware and which totalled nearly 52,000 pounds. It would seem that when appropriate adjustments are made to Hennessy's figures a substantial excess of liabilities over assets would be disclosed. However, the main question is whether the arrangement was made, and the subsequent transactions between the company and the respondent took place, under such circumstances as to lead to the inference that the respondent knew or had reason to suspect that the company was unable to pay its debts as they became due and that the effect of the various transactions would be to give the respondent a preference, priority or an advantage over the creditors. To my mind the answer to this question must be in the affirmative for the evidentiary matters which so plainly establish that the company was unable to pay its debts as they became due were matters within the knowledge of the respondent's responsible officers. It was conceded in evidence that it was found to be "impracticable" for the company to observe the instruction given in September 1960 to reduce its overdraft by 3,000 pounds per month and that instead of the company's indebtedness to the respondent being reduced to 17,000 pounds by the end of October 1960 it had risen to 22,655 pounds. Then, in the circumstances already related, it further increased to 41,316 pounds on 21st November 1960 and the company's promise to reduce the indebtedness by 10,000 pounds within a week or ten days was not honoured. Instead, by 1st December 1960 the overdraft had risen to 44,694 pounds and this occurred notwithstanding the dishonour of cheques drawn on the account in November for a total amount approximating 35,000 pounds. These cheques had obviously been drawn to pay trade debts and it was about as clear as it could be that the company was unable to meet its debts out of its resources. It was about this time that the arrangement in question was made and from then onward the chief manager required a daily return to be made as to the state of the account. From 1st December 1960 onward there was constant consultation between the respondent and Hennessy as to which of the company's cheques should be honoured and which should be dishonoured. It must, I think, have been apparent by 1st December 1960 that the company was quite unable to meet its debts as they became due but the learned trial judge found that the respondent held the opinion at this time that "behind these cheques there was a very substantial margin of realizable stock". No doubt this belief, if it existed, was induced, as his Honour found, by mis-statements by Hennessy as to the value of stock in hand from time to time and by its lack of knowledge of two trade debts aggregating nearly 52,000 pounds. But we do not know what Connors believed as to the value of the stock on hand for he was not called as a witness. We do know, however, that promises from time to time to provide him with copies of the company's accounts were not kept, and this, in the circumstances of the case, afforded some grounds for apprehension. Further the features of the case upon which the learned judge founded his decision sink into comparative insignificance when regard is had to the failure on the part of the company, obviously through inability, to meet the respondent's demands to reduce its overdraft by 3,000 pounds as from October 1960 and the further failure of the company to make good its promise of 21st November to reduce its overdraft by 10,000 pounds within a week or ten days. When there is added to these matters the evidence concerning the inability of the company to provide funds to meet the cheques which were dishonoured in November 1960 no doubt can exist that the payments made to the account between 1st December 1960 and 8th February 1961, and which were made subject to the arrangement in question, were made under such circumstances as to lead to the inference that the respondent knew or had reason to suspect that the debtor was unable to pay its debts as they became due and that the effect of the payments would be to give it a preference over other creditors to the extent which the arrangement envisaged. (at p232)

13. As already appears the attack which is made is not made in respect of any specific payments to the credit of the account. What is said is that the arrangement was made on the basis that the company would continue to pay the whole of its takings to the credit of its account with the respondent and that the latter should be entitled during each of the three succeeding months - December 1960 and January and February 1961 - to retain in permanent reduction of the company's indebtedness to the respondent so much of the amounts deposited in each of those months, not exceeding 7,000 pounds per month, as it should think fit. It is, I think, of no consequence that no individual deposit is attacked or can itself be attacked as a preference ; it is sufficient for th appellant to show that the company paid moneys into the hands of the respondent partly in order that it might in some limited fashion be permitted to continue trading and partly in permanent reduction of its overdraft indebtedness. To my mind the payments made in pursuance of an agreement to this effect are void to the extent to which they were, consistently with the arrangement in question, appropriated by the respondent in permanent reduction of the overdraft. (at p233)

14. For these reasons I am of the opinion that the order of the Supreme Court should be set aside and that it should be declared that of the moneys deposited to the credit of the company's account with the respondent between 1st January 1960 and 8th February 1961 the sum of 20,292 pounds constituted a preference and, therefore, that such payments were to that extent void as against the liquidator. Further an order should be made that the respondent pay this sum to the liquidator. (at p233)

Orders

Appeal allowed with costs. Order of the Supreme Court of Queensland set aside. In lieu thereof, order as follows:
(1) Declare that the payments made into the current account of the company with the Fortitude Valley Branch of the respondent the Bank of New South Wales in the period from 1st December 1960 to 8th February 1961 both inclusive were as to 20,292 pounds thereof invalid as against the liquidators by force of s. 275 of The Companies Acts, 1931 to 1960 (Q.), and that the respondent is liable to pay the said sum to the liquidators. (2) Order that the respondent pay the said sum to the liquidators accordingly.
(3) Order that the respondent pay the costs in the Supreme Court of the application in respect of the said payments.