Sperling, Arthur Edward & Anor Ex Parte Aitken, Lindsay Robert

Re: ARTHUR EDWARD SPERLING and CHRISTINE LYNNE SPERLING
Ex Parte: LINDSAY ROBERT AITKEN, the trustee of the property of ARTHUR EDWARD
SPERLING and CHRISTINE LYNNE SPERLING the debtors
And: AVCO LEASING LIMITED
Nos. W.217X and W.218X of 1983
Bankruptcy
3 FCR 124

COURT

IN THE FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION BANKRUPTCY DISTRICT
OF THE STATE OF NEW SOUTH WALES AND
THE AUSTRALIAN CAPITAL TERRITORY
Wilcox J.(1)

CATCHWORDS

Bankruptcy - alleged preference - compromises of actions for damages in tort - proof of insolvency - whether payee was a "creditor" of payer - whether payment constituted a preference to a creditor - whether transaction was made in "good faith" and in the ordinary course of business.

Bankruptcy ACT 1966 s.122

Bankruptcy - Whether payment a preference priority or advantage in favour of a creditor - Whether debtor unable to pay his debts - Whether creditor had reason to suspect that debtor unable to pay his debts - Bankruptcy Act 1966 (Cth), s. 122.

HEADNOTE

A payment in settlement of an action in tort for unliquidated damages made at the same time as and as part of the same transaction as the entry of judgment cannot be attacked as a preference under s. 122(1) of the Bankruptcy Act 1966 (Cth), for it is not a payment made in favour of a person who immediately prior to the payment was a creditor.

Consideration of circumstances in which a debtor may be found to be unable to pay his debts as they fell due from his own money.

Consideration of circumstances in which a payee may be held to have had "reason to suspect" within the meaning of s. 122(4)(c) of the Bankruptcy Act 1966 that the debtor was unable to pay his debts.

HEARING

Sydney and Canberra, July 31; August 24. #DATE 24:8:1984

APPLICATION.

Application by trustee for declaration and orders relating to payments alleged to constituted preferences.

A. R. Emmett and R. Migodzinski, for the applicant.

L. G. Foster, for the respondent.

Cur. adv. vult.

Solicitors for the applicant: Hildebrand & Brown.

Solicitors for the respondent: Baker & McKenzie.

G.F.V.

ORDER

Application dismissed.
Applicant to pay the respondent's costs of the application. Application dismissed with costs.

JUDGE1

This application is brought by Mr LR Aitken, the trustee of the property of Arthur Edward Sperling and Christine Lynne Sperling appointed under Deeds of Assignment executed on 9 August 1983. Mr Aitken claims that two payments made by Mr AE Sperling, one of the debtors, to Avco Leasing Limited, the respondent, constituted preferences within the meaning of s.122 of the Bankruptcy Act 1966. He seeks a declaration to that effect and orders requiring the respondent to pay him the moneys it has received

On 11 August 1982 the respondent filed, in the Supreme Court of New South Wales, Common Law Division, two Statements of Claim. Mr Sperling was named as first defendant in each Statement of Claim. In matter No. 15177 of 1982 ("the Taxiropoulos matter") allegations were made that Mr Sperling acted on behalf of Papari Pty Limited and Vernay Pty Limited, the second defendants, in arranging for the plaintiff to provide finance to Taxiropoulos Pty Limited, the fourth defendant. Allegations were made against Mr Sperling and some of the other defendants that false representations were made in relation to the transaction. The plaintiff alleged, against each of the first and second defendants, negligence, and against all defendants, fraud and conspiracy. The plaintiff claimed damages, which were unquantified. In addition, the plaintiff sought to recover from the second defendant the sum of $2,350.00 allegedly paid to it as a brokerage fee and, from the fifth defendant, the sum of $47,000 allegedly paid to it in the implementation of the transaction.
The other action, No. 15178 of 1982 ("the Invader Homes matter") related to finance provided by the plaintiff to a company then known as Invader Homes Constructions Pty Limited. Once again, Mr Sperling was the first defendant and the companies, Papari Pty Limited and Vernay Pty Limited, whom he was alleged to represent, were the second defendants. The remaining defendants were persons not concerned in the Taxiropoulos matter but the allegations were broadly similar. Once again, the complaint was that misleading information had been supplied to the plaintiff in order to induce it to provide finance and, specifically, there were charges of negligence, fraud and conspiracy. Damages were claimed against all defendants and the plaintiff, in addition, sought to recover from the second defendants the brokerage fee paid to them of $1,521 and from the fifth defendant the sum of $30,430 said to have been advanced as a result of the misrepresentations.
Defences were filed, on behalf of Mr Sperling, in each matter in October 1982 and pre-trial directions were given.
In late January or early February 1983 negotiations occurred between the parties to the Invader Homes action resulting in an agreement being reached, subject to execution of Terms of Settlement and the making of orders by the court. The agreement contemplated that Mr Sperling would pay to the respondent, the plaintiff in that action, the sum of $11,666.67. A similar amount was to be paid by the two second defendants and a similar amount by one other defendant.
After the terms of the settlement had been agreed, but before any orders had been made, the solicitors for Mr Sperling wrote to the solicitors for the present respondent a letter, dated 24 February 1984, with which they enclosed a cheque for the agreed amount of $11,666.67. The letter stated the basis upon which payment was made, in these terms:

"We confirm your undertaking to hold the enclosed cheque pending Consent Orders ... being made by the Supreme Court of New South Wales. We note that if, for any reason, the Consent Orders are not approved within eight days of the date of the letter the enclosed cheque will be returned to us".

This letter was hand delivered to the solicitors for the respondent, who acknowledged receipt.
On 25 March 1983 Terms of Settlement were signed on behalf of each of the parties and filed in court. The Court made orders in accordance with those terms, those orders including the entry of verdict and judgement for the plaintiff (the present respondent) against Mr Sperling in the sum of $11,666.67. The cheque previously delivered to the solicitors for the respondent to be held pending the making of orders was not returned and, no doubt, it has been accounted for to the respondent.
The Taxiropoulos matter was fixed for trial on 2 May 1983. On that day the matter was settled in accordance with filed Terms of Settlement. These terms provided for an order, which was made, that the action "be stood over for mention to November 4 1983, upon the terms set out below." Paragraph 4 of the Terms relevantly provided:

"4. The Court notes the following essential terms of settlement:

(a) the first defendant to pay to the plaintiff on or before 2 November, 1983 the sum of Thirty-three thousand dollars ($33,000) together with interest at the rate of 15.5% per annum such interest to commence to run on 2 August, 1983 provided that, if the said sum of Thirty-three thousand dollars

($33,000) is paid on or before 2 November, 1983 no interest shall be payable, ...

(c) the first defendant to procure that he and his wife Christine Lynne Sperling provide Mortgage security by way of equitable charge over their house property at 19 Taylors Road, Dural, New South Wales in favour of the plaintiff to secure payment pursuant to clause (a), such security to be in a form acceptable to the plaintiff and to be subject in priority to the existing first registered mortgage ... and the existing second registered mortgage ... and a third unregistered mortgage ... The said Christine Lynne Sperling shall have no personal liability thereunder.

(d) The first defendant and his wife Christine Lynne Sperling to pay the stamp duty upon such security. ...

(f) if the first defendant defaults in his obligations under clauses (a),

(c) or (d), the plaintiff shall be at liberty to enter judgment against the first defendant forthwith after such default for the said sum of Thirty-three thousand dollars

($33,000) plus interest. ...

(m) Provided the first defendant complies with his obligations under clauses (a), (c) and (d) hereof, the plaintiff to consent to the dismissal of the proceedings against the first defendant; otherwise the provisions of (f) shall apply. ...

(p) the parties to enter into formal documents to reflect the above terms within fourteen (14) days of the date hereof".

The parties did execute a deed, dated 31 May 1983, to confirm their arrangement. This included a covenant by Mr Sperling to pay to the respondent the sum of $33,000 on or before 2 November 1983 together with interest from 2 August 1983 with a proviso that if the money was paid on time then no interest should be payable. Mrs Sperling, although not a party to the actions, joined in the deed and both she and her husband covenanted to mortgage their home at Dural to secure the payment of the sum of $33,000. Such a mortgage was executed on that same day. The mortgage does not appear to have been registered. The reason, no doubt, was that immediately after the settlement, on 5 May 1983, the respondent had lodged a caveat against the title, which it presumably regarded as sufficient to protect its interests.
On 12 July 1983 both Mr and Mrs Sperling executed an authority under s.188 of the Bankruptcy Act authorising Mr Aitken to call a meeting of their respective creditors for the purposes of Part X of that Act and to take control of their respective property in accordance with that Part. Mr Aitken called meetings of creditors of each of the debtors. At each meeting it was resolved that the debtor be required to execute a deed of assignment under Part X of the Bankruptcy Act and that Mr Aitken be appointed trustee. Deeds of assignment, in the usual form, were executed by each of the debtors on that same day.
The home of Mr and Mrs Sperling at Dural had been placed on the market in late 1982. In August 1983 an offer was received, in the sum of $225,000. At separate meetings of the creditors of each of the debtors, held on 9 September 1983, Mr Aitken was authorised to accept this offer. Contracts were exchanged on 13 September 1983, Mr Aitken became the registered proprietor of the property on 12 October 1983 and settlement was effected on 20 October 1983. At the time of settlement a cheque for the sum of $33,000 was handed to the solicitor for the respondent in satisfaction of the mortgage granted to the respondent on 31 May 1983. In his evidence in this application Mr Aitken says that he permitted this course to be taken "to facilitate a settlement of the conveyance and bring to an end the debtors' obligation to pay mortgage instalments".
The trustee now seeks to recover from the respondent the two payments made to it pursuant to the two settlements, viz the sum of $11,666.67 paid in respect of the Invader Homes matter and the sum of $33,000 paid to discharge the mortgage granted in relation to the settlement of the Taxiropoulos matter.
Section 231 of the Bankruptcy Act makes applicable to the administration of arrangements with creditors without sequestration, under Part X, many of the provisions in 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 to preferences. In the application of the section the date of the special resolution requiring the execution of a deed of assignment is to be treated as if it was the date upon which a creditors petition had been presented and the date of execution of the deed is to be treated as if it was the date of a sequestration order. The trustee of the deed is equated to the trustee in the bankruptcy.
Section 122 relevantly provides:

"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 this section referred to as "the debtor"), in favour of a creditor, having the effect of giving that creditor a preference, priority or advantage over other creditors, being a conveyance, transfer, charge, payment or obligation executed, made or incurred -

(a) within 6 months before the presentation of a petition on which, or by virtue of the presentation of which, the debtor becomes a bankrupt; or

(b) on or after the day on which the petition on which, or by virtue of presentation of which, the debtor becomes a bankrupt is presented and before the day on which the debtor becomes a bankrupt,

is void as against the trustee in the bankruptcy. ...

(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) the rights of a person making title in good faith and for valuable consideration through or under a creditor of the debtor; or

(c) a conveyance, transfer, charge, payment or obligation of the debtor executed, made or incurred under or in pursuance of a maintenance agreement or maintenance order.

(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.

(4) For the purposes of this section -

(a) a conveyance, transfer, charge, payment or obligation shall be deemed to have been executed, made or incurred in favour of a creditor if it is executed, made or incurred in favour of a person in trust for that creditor;

(b) a payment of tax or municipal or other local rates under a law of the Commonwealth or of a State or Territory of the Commonwealth shall be deemed to be a payment made for valuable consideration and in the ordinary course of business; and

(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. ..."

In order to make out a prima facie case of preference, sub-s.(1) requires a trustee to establish five elements:

(a) that the transaction took the form of being a conveyance or transfer of property, a charge on property, a payment made or an obligation incurred;

(b) that the transaction was undertaken by a person then unable to pay his own debts as they become due from his own money;

(c) that the transaction was in favour of a creditor;

(d) that the transaction had the effect of giving that creditor a preference, priority or advantage over other creditors; and

(e) that the preference was derived at a particular time in relation to the presentation of the petition and/or the date of the sequestration order.

Counsel for the respondent concedes that, in this case, elements (a) and (e) are made out in relation both to the payment of the sum of $11,666.67 and the granting of the mortgage pursuant to which the payment of $33,000 was received. However, he contests each of the other elements. In addition he relies upon sub-s.(2) - in relation to which he bears the onus of proof - and contends that his client took each of the money and the mortgage as a "purchaser, payee or encumbrancer in good faith and for valuable consideration and in the ordinary course of business". These submissions are, of course, put in the alternative: the applicant is entitled to succeed only if he makes out a case in relation to each one of the elements in sub-s.(1) and if the respondent fails to make out a defence under sub-s.(2). I propose to discuss separately the evidence and arguments put in relation to each of element (b) above, elements (c) and (d) above, and sub-s.(2).
The first matter arising under sub-s.(1) is element (b): whether the trustee has shown that Mr Sperling was, at any relevant time, "a person who is unable to pay his debts as they become due from his own money". The trustee placed in evidence copies of three verified Statements of Affairs; for Mr Sperling, for Mrs Sperling and for Mr and Mrs Sperling jointly. Each of the statements purported to show the position as at 12 July 1983, the date of execution of the two authorities to call meetings of creditors.
The individual Statement of Affairs of Mr Sperling disclosed 13 unsecured creditors to whom was owed a total sum of $63,844.71 as follows:

"Healco Services (NSW) Pty Ltd $97.60 Mrs C. Oliver 6,000.00 Janlena Pty Limited 26,351.00 Hilderbrand (sic) & Brown - Solicitors 396.65 Gerbert & Goddard 1,370.00 Arthur Sperling & Associates P/Ltd 20,227.00 Morrison Motors 740.15 David Jones 1,262.00 National Australia Bankcard 1,234.77 A.N.Z. Bankcard 631.14 Deputy Commissioner of Taxation 3,350.35 John Fairfax & Sons 30.00 Axtens & Co 2,153.75"

Contingent liabilities to Alliance Acceptance Corporation Limited in an unknown amount and to the Deputy Commissioner of Taxation in the sum of $44,000 were disclosed. No assets were disclosed, resulting in a net deficiency in the rounded sum of $63,845.00.
Mrs Sperling disclosed unsecured debts of $56,174.12, but all but $1,731.87, which was owed to National Australia Bankcard, represented debts also owed by her husband, being the first six items listed above. Mrs Sperling disclosed a contingent liability to the Deputy Commissioner of Taxation for $3,000 and assets consisting of one, One dollar share in each of the creditor companies, Janlena Pty Limited and Arthur Sperling & Associates Pty Limited.
The joint Statement of Affairs showed debts of $54,442.55 but, once again, these were the first six items listed by Mr Sperling. The joint statement disclosed the home at Dural at an estimated value of $230,000 subject to liabilities connected therewith - including the liability of $33,000 to the respondent under the mortgage - yielding a surplus of $35,800. The joint statement also disclosed household furniture and effects estimated at $10,000 and a contingent asset, being a claim against Arthur Sperling & Associates for $19,179.
The only evidence relating the material in the Statement of Affairs to any earlier date is that contained in para 25 of an affidavit of Mr Sperling dated 31 July 1984 and filed by the applicant trustee. That paragraph refers to the position at 1 February 1983. The applicant contends - and the respondent does not dispute - that proof of a continuing condition of insolvency from that date until 12 July 1983 would constitute proof of insolvency at each of the dates material to the two claims. Mr Sperling says:

"To the best of my knowledge and belief the unsecured creditors set forth in Part II of my said Statement of Affairs, with the exception of Healco Services (NSW) Pty Limited and Hildebrand & Brown, Solicitors, were unsecured creditors of mine as at the 1st February 1983 and have remained unsecured creditors since that date. The particulars set forth in Parts I, III, IV, V, VI and VII were likewise the same as at 1st February 1983 and have remained unchanged since that date".

Part I of the Statement of Affairs is the summary sheet showing the deficiency of $63,845 and I interpret the paragraph as an expression of belief by Mr Sperling that, at 1 February 1983, he owed to the creditors listed as unsecured creditors, in Part II of the Statement of Affairs (other than Healco Services (NSW) Pty Limited and Hildebrand & Brown), the amounts nominated in the Statement of Affairs. On this basis the unsecured creditors of Mr Sperling at 1 February 1983 totalled $63,350.46.
However, almost the whole of that indebtedness was a joint indebtedness with Mrs Sperling. There was a surplus of assets on the joint account. If the house and household effects had been sold in February 1983 and used to pay the debts of Mr and Mrs Sperling the situation would have been as follows:

$ $ $ $

Sale of house 225,000.00

Less mortgages and

costs (excluding

mortgage to the

respondent but

adopting other

figures claimed as at

12 July) 161,200.00

Net proceeds of sale 63,800.00

Household effects 10,000.00

Total available assets 73,800.00

Less:

Debts of Mr Sperling

and joint debts 63,350.46

Separate debt of

Mrs Sperling 1,731.87

65,082.33

Surplus of assets over

total liabilities 8,717.67

The analysis I have made is an evaluation of the only evidence put before the Court as to the financial position of the debtors in early 1983. It shows that, upon a "balance sheet" approach and assuming realization of the house at the price actually achieved later in 1983 and realization of household effects at estimate value, there would be a slight surplus of assets over liabilities. The substantial deficiency shown in Mr Sperling's separate Statement of Affairs arises because joint debts have been included but not joint assets. The surplus of $35,800 in the joint Statement of Affairs is calculated after taking into account, as a debt, the mortgage liability to the respondent in the sum of $33,000.
I have summarised the "balance sheet" position because this was the only material put before the Court. However, this is not the correct approach. In Bank of Australasia v Hall (1907) 4 CLR 1514 at p 1528 Griffith CJ expressly rejected that course:

"It was suggested, but the argument was not pressed, that the debtors affairs should be regarded from the point of view of a balance sheet of assets and liabilities. This is not what the Statute says. .... 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 money 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."

The judgements given in the Bank of Australasia case emphasised the necessity to consider when debts will become due. At p 1554 Higgins J said:

"The critical words are 'as they become due@; so that, on the one hand, a debtor in making a payment or giving a security to a creditor, has to take into account, not only his debts immediately payable, but his debts which will become payable; and on the other hand, he is not obliged to keep money always on hand to meet debts not immediately due. It is sufficient that he see to it that he would be in a position to get enough moneys of his own to pay each debt as and when it becomes due."

See also Issacs J at p 1543.
The approach taken in the Bank of Australasia case has been reaffirmed on a number of occasions in subsequent decisions of the High Court; see Rees v Bank of New South Wales (1964) 111 CLR 210 at p 230, Sandell v Porter (1966) 115 CLR 666 at p 670 and Hymix Concrete v Garritty (1977) 13 ALR 321 at pp 327-328. In Sandell at p 670 Barwick CJ said:

"The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtors inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency".

In my opinion the evidence in the present case falls well short of that necessary to demonstrate that at any relevant date Mr Sperling was unable to pay his debts as they fell due from his own moneys. Mr Sperling was willing to assist the trustee in relation to the application. He swore two affidavits and gave oral evidence. He may - through the creditors Janlena Pty Limited and Arthur Sperling & Associates Pty Limited - have had an interest in the success of the application. Notwithstanding those matters, there was a dearth of evidence as to the nature, and due date for payment, of the debts. The two debts to Janlena and to Arthur Sperling & Associates together account for $46,578. Each of these companies is, apparently, controlled by Mr and Mrs Sperling. Mr Sperling said in evidence that the debt to Janlena "was loan funds that are borrowed from the company". He was asked whether it was one borrowing or several and replied: "It was handled by the accountants, I am not too sure how it came about". He thought that it accrued over a period of time and represented a balance of his loan account. Mr Sperling did not know how much would have been owing in August 1982 or the extent of his borrowings between that time and 1 February 1983, the date as at which he had affirmed the correctness of the debt. It is difficult to interpret his evidence as providing any confirmation of the amount of the debt at 1 February 1983; and no other confirmation was offered. It provides no material at all relating to the due date for payment.
The position in regard to the debt to Arthur Sperling & Associates is even less satisfactory. There was no evidence as to the nature of this debt or the time by which, or circumstances under which, the debt had to be repaid. Apart from the inference one might draw from the name, the only material I have is that Mrs Sperling is a shareholder of the company and that the couple make a joint claim against the company for $19,179, an amount almost as much as the alleged debt.
Counsel for the applicant submitted that, in the absence of evidence as to the due date for payment, I should assume that all debts were payable on demand. I do not think that this is the proper course. The true position was easily provable by his client, who bore the onus of proof. Even after the lack of evidence was pointed out by counsel for the respondent in argument, no application was made to recall Mr Sperling to deal with the matter. I must conclude that the applicant deliberately chose not to place evidence on this matter before the Court and, consequently, that such evidence would not have assisted the applicant's case: cf Jones v Dunkel (1959) 101 CLR 298 at pp 308, 313, 319. In any event there was no evidence that either company had made, or was likely to make, a demand for re-payment. Whatever assumption as to the likelihood of a demand may be appropriate in the case of arms-length creditors has little place in relation to creditors apparently controlled by the debtors.
No information was put before the Court regarding any income available to Mr Sperling. In his affidavits he gave his occupation as "finance broker" and this is consistent with information obtained early in 1983 by Mr Gibson, the manager of the Sydney office of the respondent. I speculate that he was employed by Arthur Sperling & Associates but I have no idea what was his remuneration or whether he had any entitlement to require that company to provide funds out of which he might have defrayed his debts, or some of them. I only know that Mr and Mrs Sperling make a contingent claim against Arthur Sperling for $19,179. I do not know anything about the nature, or availability, of that claim.
The state of the evidence does not enable me to make a finding that, at any relevant date, Mr Sperling was unable to pay his debts as they became due from his own money. It is possible that he was in that situation but the fact has not been proved.
The elements (c) and (d) in s.122(1), as analysed above, may be considered together. The respondent disputes that either of the two transactions was a transaction "in favour of a creditor" and, therefore, says that neither transaction had the effect of giving to a "creditor" a preference, priority or advantage over other creditors. It is of the essence of a preference, it is said, that the person benefitted by the transaction be a creditor before the transaction and that he be advantaged in his capacity as a creditor. Counsel referred to a passage in the judgement of Dixon J in Robertson v Grigg (1932) 47 CLR 257 at p 271 spoken in relation to s.95 of the Bankruptcy Act, 1924, the equivalent to s.122 in the current Act.

"The relationship of debtor and creditor was for long the very foundation of the provisions of the bankruptcy law affecting preference, and, although exceptions have been introduced, the old rule otherwise remains and nothing can amount to a preference unless the person preferred is a creditor. Sec. 95 does not depart from this general principle. In making each separate advance on the faith of the agreement and thereby obtaining a charge in respect of the advance, the respondent did not obtain any benefit or advantage in relation to the past indebtedness. He did not deal with the debtor in his capacity of creditor. No pre-existing debt was better secured or otherwise affected by reason of any subsequent advance. There was, therefore, no preference to him as a creditor."

Counsel for the respondent argues that a "creditor", for the purpose of the section, is a person who would have been entitled to prove in the bankruptcy of the payee if a sequestration order had been made immediately before the payment. He refers to what was said by O'Connor and Isaacs JJ in the Bank of Australasia case at pp 1536 and 1546 respectively. Section 82(2) provides that demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in a bankruptcy. The claims made by the respondent against the debtor in the Supreme Court were, in each action, claims for unliquidated damages for tort: negligence, fraud and conspiracy. Consequently, the argument runs, prior to the day upon which each claim was converted into an obligation to pay a certain sum there was no debt provable in bankruptcy; and, therefore, in respect of that claim the respondent was not a "creditor" within the meaning of s.122.
Counsel for the applicant contend that it was too broad a proposition to say that a "creditor", within the meaning of the section, must always be able to prove in a bankruptcy, that a preference may be given to a surety for the debtor (Halsbury, vol 3 para 910); but this qualification is not presently material. They referred also to two cases where proof was allowed in respect of tortious claims, Re Mumford (1808) 15 Ves Jun 289; 33 ER 763 and Ex parte Adamson; re Collie (1878) 8 Ch D 807; but in each of these cases the quantum of damage had been determined prior to the bankruptcy. They have no application to a case where the damage is still unliquidated at the date of bankruptcy.
I think that the respondent's argument is sound, with the result that it is of critical importance to determine, in relation to each transaction, whether there was a period of time between the quantification of damage by the acceptance by the debtor of the obligation to pay a particular sum of money and the date of the action said to constitute the giving of a preference. The discharge or securing of a debt at the time of its creation is not the giving of a preference: see Burns v Stapleton (1959) 102 CLR 97 at p 105.
In relation to the payment of the sum of $11,666.67, in settlement of the Invader Homes matter, the evidence is that a bank cheque was sent to the solicitors for the respondent to be held by them in escrow pending the filing of Terms of Settlement and the making of formal orders. There was no payment at the date when the letter was delivered, 24 February 1983. The solicitors were bound to hold the cheque unbanked and to return it if required so to do. They became entitled to bank it and to pay the proceeds to their client, the respondent, at the moment of fulfilment of the condition upon which it was delivered, the making of consent orders by the Court. But it was not until that moment that the obligation of Mr Sperling to pay the sum certain of $11,666.67 arose. There may have been some small interval of time between the execution on behalf of the various parties of the Terms of Settlement and the making of the orders - a matter in relation to which there is no evidence - but this would not affect the position. The signing of the Terms of Settlement and the giving of consent to the making of the orders by the Court must be regarded as the one transaction. Moreover, there was no obligation to pay the money until the orders were made. The Terms of Settlement did not, in themselves, impose any obligation upon Mr Sperling to pay any money. They merely required him to consent to the entry against him of a verdict and judgement. It was that entry - which took place contemporaneously with the commencement of the respondent's entitlement to bank the cheque, and so the payment - which created the obligation to pay. Under those circumstances there was no payment to a "creditor" in relation to a pre-existing obligation.
The position in respect of the Taxiropoulos matter is a little different but the result is the same. The Terms of Settlement filed on 2 May 1983 did not provide for any immediate orders - the proceedings were merely to be stood out of the list. But para 4 contained what was described as "essential terms of settlement". The debtor's obligation to pay the sum of $33,000 arose, for the first time, under para 4(a). At the same time there arose an obligation to mortgage the Dural property to secure the debt: para 4(c). That agreement to mortgage constituted an equitable charge of the debtor's interest in the property: see Montague v Earl of Sandwich (1885) 32 Ch D 525. The land was held under the Real Property Act but that does not matter: see Barry v Heider (1914) 19 CLR 197.
The execution of the formal mortgage on 31 May changed the situation in two respects. First, Mrs Sperling's interest was affected for the first time. She was not a party to the action for damages or to the Terms of Settlement. However, on no view was she previously a creditor of the respondent. Secondly, the equitable obligation of Mr Sperling was reduced to a form permitting registration of the interest of the respondent. This did not affect the substance of the obligation but merely its enforcement. It did not affect the quantum of the interest. In the event, the mortgage was never registered so that the interest of the respondent never rose above an equitable mortgage.
The applicant contends that the execution of the mortgage constituted a preference. However, the relevant act must be the creation of the equitable charge - not merely its confirmation in a registerable form. The creation of the charge occurred at the same moment as the creation of the liability, when the Terms of Settlement were filed.
My conclusion, in relation to both the payment of $11,666.67 and the grant of the mortgage, is that at the respective relevant dates the respondent was not a "creditor" of Mr Sperling; element (c) is not made out. Further, there was no grant to a "creditor" of a preference, priority or advantage over other creditors; element (d) is lacking.
In relation to sub-s.(2), there is no dispute that the respondent, in relation to both transactions, acted in good faith, in the ordinary meaning of that term.
There was evidence that the respondent had no actual knowledge of insolvency. The Sydney manager of the respondent, Mr Gibson, gave evidence as to the state of the respondent's knowledge concerning Mr Sperling's financial position. He said that the only enquiry he had made as to Mr Sperling's financial circumstances was within his own office, that he obtained no information other than that Mr Sperling had left his former employment and was active in the market as a finance broker and that he had no reason to believe that he was not financially sound. Mr Gibson produced his files, which were inspected over an adjournment; after which I was informed that it was agreed by counsel that, apart from a document dated June 1981 relating to Janlena Pty Limited and which was "neutral" in relation to insolvency, there was no information in the files relating to Mr Sperling's financial circumstances. There was no evidence to indicate that any information as to the financial position of Mr Sperling had, at any time, been put before the respondent. This is not surprising. The liabilities arose out of claims in tort, not contract.
The applicant, however, relies upon s.122(4)(c) and says that the payment of $11,666.67 was made and the mortgage was taken 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 his debts as they became due from his own money and that the effect of each transaction would be to give him a preference over other creditors.
If I am correct in the opinion that neither transaction could, in law, amount to a preference over other creditors then no inference of either knowledge or suspicion of a preference may properly be drawn; full knowledge of the facts would have resulted in the contrary belief. However, lest that view be wrong, I should state my conclusion in respect of the applicant's argument that the circumstances of the payment and mortgage, respectively, lead to the inference that the respondent had reason to suspect that Mr Sperling was insolvent. In each case, it is said, the compromise of the action was linked with the securing of payment. In the first case the unusual step was taken of requiring the delivery of a bank cheque in advance of formal orders. In the second case the terms required the grant of a mortgage, it being contemplated that the agreed $33,000 would be paid out of, and only out of, the proceeds of the sale of the house.
The circumstances referred to by the applicant do, certainly, support the conclusion that the respondent was concerned to ensure the actual receipt of any agreed verdict. They suggest that the respondent was also concerned with the time of receipt. In the first case the mechanics employed ensured payment immediately upon settlement. In the second case, by waiver of interest in the event of payment by 2 November 1983, they encouraged payment within six months of the date of the settlement. In Downs Distributing Co Pty Limited v Associated Blue Star Stores (1948) 76 CLR 463 at p 475 Latham CJ pointed out that the provision of a creditor knowing of insolvency adopts a subjective criterion; applied by inference made by the Court. The provision relating to circumstances being such that an inference can be drawn that there was reason to suspect imposes an objective test:

"It is intended to deal with circumstances such that an inference can fairly be drawn by a court that there was reason to suspect, whether or not in fact the mind of the creditor consciously adverted to the significance with respect to the financial position of the debtor of the matters mentioned in the sub-section."

That inference may only be drawn from consideration of the nature of the transaction and, in particular, whether it was consistent or inconsistent with the ability of the payer to pay his debts as they became due from his own money.
The circumstances in relation to the payment of the cheque for $11,666.67 are not inconsistent with a subjective fear or suspicion by the respondent that Mr Sperling was unable to pay his debts as they became due but they do not lead to an objective conclusion that the respondent had reason to suspect that fact. It is not uncommon for a party to be prepared to compromise an action only upon terms which will ensure that there is in fact a prompt payment. Delay in payment, even by a solvent judgement debtor, is a factor which may reduce the advantage of an agreed verdict. I do not think that the requirement of a bank cheque properly leads to the inference that the respondent had reason to suspect insolvency.
The position in relation to the mortgage is rather different. In this case the respondent was prepared to allow Mr Sperling a period of six months, free of interest, in which to make payment. I accept Mr Gibson's evidence, which was not contradicted, that he had no actual knowledge of insolvency but this does not assist in relation to the question whether there was reason to suspect insolvency. The terms of the Taxiropoulos settlement, and especially the arrangements for securing payment, do suggest at least a suspicion that Mr Sperling could not pay his debts as they became due and, in particular, that he needed time to discharge this particular obligation. In relation to this transaction the defence of good faith, in the special sense provided in s.122(4)(c), is not made out.

The other elements in s.122(2) are that the transactions be for valuable consideration and in the ordinary course of business. In each case there was valuable consideration: the compromise by the respondent of its claim. In neither case was the transaction ordinary, as between the parties, but this is not the test. Rather the question is whether the transaction is usual in business generally: see Burns v McFarlane (1940) 64 CLR 109 at p 125; Downs Distributing Co at pp 476-477. That test is met by the payment of the cheque for $11,666.67; there is nothing unusual about the settlement of a claim upon the basis of an immediate payment in full. It is not satisfied in relation to the grant of the mortgage; it is not usual for a claim for damages, arising in a commercial context, to be compromised upon the basis of a grant of a mortgage over the home of a defendant accepting liability.
My conclusion is that the defence granted by sub-s.(2) is made out in relation to the payment of the sum of $11,666.67 but not in relation to the grant of the mortgage. Of course, if I am correct in my view that not all of the elements required by sub-s.(1) are made out, the applicability or otherwise of sub-s.(2) does not matter.
I should mention that an argument is put on behalf of the respondent that the sum of $11,666.67, or part of it, was not paid by Mr Sperling and for that additional reason is not recoverable. The basis of this contention is evidence which indicates that the funds to procure the bank cheque were paid to the solicitors for Mr Sperling by Janlena Pty Limited. However, fuller analysis of the evidence shows that certain insurance policies had been surrendered by Mr and Mrs Sperling and the proceeds deposited with Janlena Pty Limited. The payment by Janlena was a re-payment of that deposit. Having regard to the evidence of Mrs Sperling that, in July 1982, she authorised her husband to do whatever was necessary in relation to the family finances, Mr Sperling must be taken as having Mrs Sperling's authority in February 1983, to borrow from her that portion of the re-paid deposit which belonged to her. The payment made by Janlena to the solicitors was at the time treated by the solicitors as a payment made on behalf of Mr Sperling. I think that this was its true character. The bank cheque was paid to the solicitors for the respondent on his behalf.
The application, in respect of both transactions, should be dismissed with costs.

[1984] FCA 258

24 AUGUST 1984