Wily, Hugh Jenner v Warren, Susan

[1997] FCA 574

FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - application for declaration that specified payments by the bankrupt to the respondent are void - whether respondent had notice of presentation of creditor’s petition at time payments were made - whether payments in good faith and the ordinary course of business.

Bankruptcy Act 1966 (Cth), ss 115(1), 123

Downs Distributing Company Pty Ltd v Associated Blue Star Stores Pty Ltd (in liq) (1948) 76 CLR 463, cited

Robertson v Grigg (1932) 47 CLR 257, cited

IN THE MATTER OF THE BANKRUPT ESTATE OF DAVID BOYD WARREN

HUGH JENNER WILY v SUSAN WARREN

NO NB 2073 OF 1993

TAMBERLIN J
SYDNEY
30 JUNE 1997

IN THE FEDERAL COURT OF AUSTRALIA	)
GENERAL DIVISION	)
BANKRUPTCY DISTRICT	)  NB 2073 of 1993
OF THE STATE OF NEW SOUTH WALES	)
)

IN THE MATTER OF THE
  BANKRUPT ESTATE OF
  DAVID BOYD WARREN

BETWEEN:	HUGH JENNER WILY Applicant
AND:	SUSAN WARREN Respondent

JUDGE:	TAMBERLIN J
PLACE:	SYDNEY
DATED:	30 JUNE 1997

MINUTES OF ORDER

THE COURT:

1. Declares that the payment of the sum of $4,000 by the bankrupt to the respondent in the first two weeks of August 1993 is void pursuant to the provisions of the Bankruptcy Act 1996.

1. Declares that the payments of the sums of money amounting to $8,803 by the bankrupt to the respondent in or about July 1994, with respect to work on property at 16 Hodgkinson Street, Griffith in the Australian Capital Territory, are void pursuant to the provisions of the Bankruptcy Act 1996.

1. Orders that interest be awarded on those sums from 7 August 1995 to 23 June 1997 in the sum of $2,819.10 together with further interest at the rate of 10.5% from 23 June 1997 to the date of judgment and direct the respondent to pay those amounts.

1. Orders that the respondent pay the applicant’s costs pursuant to the Bankruptcy Rules.

Note:Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

IN THE FEDERAL COURT OF AUSTRALIA	)
GENERAL DIVISION	)
BANKRUPTCY DISTRICT	)   NB 2073 of 1993
OF THE STATE OF NEW SOUTH WALES	)

IN THE MATTER OF THE
  BANKRUPT ESTATE OF
  DAVID BOYD  WARREN

BETWEEN:	HUGH JENNER WILY Applicant
AND:	SUSAN WARREN Respondent

JUDGE:	TAMBERLIN J
PLACE:	SYDNEY
DATED:	30 JUNE 1997

REASONS FOR JUDGMENT

This is an application on behalf of Hugh Wily who is the trustee of the bankrupt estate of David Warren.

The application seeks a declaration that a payment of $4,000 by the bankrupt to the respondent, Susan Warren, who was at all relevant times the wife of the bankrupt, made on or about 3 August 1993, is void pursuant to the provisions of the Bankruptcy Act 1966 (Cth) (“the Act”). The application also seeks a declaration that the payments of sums of money amounting to $8,803 by the bankrupt to the respondent, in or about July 1994, which related to renovations made to a property owned by the respondent at 16 Hodgkinson Street, Griffith in the Australian Capital Territory, are void pursuant to the Act.

This application involves consideration of the application of s 123 of the Act.

Section 123 relevantly provides:

“123(1) Subject to sections 118 to 122 (inclusive), nothing in this Act invalidates, in any case where a debtor becomes a bankrupt:

(a)a payment by the debtor to any of his creditors;

(b)a conveyance, transfer or assignment by the debtor for valuable consideration;

(c)a contract, dealing or other transaction by or with the debtor for valuable consideration; or

(d)any transaction to the extent of a present advance made by an existing creditor;

if:

(e)the transaction took place before the day on which the debtor became a bankrupt;

(f)the person, other than the debtor, with whom it took place, did not, at the time of the transaction, have notice of the presentation of a petition against the debtor; and

(g)the transaction was in good faith and in the ordinary course of business.

123(2) The burden of proving the matters referred to in paragraphs (1)(e), (f) and (g) in relation to a transaction lies upon the person who relies on the validity of the transaction.

123(3) For the purposes of subsection (1), a transaction shall not be deemed not to have been in good faith and in the ordinary course of business by reason only that, at the time of the transaction, the person, other than the debtor, with whom it took place had notice of the commission of an act of bankruptcy by the debtor.”

On 22 May 1992 Ian Edwards obtained a final judgment against the bankrupt in the District Court of New South Wales. This judgment was in respect of legal fees.

On 7 October 1992 Mr Edwards caused a bankruptcy notice to be issued. This notice was served on the bankrupt on 6 November 1992. The bankrupt failed to comply with its requirements on or before 4 December 1992. This failure is the relevant act of bankruptcy. This date, 4 December 1992, is the commencement date of the relation back period.

On 4 June 1993 a creditor’s petition was presented, based on the act of bankruptcy. It was originally returnable on 29 July 1993, but was not heard on that date. The hearing on the petition in fact took place on 10 August 1993 when a sequestration order was made against the estate of the bankrupt. The applicant, Mr Wily, was appointed trustee of the bankrupt estate.

In his Statement of Affairs dated 30 August 1993, the bankrupt disclosed assets of $1,000 and liabilities of $257,623.

The bankrupt and the respondent were examined under the provisions of s 81 of the Act on 29 June 1994 and 6 July 1995.

On 7 August 1995 and 7 November 1995, the applicant, after considering transcripts of the above examinations, made demands on the respondent for payment of the sums of $4,000 and $8,803 respectively. Liability was denied on her behalf by Mr Byrnes, a corporate adviser to Mrs Warren.

No notice of opposition to the application was filed. It was not until 18 June 1997 that the respondent swore an affidavit which was filed the following day. The application before me was heard on 23 June 1997.

As a result of the relation back arising from s 115(1) of the Act, the title of the trustee to the property of the bankrupt relates back to 4 December 1992.

In response to the application the respondent claims the protection afforded by s 123 of the Act . It is clear from subs (2) that the burden of proving the matters necessary to ground that claim, as set out in pars 1(e), (f) and (g), in relation to any transaction rests on the respondent.

The sum of $4,000 referred to in the first declaration was paid to the respondent by the bankrupt on or about  3 August 1993. The bankrupt requested the respondent to then write out a cheque for this amount and pay it to Blake Dawson Waldron in satisfaction of legal fees incurred by the bankrupt to that firm. The plaintiff was aware that her husband had consulted Blake Dawson Waldron in relation to his business dealings. She was not normally in the habit of paying her husband’s personal accounts and she regarded payment by her of his legal fees as a most unusual circumstance.

In the transcript of her examination on 29 June 1994, the following exchange took place:

“QNow, you were aware, were not you, that your husband was served with a creditor’s petition on 29 June 1993?

A.Yes , I suppose so. If that’s the date.

Q.Did you discuss the creditor’s petition and the possibility of your husband’s bankruptcy at about 29 June, or early July?

A.I am sure we did.”

An attempt was made by Mr Newman, who appeared for the respondent before me, to explain away this evidence on the basis that the respondent at the relevant time was heavily preoccupied professionally, and was under considerable pressure and distress resulting from marital disharmony.

While I accept that the applicant was under considerable stress, working long hours, and that she experienced marital problems, I find that the above answers are clear, specific and definite. I accordingly find that the applicant was probably aware of the creditor’s petition having been presented, by 29 June or at the latest by early July 1993.

That being so, par (f) of subs 123(1) of the Act has not been satisfied.

In addition, I am not satisfied that the transaction involving payment of the legal fees was in the ordinary course of business in view of its unusual nature as conceded by the respondent. Furthermore, having regard to the evidence as to discussions concerning possible bankruptcy, knowledge of presentation of the petition, and the unusual nature of the transaction, the respondent has not satisfied me that the transaction was in good faith. Other circumstances which lead me to the latter conclusion include the timing of the large cash withdrawals from the joint account on 28 July and 9 August 1993; the mistrust by the respondent of her husband as to financial matters; the timing of the purchase of the Hodgkinson Street property; the false story as to the expenditure of the $35,000; and the belated reference to the agreement as to the payment of rent.

Accordingly, the protection afforded by s 123 of the Act is not available to the respondent in relation to the payment of $4,000 to the solicitors.

In relation to the payments amounting to $8,803 by the bankrupt I am satisfied that these payments were made for the benefit of the respondent. They were paid in respect of work on the property at Hodgkinson Street, in the ACT, which had been purchased by and in the name of the respondent.

It is clear from the evidence including the affidavit of Kim Biddulph dated 3 July 1996, filed on behalf of the applicant, that payments were made over the period September-December 1993 and were in respect of work on the Hodgkinson Street premises.

The payments of $8,803 do not attract the protection of s 123 because the transaction took place after the date which the debtor became a bankrupt. That is to say after 10 August 1993. Furthermore, by that time the respondent was clearly aware of the bankrupt’s fears concerning possible bankruptcy. She was also aware of and had discussed the creditor’s petition with her husband. I am not satisfied that this transaction was made in good faith and in the ordinary course of business.

The case advanced for the respondent was based on assertions in her affidavit of 18 June 1997 that in or about October 1993 she suggested to the bankrupt that because he was still living with her he should be paying up to $150  per week to live in the house.  She asserts that he was not paying anything and had been living there rent free. The respondent states that she had to carry all the mortgage repayments and the maintenance of the property and suggested an arrangement. She swears that, in response, the bankrupt then agreed, in lieu of paying rent, to arrange for some work on the premises to be carried out. He suggested that his knowledge of the building industry meant that he could get the work done cheaply. He was a landscape consultant by calling. He estimated that he could arrange about $8,000 worth of improvements on the property which would increase the value of the house. The respondent said that she agreed provided he was responsible for all bills incurred in the work; that the subcontractors were accountable directly to the bankrupt, and that the bankrupt paid the subcontractors from his own funds.

Counsel for the trustee submits that this evidence was a recent invention. Mr Newman, for the respondent, points to evidence given by her at the examination of 6 July 1995, to the effect that the payment of $8,803 by her husband for improvements to the house, was by way of “helping” the family because she was paying the mortgage and paying all the other bills that she could manage to pay. However, in her earlier evidence there was no reference to $150 per week rent or to any specific arrangement as set out in her affidavit of 18 June 1997.

The evidence on this aspect is somewhat contradictory and unsatisfactory. The bankrupt stated in evidence on the examination of 6 July 1995 that when he moved into Hodgkinson Street he did not pay rent but paid some of the household expenses, such as electricity bills, children’s maintenance costs, bus tickets and clothing. They were said to be random amounts.

Mr Byrnes, the adviser to the respondent, in a letter dated 10 November 1995, asserted that the moneys provided for work to be done on the property were part of an arrangement that Mr Warren would pay these bills and not be required to contribute to the maintenance of the property. This letter does not suggest that these payments were in respect of “rent”. This letter was specifically stated to have been written on instructions.

The evidence does not satisfy me that there was any arrangement between the bankrupt and the respondent to the effect that the sum of $8,803 was ever agreed to be paid in lieu of rent or maintenance of the property.

The payments in question amounting to $8,803 cannot be said to have been made in the ordinary course of business. The expression “ordinary course of business” was explained by Rich J in the well-known statement in Downs Distributing Company Pty Ltd v Associated Blue Star Stores Pty Ltd (in liq) (1948) 76 CLR 463 at 477 as follows:

“The provision does not require that the transaction shall be in the course of any particular trade, vocation or business. It speaks of the course of business in general. But it does suppose that according to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course. It means that the transactions must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation.” (Emphasis added)

In Robertson v Grigg (1932) 47 CLR 257 at 267-268, the High Court majority said:

“Therefore, the test under s 95 of the ordinary course of business is not whether the act is usual or common in the business of the debtor or of the creditor, but whether it is ‘a fair transaction, and what a man might do without having any bankruptcy in view’.”

In my view neither of the transactions under challenge in the present case could be said to have been made in the ordinary course of business. They were clearly driven by considerations related to the prospective or actual bankruptcy of Mr Warren.

For the above reasons, I am not satisfied that the protection claimed under s 123 by the respondent is available.

Conclusion

I grant the application and make the following orders:

1. Declare that the payment of the sum of $4,000 by the bankrupt to the respondent in the first two weeks of August 1993 is void pursuant to the provisions of the Bankruptcy Act 1996.

1. Declare that the payments of the sums of money amounting to $8,803 by the bankrupt to the respondent in or about July 1994, with respect to work on property at 16 Hodgkinson Street, Griffith in the Australian Capital Territory, are void pursuant to the provisions of the Bankruptcy Act 1996.

1. I award interest on those sums from 7 August 1995 to 23 June 1997 in the sum of $2,819.10 together with further interest at the rate of 10.5% from 23 June 1997 to the date of judgment. And direct the respondent to pay those amounts.

1. The respondent is to pay the applicant’s costs pursuant to the Bankruptcy Rules.

I certify that this and the preceding five (5) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin

Associate:

Dated:            30 June 1997

Counsel for the Applicant:	Mr J Chippindall
Solicitor for the Applicant:	Michell Sillar with Webeck Farland Pender
Solicitor for the Respondent:	Newman & Associate
Dates of Hearing:	23 June 1997