Robinson, Maurice Desmond v Jackson, John Henderson

[1982] FCA 122

Re: MAURICE DESMOND ROBINSON and STEPHEN MICHAEL ROBINSON
Ex parte: JOHN HENDERSON JACKSON as trustee of the property of MAURICE DESMOND
ROBINSON and STEPHEN MICHAEL ROBINSON
And: ROTA-FORMA PTY. LTD.
Nos. 32 and 33 of 1981 Part X
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA
Fisher J.

CATCHWORDS

BANKRUPTCY - Advoidance of preference - Mortgage securing antecedent indebtedness - good faith - inability of debtors to pay debts as they became due - application by trustee of a Part X deed.

BANKRUPTCY ACT 1966 ss.121; 122(1)(2)(3)(4); s.231.

HEARING

ADELAIDE

#DATE 24:6:1982

ORDER

1. Declaration avoiding as against the applicant the mortgage to the extent that it purports to secure the existing indebtedness and two payments totalling $25,301.85.

2. The respondent to pay the said sum of $25,301.85 to the applicant.

3. The respondent to pay to the applicant the costs of the application the same to be taxed if not agreed.

JUDGE1

The applicant John Henderson Jackson is the trustee of two separate deeds of assignment executed pursuant to the provisions of Part X of the Bankruptcy Act 1966 ("the Act") by Maurice Desmond Robinson and Stephen Michael Robinson ("the debtors") on 24 July 1981. This application is pursuant to s.121 of the Act for declarations and consequential orders against the respondent Rota-Forma Pty. Ltd. ("Rota-Forma"). Section 231 of the Act makes applicable, inter alia, s.122 to a debtor executing a deed of assignment as if, to the extent presently relevant,

"(a) . . .

(b) a sequestration order had been made against him on that petition on the day on which he executed the deed; and

(c) the trustee of the deed were the trustee in his bankruptcy."

The declarations sought are that a mortgage executed by the debtors in favour of Rota-Forma on 9 February 1981 is void against the applicant as such trustee, insofar as it secured part advances, as a preference priority or advantage under s.122 of the Act and that two payments made by the debtors to Rota-Forma, one of $15,000 on 25 February 1981 and one of $10,301.85 made on 17 March 1981 are also void under s.122. The application was commenced in the Court of Insolvency of the State of South Australia exercising as it then did Federal jurisdiction in Bankruptcy. However it came for hearing before the Federal Court of Australia which on 1 February 1982 assumed jurisdiction in bankruptcy in South Australia in place of the Court of Insolvency. Transitional provisions enacte in the Statute Law (Miscellaneous Amendments) Act 1981 ensured that it was proper for the Federal Court to exercise jurisdiction in the matter notwithstanding the fact the action had been initiated in another Court.

The application is brought under the provisions of s.122(1) of the Act which provides so far as is presently material as follows

"122(1) . . . A conveyance or transfer of property, a charge on property, or a payment made, or an obligation incurred by a person who is unable to pay his debts as they become due from his own money . . . in favour of a creditor, having the effect of giving that creditor a preference, priority or advantage over other creditors, being a conveyance, transfer, charge, payment or obligation executed, made or incurred -
(a) within 6 months before the presentation of a petition on which, or by virtue of the presentation of which, the debtor becomes a bankrupt; or
(b) . . .
is void as against the trustee in bankruptcy."

By virtue of the provisions of s.231 of the Act the trustee of a deed is equated to the trustee in bankruptcy for the purposes of s.122 and the date of execution of the deed, namely 24 July 1981, is equivalent to the date of the sequestration order referred to in that section.

The execution of the mortgage on 9 February 1981 and the two payments abovementioned were all clearly within the relevant period of 6 months, and were respectively either a charge on property or payments made in favour of a creditor. The question however is whether the mortgage, to the extent it secured antecedent debts, and the payments had the effect of giving Rota-Forma a preference, priority or advantage over other creditors. Rota-Forma also argued, though not strongly, that the debtors had not established that, in terms of s.122, they were unable to pay their debts as they became due from their own money at the relevant times.

On 25 May 1979 the two debtors commenced business operations as manufacturers of steel garages etc, under the business name Streamline Constructions. In June 1980 they had their first contact with Rota-Forma, buying on a few occasions steel either for cash or credit. However, as a result of a dispute concerning a discoutn claimed by the debtors, purchases shortly thereafter ceased. In September 1980 the debtors in conjunction with their wives, who had no other involvement in the business, bought 6 acres of land for the purpose of resiting their operations. They paid $115,000 for the land, $80,000 of which was advanced by their bank and an associated finance company. An old moveable house on the land was sold for $10,000 and an industrial building erected at a cost of $54,000. This latter sum was, contrary to the debtors expectations, provided solely out of the cash flow of the business, and in consequence they were at all relevant times very short of ready cash. However there is little doubt that the business operations were profitable and sales increased considerably during the 1980-81 financial year. The bulk of their supplies of raw materials, mainly steel sheet metal, were purchased on credit from Fielders Pty. Ltd. ("Fielders") during the calendar year 1980.

In December 1980 David Jones, a recently employed sales manager of Rota-Forma, approached the debtors seeking orders from them. During the latter part of that month Fielders, which company was owed some $38,000, refused to supply further material on credit to the debtors. The debtors said they had a number of discussions with David Jones in December and told him of their problem with Fielders and their financial position. At the time they had some 30 creditors totalling $168,000 whom they could not pay and they needed to purchase approximately $55,000 of steel per month on credit. The debtors said they informed David Jones fully of their financial position. He said he would try to arrange credit for them with Rota-Forma.

During January 1981 the debtors had at least two conferences with the Managing Director of Rota-Forma, Alex Karytinos ("Alex"), David Jones and two other employees of Rota-Forma. None of the witnesses could fix exactly the dates of these meetings, though it would appear that they were approximately a fortnight apart with the last meeting occuring towards the end of January 1981. Prior to the first meeting the debtors recommenced buying sheet metal from Rota-Forma, to which they owed $25,301.85 for purchases by the end of January. At the first meeting the debtors said that they informed Alex that Fielders had stopped their credit, and that they were looking to Rota-Forma to make available credit up to $55,000 per month. The credit terms they sought were 30 days, which entailed in effect payment within two months after delivery. The debtors said that they probably did not mention to Alex at any of the conferences the extent of their indebtedness to creditors other than Fielders, though they had reason to believe from what was said at the meeting that David Jones had passed to Alex the information they had given to him. In consequence of the meetings Alex agreed to give the debtors the credit sought but in the first instance asked them to obtain a bank guarantee of payment of their indebtedness. To this end he introduced them to his own bankers and when they refused, asked the debtors for a third mortgage. I deal in greater detail with these matters when considering the protective provisions of s.122.

The debtors and their wives executed this mortgage on 9 February 1981 which mortgage secured all past and future sums owing by the debtors to Rota-Forma. Thus it purported to secure the moneys at that date owing for the January purchases by the debtors, namely $25,301.85. From that date onwards David Jones put pressure on the debtors seeking payment of the $25,301.85, visiting them every day and sometimes 2 or 3 times per day. This amount was reduced by $15,000 paid on 25 February 1981 and the balance on 17 March 1981, in one instance by a post-dated cheque.

The questions which arise for determination are whether the debtors were unable to pay their debts as they became due from their own money at the relevant dates; whether the transactions attacked had the effect of giving Rota-Forma a preference priority or advantage over other creditors; and whether the giving of the mortgage and the amounts paid were received by Rota-Forma in circumstances which entitled it to the benefit of the protective provisions of s.122 of the Act.

I will deal with these questions in turn.

1. Insolvency
The test enunciated in Sandell v Porter (1966) 115 C.L.R. 660 by Barwick C.J. at 670 requires consideration of what the debtors may be able to procure in addition to their immediate cash resources by realization or mortgage of their assets within a relatively short time. In other words a conclusion of insolvency is to be drawn from a consideration of their financial position in its entirety and ought generally not to be drawn merely from evidence of a temporary lack of liquidity. In this matter there is no doubt that in the early months of 1981 the debtors were suffering a severe lack of ready money and the only assets they had available for realization were the assets committed to their business. It was not a mere temporary lack of liquidity for they had creditors totalling some $150,000 whose demands they were unable to meet, at least in part because their working capital had been laid out in erecting the industrial building on their land. It must be conceded that they had assets tied up in the business which was expanding and was profitable. However they were unable to pay their debts as they became due and it was not a temporary lack of liquidity which could be over come by selling assets while they still continued their business. Furthermore, they could not borrow further funds from their bank or from Rota-Forma's bank on their assets. The debtors were suffering an "endemic shortgage of working capital" (Hymix Concrete Pty. Ltd. v Garritty (1976-77) 13 ALR 321 per Jacobs J. at p.328). The conclusion must be drawn that they were insolvent at all relevant times and the respondent's counsel did not seriously contend to the contrary.

2. Preference
The question here for consideration is whether by the securing by the mortgage of the antecedent debt and the receipt of the two payments Rota-Forma obtained a preference priority or advantage over other creditors of the debtors. It seems to me that there was little doubt that this is the case and Rota-Forma's contention that, in the context of arrangements in the nature of a running account, it was not left with any preference, priority or advantage is not sustainable. This submission does not accord with the facts as Rota-Forma, in agreeing to grant the debtors extended credit provided it had the security of a mortgage, took the opportunity, to the detriment of other creditors, of obtaining security also for antecedent unsecured indebtedness.

3. Protective Provisions
Rota-Forma contended that even if the applicant established the matters upon which the onus lay upon him, it was still entitled to the protection of s.122(2) et seq. These provisions are as follows:
Section 122 (2). "Nothing in this section affects
(a) the rights of a purchaser, payee or encumbrancer in good faith and for valuable consideration and in the ordinary course of business
(b) . . .
(c) . . ."
Section 122 (3). "The burden of proving the matters referred to in sub-section (2) lies upon the person claiming to have the benefit of that sub-section."
Section 122 (4). "For the purposes of this section
(a) . . .
(b) . . .
(c) A creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the conveyance, transfer, charge, payment or obligation was executed, made or incurred under such circumstances as to lead to the inference that the creditor knew, or had reason to suspect -
(i) that the debtor was unable to pay his debts as they became due from his own money; and
(ii) that the effect of the conveyance, transfer, charge, payment or obligation would be to give him a preference, priority or advantage over other creditors."

It is therefore now necessary to consider and assess the evidence for the purpose of determining whether it establishes the bonafides of Rota-Forma or alternatively circumstances from which the inference can be drawn that Rota-Forma either knew or had reason to suspect as abovementioned (s.122(4)(c)).

Rota-Forma acknowledged through its counsel its burden of proof that it was obliged to satisfy me that it was entitled to the benefit of the protective provisions. Even if it satisfies me that it acted in good faith a further objective question remains to be decided. Rota-Forma is deemed not to be a payee in good faith unless I am satisfied that the circumstances surrounding the relevant transactions were not such as to lead to the inference that it knew or ought to have known that the debtors were unable to pay their debts and that the effect was to give it preference or advantage. As acknowledged by Kitto J. in Queensland Bacon Proprietary Limited v Rees (1966) 115 C.L.R. 266 at p.303, this is an objective 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 in fact reacted to the circumstances. The character of the circumstances 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".

My opinion is that not only has Rota-Forma failed to satisfy me that it acted in good faith but also that the circumstances amply justify the drawing of the specified inference. In my opinion the officers of Rota-Forma, Alex, David Jones and another employee Nick Vartzakas ("Nick") were aware that the debtors were unable to pay their debts, and that this knowledge prompted the taking of security for the January purchases.

I am not prepared to accept Alex's evidence to the contrary and David Jones, to whom the debtors say they explained fully their circumstances, has not came forward to dispute this evidence. In his absence I accept that he was fully aware and I draw the inference that, in accordance with his duty, he informed the managing director Alex.

My unwillingness to accept the evidence to the contrary of Alex is confirmed by the admissions he made on 9 March 1981 to the witness Griffin, who was at the time advising the debtors. Alex took the initiative to tell Griffin when he telephoned on that date that he was aware of the previous bankruptcy of one of the debtors and of the current bankruptcy notices against them and of their problems. I have no hesitation in accepting, despite Alex's denials, the evidence of Griffin who was not only an impressive witness but also independent of the parties. I am satisfied that Alex was fully aware on 9 February 1981 of the debtors' predicament which awareness prompted him to have David Jones continually pressure the debtors for payment of the January purchases even though they were prima facie secured. Moreover the evidence of Alex did not coincide with that of his other employee, Nick, as to the reason they were given why the debtors could not obtain credit from Fielders. Each of them also said that he checked the credit references of the debtors at the time the mortgage was taken and ascertained that the debtors were "paying well". I just do not accept this evidence, particularly as one of the creditors, Stratco, was attempting at the time to force the debtors to pay. Alex was also aware that the debtors could not obtain further assistance from their own bankers nor from his company's bank and he knew that they were refused supplies on credit from their normal supplier of steel, Fielders, to whom they owed $38,000 at all relevant times.

It is my finding that Rota-Forma was, notwithstanding its awareness of the debtors' financial circumstances, keen to do business with the debtors. When the debtors pressed, or indicated their need, for a larger amount of credit for a longer term, Rota-Forma took steps to secure its existing position as well as payments for subsequent supplies. It did this knowing full well the extent of the debtors' obligations to other creditors and that some at least of the other creditors were pressing for payment. By requiring security for existing indebtedness, and applying continuous pressure through David Jones to collect payment for January purchases, even though prima facie secured, and by the taking of a post dated cheque, Rota-Forma was knowingly engaging in an attempt to obtain an advantage for itself over other creditors. It follows that I am not satisfied that it acted in good faith, and additionally the relevant circumstances more than justify the drawing of the specified inference.

The orders of the Court must be that the applicant is entitled to a declaration avoiding the mortgage as against him to the extent that it purports to secure the indebtedness of $25,301.85 and also avoiding the two payments totalling this amount. Rota-Forma must repay the sum of $25,301.85 to the applicant together with the costs of this application, the same to be taxed if not agreed.