Muntz v Smail [1909] HCA 13

Muntz v Smail [1909] HCA 13 - HCA 1909 case summary — Zoe

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was to carry out his engagement with the respondent. But the motive is unimportant. Motive was only important in the case of pressure by the ereditor, and by see. 116 of the Insolvency Act 1897 pressure no longer supports a preferential payment. The only question is whether the disposition was made with the intention of giving the creditor a preference: Sharp v. Jackson (1); Stewart & Walker v. White (2), that is, with the knowledge that the result would be to give apreference. In Gow vy. White (3) it was held that the intention of the insolvent was to carry on his business if he could, and that was held not to constitute a fraudulent preference. To hold that a payment made because the debtor thought he lawfully ought to pay is not a pre- ference, is to go back to motive. In Jn re Vawtin; Ex parte Saffery (4), it was held that the dominant intention of the debtor was to fulfil an obligation which he believed he was under to his creditor. But there is no question of dominant intention here. There is no doubt about the intention here, the only doubt is as to the motive: In re Tweedale; Ex parte Tweedale (5), where a bill of sale was given by the debtor to correct an error in one given some time previously, the debtor believing that he was under a legal obligation to do what he did, may be supported on the ground that he did not want to put the creditor in a better position. Here the evidence shows that the intention was to put the creditor in a better position. Eyles was not bound to allow the respondent to sell his cattle when he did. His only obli- gation, if any, was to sell through the respondent, but the time of sale was at his own option. The promissory note was not yet due so that Eyles could not have thought that he was bound to sell the cattle then. In In re Cohen (6) it was held that the real intention of the debtor in making the payment complained of was to enable him to carry on his business and finally to pay all his creditors equally. Lompkins v. Saffery (7) disposes of the position that the fact that a debtor thinks he is bound to make a payment renders the payment not a preference. If the decision of Beckett J. were right the section would be of

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background the notion of preference. The principle established by Sharp vy. Jackson (1) did not come into consideration at all, Mr. Starke, however, set up another answer to the appellant's case. He contended that the agreement made before the pur- chase of the cattle amounted in law to an equitable assignment of the moneys to be realized by the subsequent sale of them. No reference is made in the judgment of @Beckett J. to this point, and Mr. Mann, who appeared for the appellant in the Supreme Court, says that it was not raised there. Mr, Starke says that it was. I think that it is plain that, if it was raised at all, it was raised not as an independent answer to the action, but as a matter relevant to determine the dominant view of the debtor. In this connee- tion the case of Hunt v. Mortimer (2) was cited, in which Parke J. held that the facts established an equitable assignment of a future fund, and that payment of the fund to the equitable assignee was not a fraudulent preference. The other Judges put the case on the ground that the payment in question was made in fulfilment of a special contract, and was not voluntary. In the present case, if this had been set up as a substantive defence, evi- dence might, and probably would, have been given as to the details of the previous transactions between the parties, which would have been very material for the purpose of determining whether the conversation of December was intended by tlie parties to have the effect of an equitable assignment of future purchase moneys. Assuming the point to be open, Mr. Duffy made two answers: (1) that, assuming a verbal assignment to be good, the test whether an agreement operates as an equitable assignment or not is whether the parties intended that it should have that effect, and that the evidence in this case negatives such an intention; and (2) that under the Victorian Book Debts Act 1896 an assignment of a future debt is void unless in writing and registered. I have already quoted the relevant evidence on the subject, and in my opinion it entirely fails to establish any such intention. It appears to me that the agreement to effect sales through the respondent was a mere collateral agreement. Although performance of it would have given the respondent the opportunity of protecting himself against loss by retaining the (1) (1899) A.C., 419. (2) 10B. &C., 44.

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sense of the word, that we are to discover, it is the view, in the sense of object or intention. As Lord Hsher puts it in the case first cited, " What had he obviously in view?" If he had more than one object, what was the main and substantial one? See Ex parte Hill ; In ve Bird (1), in which Bowen L.J. says : - * We have to look to the words of see. 92, and they are, with a ' view of giving such creditor a preference over the other creditors.' There are only three conceivable meanings which these words ean have. (1) They may conceivably mean the case where the debtor has present to his mind as one view, among others, the giving a preference to the particular creditor. I do not think that this is the true interpretation of the words; (2) Another possible con- struction of the words is to read them as equivalent to ' with the view ' - the real, effectual, substantial view - of giving a prefer- ence to the creditor, the word w being equivalent to the. I think that this is the correct interpretation ; (3) The other conceivable construction is to treat them as equivalent to ' with the sole view or sole motive.' I should prefer keeping to the word 'view' instead of 'motive, though in nine cases out of ten the two words may come to the same thing. Is then the expression "with a view' convertible into 'with the sole view'? My answer is that the latter words are not in the Act, and I do not wish to lay down that they mean the same thing as the words which are init. . . . But if we are to consider whether amongst all the shadows which pass across a man's mind, some view as well as the dominant view influenced him to do the act, we shall be embarking on a dark and unknown voyage across an exceedingly misty sea." And he puts the following as the true test under sec. 92 (2): - *(1), had the debtor a view of giving a preference to the creditor? and (2), was that the operative effectual view"? To my mind that is beyond question the true construction of the section. Iadd some words used by Lindley LJ. in Ex parte Griffith ; In re Wilcoxon (3): - *I emphatically protest against being led away from the words of the section hy any argument that the standard which the legislature has laid down is equivalent to

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the question, avoids any finding in respect of it in his judgment. I propose, therefore, to direct my observations solely to the ground on which Mr. Justice &Beckett based his decision. The issue raised by that ground is partly of law and partly of fact, and as to the latter the determination turns in no way upon personal credibility or demeanour of witnesses, but upon the inference to be drawn from facts which are practically undisputed. Under these circumstances this Court is free to consider the whole matter on its merits. As to the vital portions of the evidence there is little dispute. The agreement between the insolvent and Smail, in so far as it is material, bound the former to place his cattle in the latter's hands for sale with the right to retain pro- ceeds to the amount of the advance. At the end of December 1906 the insolvent knew he was in insolvent circumstances, and had instructed his solicitors to call a meeting of creditors on 10th January following. In addition to other débts he was then liable to six different firms of auctioneers besides Smail on pro- missory notes given for purchase of cattle, which had been bought by him through them. Under these circumstances McNaughton, manager for one of the firms, Muntz Bros. saw him on 29th December, and to him the insolvent made a full statement of his debts, his debtors, and his assets, and informed him of his inten- tion to call a meeting of his creditors on the date mentioned. McNaughton asked that some of the cattle should be handed over to his firm in payment of their debt, but the insolvent declined to take that course, alleging that he intended to keep all his property for division amongst his creditors. On the same day another cattle auctioneer, McNamara, standing in the same position as a creditor, had a similar interview with him and with a similar result. Five days afterwards Smail and his manager called on the insolvent. They appear to have discussed the position with him, and urged their right to have the cattle bought through them handed over to them for sale in accordance with the agreement. After some discussion he determined then to abandon his design of keeping all his property for division amongst his creditors generally, and yielding to Smail's persua- sion handed over to him for sale certain cattle so bought, sub-

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notes out of the proceeds. The learned Judge states that the insolvent gave as his reason for taking this step that "he thought that he was carrying out the agreement he had made," also, that on a doubt being suggested by him to Smail, "as to whether he could sell - whether it would be fair to others," the latter said that he expected him to carry out his contract with him to which the insolvent had in substance replied "he remembered the conditions under which he had bought, and was prepared to carry them out." These are the material facts to which the law is to be applied. The rights of the general body of creditors represented by the assignee against a creditor who has been pre- ferred are contained in section 73 of the Insolvency Act 1890. In all respects but one the facts are admittedly within the section. But the respondent denies that the insolvent made the transfer and payment " with a view of giving Smail a preference over other creditors " within the meaning of the Act. There can be no doubt at the present day as to the interpretation of these words, which are the same as those of the English Bankruptey Act 1883, nor can there be any doubt as to the general principles on which the provisions of the section are to be applied to the facts. The judgment of Lord Halsbury L.C. in the House of Lords in Sharp v. Jackson (1),is universally accepted as a correct exposition of the law, and this Court in Stewart and Walker v. White (2) and Gow v. White (3), in construing similar words in the Queensland Bankruptey Act, has followed that interpretation. Lord Halsbury L.C. approves and adopts the words of Lord Esher M.R. in delivering judgment in the case in the Court of Appeal. "The question," he says, "whether there has been a fraudulent preference depends, not upon the mere fact that there had been a preference, but also on the state of mind of the person who made it. It must be shown not only that he has preferred a creditor, but that he has fraudulently done so, It depends upon what was in his mind. Whether it is called 'intention' or 'view' or 'object' does not appear to me to matter much. The question is whether in fact he had the intention to prefer certain creditors. It has been argued that the debtor must be taken to haye in-

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is true for this purpose. I think one must find out what he really did intend." The word fraudulently used in this connection means of course "in contravention of the section" - no more. The key note of that interpretation is in the last sentence of the quotation. The Court must find out what the creditor "really did intend" in making the transfer or payment. In a large number of instances that is not difficult, but there is a class of cases in which the ascertainment of the real intention of the debtor is no easy matter, cases in which, although the debtor must be aware that the transfer or payment will have the effect of preferring one creditor to the others, he makes it not with that end in view, but to effect some other object altogether different, his aind being set on the achievement of that other object and giving no heed to the effect of the payment as a preference. In many instances the real intention stands out so clearly as to be unmis- takeable. But there are necessarily many on the border line in which the disentanglement of motives, reasons and inducements with the view of arriving at the real intention of the insolvent has proved a complex and unsatisfactory inquiry. In such cases Judges have occasionally wandered far afield into what Bowen LJ. has deseribed in Ex parte Griffith ; In re Wileowon (1) as " the old metaphysical exploration of the motives of people," and in many of the reported cases inaccuracy in the use of such words as "intention," " motive," "inducement," has made it difficult to extract the principle of the decision. I shall therefore not attempt to discuss all the cases cited, believing as I do that the safest and simplest method of dealing with the matter is to follow the section as closely as possible, reading it in the light of Lord Esher's clear and simple exposition. Where the evidence points to the existence in the debtor's mind of several intentions it may become necessary for the Court to inquire which is the "dominant intention," to adopt an expression used by some of the Judges. But whether described as the "real intention" or the "dominant intention" the thing to be ascertained is always the same. What was the end the debtor had set his mind on attaining by means of the payment or transfer? Was the

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preference of the particular creditor the end in itseff? Or was that incidental merely to the achievement of some other end to be accomplished by means of the payment or transfer? The ground taken by the respondent was that the insolvent's "dominant intention," as disclosed by the evidence, was not to prefer Smail to the other creditors, but to discharge the legal obligation under which the agreement with Smail had placed him, and which he believed it would be wrong to disregard. In support of this ground Mr. Starke sought to bring the facts within a class of cases in which it had been decided, under many differing sets of circumstances, that preference was not the dominant intention, It is unnecessary to deal with all the cases of that class that were cited, but an examination of the principal decisions is essential to the proper consideration of the argument. Bills v. Smith (1) was strongly relied on as turning on similar facts, the intention there being, as was found by the jury, to fulfil a legal obligation to pay a certain sum on a particular day. The question was raised in the form of an objection to Mr. Justice Blackburn's direction to the jury. The latter found, in effect, that the payment was made by the bankrupt bond fide and without any inten- tion of giving a preference to the creditor preferred. In the course of the summing up the learned Judge had directed the jury that, if the bankrupt had paid the debt simply in the dis- charge of the obligation he had entered into to pay on a given day, without any view of giving a preference to this particular creditor at the expense of the rest, the payment could not be a fraudulent preference within the meaning of the bankruptey law. The Court held the direction to be right. It is difficult to see how the case helps the respondent. The account of the facts is meagre. It must, however, be assumed that the jury followed the learned Judge's direction, which laid down the law in sub- stantially the same terms as Lord Halsbwry's statement of it in the case Ihave quoted. As they found that the payment was made merely in discharge of a contractual obligation to pay on a particular day, it must be taken to have been established by the evidence to their satisfaction that that, and not the preference of the creditor, was the real intention of the insolvent in making

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If I may venture, without presumption, to add my concurrence to that last observation, I do so unhesitatingly. The law as to what is a "preference" has never been the subject of judicial doubt so far as I can ascertain. No better example can be obtained on the point of principle than Sharp v. Jackson (1) itself. Lord Halsbury refers (2) to "the mere voluntary de- ciding (I will not use the word ' preferring') to pay one creditor and leave another unpaid." It is true in some of the cases you find the word " preferring" used to indicate that some advantage has been given, but the House of Lords has drawn pointed atten- tion to the proper use of the term. The facts of the case were simplicity itself. Prance, one of the members of a firm of solicitors, on 29th March 1894 executed a deed conveying an estate to make good in full a sum of £4,200 owing to an estate for breach of trust. The firm knew for some years that they were insolvent, and two days after they voluntarily petitioned for sequestration and were accordingly adjudicated bankrupt. Of course, Prance, as a solicitor and a business man, knew per- fectly well what he was doing, and that he was paying one creditor in full while others would go short. It would be idle to imagine that he did not know that the creditor was in fact receiv- ing an advantage over others ; indeed, Prance had it very vividly present to his*mind that unless that creditor did receive full payment, although the others would get so much the less, very unpleasant consequences might happen to himself. He intended that the particular creditor should receive this advantage. But the point was, as the Lord Chancellor said (3) : - " What were the reasons why it" (the deed) " was executed?" As it appeared he was taking the step of giving this advantage, not for the purpose of benefitting the creditor, but because he "was thinking of some- thing else" (4), it was held to be no "preference." "Thinking of (1) (1899) A.C., 419. (4) (1899) A.C., 419, at p. 424, per

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Case (1), with the exception of substituting "dominant" or its H. ©. or A. equivalent for "sole" in another part of the passage, has been Ey affirmed. In Griffith's Case (2), Jessel M.R. first stated that there - Muyaz was no obligation to assign the debts, which at once distinguishes Gut it in principle from this case, and then having so far cleared the ground, asked for what purpose where they assigned? Clearly to give him "a preference" is the answer. He adds (2) : - "If it was made with a view to prefer the creditor and also with some addi- tional view it may be that it is not within the Statute. But the additional motive may have been so trifling that it ought not to be taken into account at all." Bowen LJ. protested against metaphysical speculation and turned to the practical question whether the debtor had a view to prefer one creditor to the others. His judgment was plainly rested on the fact that in the case before him " preference" was the mainspring, and in his opinion, the only spring of the debtor's action. In Ex parte Hill; In re Bird (3), Cotton L.J. said : - * The Act requires only that the substantial motive of the transaction should have been the wish to prefer the creditor." Bowen LJ. held (1) that the Act did not make it a fraudulent preference merely because the debtor had present in his mind as one view among others the giving a preference to the particular creditor; and (2) it did mean to include transactions where it was the real, effectual, substantial view, the dominant view. In Ex parte Taylor; In re Goldsmid (4), Lopes L.J. said : - < Every one who studies sec. 48" (which corresponds with sec. 73 here), "must come to the conclusion that the animus with which the particular thing is done by the debtor is an essential element in considering whether itisa fraudulent preference. The mere making of a preferential payment is not a fraudulent preference. 'The substantial motive of the debtor in making it must be looked at. If the substantial motive is to prefer the creditor, the payment is a fraudulent preference. If the substantial motive is reparation for past wrong, or to avoid evil consequences to the debtor himself, the payment is not a fraudulent preference."

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