APPEAL from the Supreme Court of Queensland exercising federal jurisdiction in bankruptcy.

The COURT delivered the following written judgment:-

This appeal is against an order, made by the Supreme Court of Queensland been declared that a certain bill of mortgage and a certain memorandum of mortgage are void against the respondent, the trustee of the estate of one, Fallon, a bankrupt, in so far as they or either of them constitute or constitutes a security over or charge upon the property or estate of the bankrupt. (at p100)

2. The bill of mortgage was given by the bankrupt and his wife in respect of certain lands under the provisions of The Real Property Acts 1861 to 1956 (Q.), of which the mortgagors are the registered proprietors of an estate in fee simple as joint tenants, and it is subject to an earlier registered mortgage in favour of a bank. The memorandum of mortgage is a mortgage by the bankrupt and his wife of certain leases under the provisions of The Lands Acts 1910 to 1953 (Q.), of which the mortgagors are the registered lessees, and it is subject to two earlier memoranda of mortgage in favour of the bank. Each instrument was executed on 19th July 1957 and purports to mortgage the land which it describes to the appellant to secure a sum of 2,732 pounds 10s. 0d. Each contains a covenant by the mortgagors to pay the principal sum to the mortgagee on or before 31st August 1957, and, while providing that the mortgagors shall not be liable to pay interest on that sum if they pay it on the due date, it includes a covenant for payment of interest at the rate of eight per centum per annum after that date in the event of default. (at p101)

3. The order under appeal was made in proceedings instituted by a notice of motion which sought a declaration that the securities referred to were void under s. 95(1) of the Bankruptcy Act 1924- 1955 (Cth). That section makes void as against the trustee in bankruptcy certain kinds of dealings by a person unable to pay his debts as they become due from his own money, if that person becomes bankrupt on a bankruptcy petition presented within six months thereafter. The mortgages in question in this case were executed within the relevant period, for Fallon became a bankrupt on a petition presented on the 13th December 1957. Townley J. found, and the appellant does not challenge the finding, that when Fallon executed the mortgages he was unable to pay his debts as they became due from his own money. In circumstances such as these, sub-s. (1) of s. 95 avoids as against the trustee (inter alia) every charge made on property by the person who is unable to pay his debts in favour of any creditor, having the effect of giving that creditor a preference, a priority or an advantage over the other creditors. Sub-section (2) provides that nothing in the section shall affect (inter alia) the rights of an encumbrancer in good faith and for valuable consideration and in the ordinary course of business. Sub-section (3) places upon the encumbrancer the burden of proving that the conditions were satisfied which are expressed in the words "in good faith and for valuable consideration and in the ordinary course of business". Sub-section (4) provides that for the purposes of the section a creditor shall not be deemed to be an encumbrancer in good faith if the charge were made or incurred under such circumstances as to lead to the inference that he knew or had reason to suspect that the debtor was unable to pay his debts as they became due, and that the effect of the charge would be to give him a preference, a priority or an advantage over the other creditors. (at p101)

4. The amount of the mortgages in question, namely 2,732 pounds 10s. 0d., was the aggregate of certain debts which Fallon owed to the appellant. Of this sum 232 pounds 10s. 0d. was the price of some cows and calves bought by Fallon from the appellant early in June 1957; 1,900 pounds was the price of ninety-five fat cows bought by Fallon from the appellant about the end of June 1957; and 500 pounds was the amount of a loan made by the appellant to Fallon at the same time. The remaining 100 pounds was added, apparently as consideration to the appellant for making the loan and allowing the amount lent and the price of the ninety-five fat cows to remain outstanding free of interest until the following 31st July. (at p102)

5. As far as the 232 pounds 10s. 0d. was concerned, it is obvious that by the mortgages in question the bankrupt gave the appellant a preference or advantage over the other creditors, for he thereby converted an unsecured debt into one secured upon Fallon's equity of redemption in his interest as a joint tenant in the subject lands. But as regards the balance of the mortgage moneys the position was different. The appellant offered uncontradicted evidence, which Townley J. accepted, to the effect that the mortgages were given in pursuance of a stipulation made by the appellant as a condition of his granting the loan and giving credit for the price of the ninety-five cows. The transaction came about in the following circumstances. The appellant was at one time a butcher at Biggenden, but about 1954 he sold his business and became a cattle dealer. Fallon was an auctioneer and commission agent in the same town. On some occasions the appellant bought cattle from Fallon, and on others he sold cattle to him. It was through Fallon that he sold his butcher's business. He had to wait at times for money which Fallon owed him, and on a couple of occasions cheques which Fallon gave him were dishonoured; but the cheques were eventually met, and until June 1957 the appellant received full payment sooner or later in respect of every transaction. About the 29th June, however, the 232 pounds 10s. 0d. for cattle bought by Fallon at the beginning of the month being still unpaid, Fallon approached the appellant with a request for a loan. There followed a conversation, as to the precise terms of which the evidence is not entirely clear. Fallon, who gave evidence by affidavit and was not cross-examined, said only that the amount which he asked the appellant to lend him was 2,000 pounds, and that the appellant gave him 500 pounds and asked him to accept certain cattle for the sum of 1,900 pounds, the cattle being ninety-five cows at a price fixed by the appellant at 20 pounds per head. The appellant's account of the matter is found only in the depositions of his examination under s. 80, these having been put in evidence before Townley J. by the respondent. The appellant denied that Fallon's request was for a loan of 2,000 pounds. According to him Fallon said that he was short of money but that he wanted to buy the ninety-five cows, that he had some cattle (about two hundred and fifty) which he was expecting to sell and that if the appellant would sell him the ninety-five cows and lend him 500 pounds in cash he would pay him as soon as he sold the other cattle. The appellant's reply, according to one account that he gave, was: "Keith, it's a big order but if you can give me some sort of security on the thing". Another version was: "Keith, you'll have to do something about it. I can't see you stuck. Can you give me some security?". He said that Fallon replied that he would give him a second mortgage on "the farms" an expression evidently referring to the lands the subject of the mortgages. In addition, he said that Fallon "suggested he would give me 50 pounds for the loan"; and the sense of his evidence is that that was agreed upon. There is, however, nothing in the evidence to warrant a finding that the agreement for security extended to the antecedent amount of 232 pounds 10s. 0d. The sale of the ninety-five cows and the loan of the 500 pounds were both made on 29th June, Fallon assuring the appellant that as soon as he sold his other cattle he would be able to pay in full. On 1st July the appellant wrote out for his own purposes particulars of Fallon's indebtedness to him. These included an item "Loaned 550 pounds". This he explained in his examination in the bankruptcy, as referring to the 500 pounds which he had lent and the additional 50 pounds "for the loan". His evidence was very vague as to whether a specific date for payment was agreed upon. An invoice of Fallon's dated the 29th June, however, contained, over Fallon's signature, the entries:

"95 cows at 20 pounds 1,900 pounds 0 0

To be paid on 31-7-57

50 pounds for every month or part thereof";

and over the appellant's initials it contained an itemized statement of Fallon's indebtedness of 2,682 pounds 10s. 0d. (allowing 550 pounds for the loan) with the words "owing by Fallon to be paid 31 July 1957". Moreover the appellant's own memorandum already mentioned was headed "Money owing to J. Burns, by K.C. Fallon and to be repaid not later than the 31st July 1957". The total which is there given is 2,682 pounds 10s. 0d., including 550 pounds in respect of the loan. However, as has been pointed out, the mortgages, the execution of which was delayed until 19th July 1957 because the appellant was away for about a fortnight, made the due date the 31st August 1957, and added a second 50 pounds to the amount of the indebtedness. (at p103)

6. Townley J. has found that Fallon, before the 500 pounds was lent to him and the ninety-five cows were delivered, "had agreed to give security for the repayment of what he received in this transaction", and that it was in pursuance of this agreement that the bill of mortgage and the memorandum of mortgage were later executed. (at p104)

7. In these circumstances, the appellant contends that 2,400 pounds of the amount secured by the documents was in the nature of a present advance made on terms of the security being given, and that therefore the mortgages did not operate to give him any preference in respect of that amount and should not be held void against the respondent in so far as they operate to secure that amount on the lands comprised in them. The order under appeal, however, declared the mortgages to be void in toto as against the respondent, the learned judge evidently taking the view that under s. 95 the fact that the instruments gave the appellant preference in respect of the 232 pounds 10s. 0d. was enough to produce this result. (at p104)

8. It is necessary to observe that s. 95(1) avoids, not instruments but certain kinds of changes in the legal situation of the person unable to pay his debts. What the sub-section clearly intends to make void, where it applies, is the change which, if allowed to be effectual, would dislocate the statutory order of priorities amongst creditors. So "every conveyance or transfer of property by any person unable" etc. must refer to every passing of property by some act of his, and not to the means by which this result is brought about; "every charge thereon made by" the person must refer to every creation by him of an interest in property by way of security, and not to what he does in order to create it; "every payment made by" the person refers to every passing by him of the ownership of money, and not to the mechanics of the transaction; "every obligation incurred by" the person refers to every arising of an obligation on his part, rather than to the event which makes it binding upon him; and "every judicial proceeding taken or suffered by" the person refers to every alteration which a step taken by or in a court brings about in a legal relationship between the person and others, and not to the taking of the step. (at p104)

9. What Fallon did by executing and delivering the relevant instruments of mortgage yields readily to analysis. As regards the antecedent debt of 232 pounds 10s. 0d., he gave security to one only of his unsecured creditors, and the case falls precisely within sub-s. (1) of s. 95. A suggestion was somewhat faintly made on his behalf that the giving of security for this sum might be protected by the provisions of sub-s. (2) of s. 95; but the circumstances of the transaction were indubitably such as to lead to the inference that the appellant knew that Fallon was unable to pay his debts as they became due and that the inclusion of the 232 pounds 10s. 0d. in the mortgage would have the effect of giving him an advantage over the other creditors in respect of that sum. Sub-section (4) of s. 95 therefore prevents the appellant from being deemed an encumbrancer in good faith, and for that reason, if for no other, sub-s. (2) cannot afford the desired protection. But as regards the 2,400 pounds, the instruments made no change which improved the appellant's position vis-a-vis the other creditors. The oral agreement which he and Fallon made originally, for the loan of 500 pounds and the sale of the ninety-five cows, included as one of its terms that the amount of the loan and the price of the cows should be secured by mortgage of the subject lands, identified by the use of the expression "the farms". The result was that when the loan was made and the cows delivered the appellant became instantly secured for the whole amount by an equitable mortgage of the lands. "The right of the appellant as equitable mortgagee" as Lord Cranworth said in Eyre v. McDowell [1861] EngR 859; (1861) 9 HLC 619 (11 ER 871) "is too clear to need any argument or reasoning in its support" (1861) 9 HLC, at p 639 (11 ER, at p 879) See also Tebb v. Hodge (1869) LR 5 CP 73 The securing of the 2,400 pounds by this equitable mortgage was not a preference to the appellant, because he was not theretofore a creditor of Fallon for any part of that amount: see Robertson v. Grigg [1932] HCA 29; (1932) 47 CLR 257, at p 271; and cf Hunt v Mortimer [1829] EngR 731; (1829) 10 B & C 44 (109 ER 367) and Muntz v Smail [1909] HCA 13; (1909) 8 CLR 262, at pp 276, 304, 305 Section 95 therefore does not invalidate the securing of that sum by the execution of the formal mortgages. As regards the 100 pounds that was added "for the loan", apparently in lieu of interest, it seems the proper conclusion from the proved facts that what was agreed upon originally was 50 pounds per month. On that basis, the equitable mortgage which came into existence when the 500 pounds was advanced and the cattle were delivered extended to this amount. Considered as interest, it was at a high rate, but we are not concerned with that in these proceedings. Its inclusion in the formal mortgages is here attacked as a preference. That presupposes that the amount was a debt antecedently owing. Assuming that it was such a debt, the answer to the trustee's claim is that it was a debt secured at the time of its creation by an equitable mortgage of the farm lands, and that therefore the appellant received no advantage over the other creditors by its inclusion in legal mortgages over the same lands. (at p105)

10. Notwithstanding that the notice of motion by which the proceedings were instituted relied only upon s. 95, the respondent has submitted an alternative argument. It is that the giving of the mortgages was an act of bankruptcy under par. (c) of s. 52 of the Bankruptcy Act, in that it was, even if only as regards the 232 pounds 10s. 0d., the creating of a charge on part of Fallon's property, which would be void as a preference if he became bankrupt. If this be so, it was contended, the bankruptcy, which supervened on a petition presented within six months thereafter, has relation back, by virtue of s. 90, to the moment of the commencement of Fallon's act in giving the mortgages: Ex parte Villars; In re Rogers (1874) LR 9 Ch 432, at p 445, so that they must be considered, so far as the bankrupt's interest in the lands is concerned, as executed by a person who had no title. The appellant, the argument adds, is not protected by s. 96, as the taking of the mortgages was, as regards the 232 pounds 10s. 0d., not in the ordinary course of business: cf. Re Sharp; Ex parte Gundry v. Johnston (1900) 83 LT 416, at p 417 What has been said in relation to the argument based on s. 95 supplies the answer to this contention also. Before the execution of the mortgages the appellant was equitable mortgagee of Fallon's interest as joint tenant with his wife in the subject lands. Consequently the relation back of the bankruptcy to the time of the execution of the mortgages could not give the respondent a title to any greater interest in the lands than that which remained to Fallon as equitable mortgagor. The mortgages that were executed did not subtract from that interest, and they are therefore unaffected by the relation back. (at p106)

11. For these reasons we think that the only relief to which the respondent has established a right in these proceedings is a declaration that the bill of mortgage and memorandum of mortgage are void as against him to the extent to which they would otherwise give the appellant security over or a charge upon the lands respectively comprised therein for 232 pounds 10s. 0d., being part of the amount therein mentioned as being due and owing by the bankrupt to the appellant. (at p106)

12. We would allow the appeal and vary the order of the Supreme Court to give effect to this conclusion. (at p106)

Vary the order of the Supreme Court of Queensland (1) by adding at the end of the declaration therein contained the words "for the sum of 232 pounds 10s. 0d. part of the amount therein mentioned as being due and owing by the said Keith Charles Leslie Fallon to the said John O'Meara Burns"; and (2) by omitting the orders therein contained for the execution and delivery of a release or releases and for the payment of costs, and substituting therefor an order that the applicant Leslie Thomas Stapleton pay one-half of the costs of the respondent John O'Meara Burns of and incidental to the motion.