Queensland Bacon Pty Ltd v Rees

Queensland Bacon Pty Ltd v Rees - [1966] HCA 21 - HCA 1966 case summary — Zoe

[3]

Hennessy's Self Service Stores Pty. Ltd. (the company) was incorporated under The Companies Acts, 1931 to 1960 of the State of Queensland (the Act) in 1959. As from 1st July of that year the company took over and commenced to conduct the self-service stores, eleven in all, then conducted in the suburbs of Brisbane by John Joseph Hennessy who, upon its incorporation, became the governing director of the company. Under his management the business of the company was rapidly expanded so that by the end of December 1960 the company had twenty-three self-service stores around Brisbane. Two of the additional stores were opened in October 1960 and the last of them was opened on 15th December 1960. This exuberant expansion of its business requiring a great deal of trading stock was not justified by the amount of capital at the disposal of the company and was carried out predominantly by means of bank overdraft accommodation and goods obtained on thirty, sixty days or, perhaps, in some instances on somewhat longer, terms of credit, from a wide range of wholesalers. In the latter part of 1960 bank credit was restricted generally in the community and the company was required by its bankers substantially to reduce its overdraft. Also, consumer demand for the foodstuffs the company was stocking did not reach the levels which the company had anticipated. Notwithstanding these influences, however, as found by the Supreme Court of Queensland "there appears to have been no outward indication that the business was verging on collapse until early February 1961 when the company quite suddenly went into liquidation". A petition was presented on 10th February 1961 to the Supreme Court of Queensland on which an order winding up the company was made on 16th March 1961. In the liquidation of the company a very substantial deficiency emerged. Trade creditors were admitted to a total of £222,097 and other unsecured creditors to an amount of £47,641. Apart from the effect which setting aside a number of payments to creditors as preferences would have, the anticipated dividend to unsecured creditors is estimated to be of the order of 2s. in the pound.

[17]

In each case his Honour accepted the evidence given on behalf of the creditor that the creditor did not know and did not in fact suspect that the company was unable to pay its debts at the time of the receipt of any of the challenged payments. These creditors thought that the company was experiencing a temporary difficulty caused by the cumulative effect of the general restriction of bank credit of the time, and the lull in consumer demand with resultant overstocking of goods bought on not unusual terms of credit. The creditors believed that the stocks on hand were sound, substantially in excess of liabilities and that they would be realized at such a rate as would make the company's embarrassment by a temporary lack of liquidity short-lived. Consequently, each creditor continued to trade with the company, at least one of them not unconscious of a business risk in so doing, though because of the season of the year and of the size of the stocks held by the company, in some instances on a reduced scale. As a result, whereas the company's account with Queensland Bacon stood at £20,826 at the end of October, it was in debit £28,232 at the date of the presentation of the petition. The comparable figures in the case of the other creditors were: Egg Marketing Board £8,732 and £7,962; Burns Philp £7,784 and £2,743; and Foley Brothers £10,592 and £10,032. The dates of the earliest payments to these creditors which his Honour set aside were, in the case of Queensland Bacon, 1st November 1960; Egg Marketing Board, 2nd December 1960; Burns Philp, 20th December 1960; Foley Brothers, 14th December 1960. Without taking out the specific figures, it may be taken in the case of each of the appellants that by reason of the continuing supply of goods after the date of the earliest payment which the Supreme Court set aside as a preference the balance due to the creditor at the date of the commencement of the winding up was different from the balance due to him at the date of that payment; and that the total of the payments set aside by the Supreme Court as preferences would be greater than the difference between the debit in the running account immediately prior to the first of such payments and the debit therein at the commencement of the winding up.

[25]

The learned Judge was pressed on behalf of one of the creditors, Foley Brothers, with the view that in deciding whether any of the payments under challenge by the liquidator had the effect of giving the creditor a preference, he should compare the amount due on "current" account by the company to the creditor at the time of the payment, with the amount due on that account at the date of the commencement of the winding up and only find that the payment effected a preference if, having regard to the deliveries of further goods and of further payments made by the company in the meantime, the running account at the commencement of the liquidation was less in debit at the date of liquidation than it was immediately prior to the challenged payment; and that he should find that the extent of the preference was the amount of the ultimate reduction in the running account between the date of the payment and the date of the commencement of the liquidation. His Honour rejected the contention saying: "In my opinion, the present case is distinguishable from Richardson v. The Commercial Banking Co. of Sydney Ltd. [2] . Each of the payments was made in respect of an indebtedness that had accrued at some time in the past, and was treated by both parties as being made in discharge of an existing indebtedness. No payment was made pursuant to any arrangement or understanding that the purpose of the payment was to ensure that further supplies of butter would be made available to the company. It is no doubt true that the company believed that if it did not pay for the butter it had received in the past, it would not be supplied with butter on credit in the future, but it was not the basis on which any payment was made or received that the respondent would give the company further supplies of butter. The payments were made and received on the footing that they were in discharge of a past debt, not on the footing that the respondent would supply butter to the value of the payments. The position was very different after 7th February 1961, when the respondent only supplied butter in exchange for cash. Each of the payments in question was the payment of an existing debt, and the effect of the payment was that the respondent was paid that debt in full, whereas the other creditors will not be paid in full. Each of the payments was a preferential payment".

[65]

The question of what inference should be drawn from all these circumstances is a question for the court. But the inference being sought is the inference which a reasonable business man in the situation ought to draw. It must be remembered that trading of the kind with which these applications are concerned is, as of present times, predominantly carried on by means of extensive credit and that overdraft accommodation supplements that credit to furnish the circulating capital. Consequently, liquidity can be lost overnight upon a reduction of overdraft limits. Whether this spells insolvency must be determined, it seems to me, by the speed with which assets of a readily realizable kind can be turned into cash. That time will be relative at least to the nature or extent of the indebtedness. Although in the full knowledge of all the facts the company was insolvent, his Honour found that the circumstances did not lead to the conclusion that the appellant knew of that insolvency. The question remains what is the proper inference which the court thinks a reasonable and prudent business man should draw from those circumstances. After much consideration I have come to the conclusion that, with the knowledge and belief of the extent of the stock in trade and with no circumstance to suggest it was in any significant degree "dead" stock, the reasonable business man ought not to suspect actual insolvency, though the circumstances demonstrated a serious and perhaps a dangerous lack of liquidity. Just the same I would not set aside his Honour's finding as to the inference which ought to be drawn from the circumstances known to the appellant were it not that, in my opinion, his Honour, in considering the question both in this and in the other applications, gave insufficient weight to the effect which the anticipated realization of the trading stock must have upon the question of insolvency. The situation of the appellant was very different from that of the bank in Rees v. Bank of New South Wales [1] . There the bank, with much more information than the appellant had, knew that the trading stock could not be realized in such an interval of time as would prevent the lack of liquidity becoming insolvency. In my opinion, therefore, the circumstances did not justify the inference required by s. 95 (4).

[78]

However, there is no need, in my opinion, to trouble to do this in connexion with this appeal as, in my opinion, in accordance with the views I have already expressed, no inference that the appellant had reason to suspect the actual insolvency of the company or an actual preference ought to be drawn from any of the circumstances of any of the payments which his Honour has avoided. No doubt, neither the provision of considerable stocks of commodities, nor the optimism of a creditor that, given time, all will be well, will prevent in some circumstances the necessary inference being drawn from a demonstrated serious lack of liquidity. But, here, the consensus of business opinion expressed in the evidence was that, upon the facts as each creditor knew them, the time interval to be allowed for the realization of the stock was believed, and reasonably upon their information believed, to be brief. That business men do not infer insolvency or find ground to suspect its existence does not of course mean that the court cannot find that the circumstances were such that the creditors had reason to know or to suspect that insolvency. But their optimism, backed up as it was in this case, by their action in continuing to give credit to the company cannot, in my opinion, be ignored when deciding whether the recipient of a preferential payment ought to have known or suspected the insolvency of his debtor. The trade with which the parties were concerned was carried on by means of large stocks obtained on credit; the extent of the stocks depended upon judgment as to the rate of their realization. A down turn in that rate maintained for a sufficient time might spell insolvency if bank credit was not available to maintain liquidity. An estimate of the anticipated rate of realization would be a vital factor in deciding whether or not insolvency had arrived. I find great difficulty in refusing to accept the business man's contemporaneous view as to what was a proper estimate of that rate and I am not prepared to hold that a reasonable and responsible business man ought in the circumstances of the payment of the cheque of £2,000 on 14th December to have suspected that his debtor was in fact insolvent. It would follow that I would not be satisfied that the inferences required by s. 95 (4) ought to be drawn in respect of any of the payments which his Honour has avoided. Accordingly, in my opinion, his Honour's declaration in this application ought to be set aside.

[81]

With this general caveat against too ready an assumption that the dishonour of a trader's cheque must in all circumstances and inevitably create in the mind of a reasonably worldly-wise creditor a suspicion of insolvency, I shall deal separately with the facts of each case. But as they must be examined with the provisions of s. 95 of the Bankruptcy Act in mind a few observations should be made at once as to the interpretation of that section. The general provision in sub-s. (1) for the avoidance of de facto preferences is well known. I need not say anything of it, for in the view I take of these four cases there is no need to review the findings under it which the learned Judge made against the appellants. Assuming those findings to be correct, the appeals depend upon the meaning and application of sub-ss. (2), (3) and (4). By virtue of sub-ss. (2) and (3) the appellants were under the necessity in the Supreme Court of proving that in respect of the payments in question they were payees in good faith, for valuable consideration and in the ordinary course of business. The learned Judge made findings which meant that they had proved they were payees for valuable consideration and (subject to what was involved in the question of good faith) in the ordinary course of business. His Honour decided, however, that because of the provisions of sub-s. (4) they should not be deemed to be payees in good faith. He considered that the burden of proof which sub-s. (3) placed upon the payees extended to proving, in relation to each of the payments in question, that the circumstances were such as to lead to the inference that the payee, although (as was established) it did not know, had reason to suspect, that the company was unable to pay its debts as they became due, and that the effect of the payment would be to give the payee a preference, a priority or an advantage over the other creditors. He was of opinion that the burden of disproving reason to suspect these matters had not been discharged, and for that reason he held the payments to be void.

[84]

In this case the learned Judge held to be void as preferences all payments made by the company to the appellant on or after 1st November 1960, that being the commencing date of the period during which he found that the company was unable to pay its debts as they became due from its own money. There were eight such payments. Each was for valuable consideration being a payment for goods supplied. Each, his Honour thought and I shall assume, had the effect of giving the appellant a preference over the other creditors, but his Honour would apparently have found in respect of each that the appellant was a payee in good faith and in the ordinary course of business, had it not been for one circumstance. This was that before the beginning of the period of insolvency as found, a cheque for £4,858 dated 10th October 1960 had been dishonoured. It was dishonoured on 15th October 1960, being marked by the bank "Arrangements incomplete. Present again in a week." It was accordingly re-presented and paid on 22nd October 1960. His Honour observed that the company's total indebtedness to the appellant at that time exceeded £24,000, that the appellant knew that there were other creditors, and that although it did not in fact suspect, it had had reason to suspect (i.e. on 15th October 1960) both that the dishonour of the cheque was due to inability on the part of the company to pay its debts as they became due and that the effect of the payment would be to give the appellant a preference, a priority or an advantage over the other creditors. His Honour considered that this reason for suspicion was never dispelled, and that on the contrary it was strengthened as time went on, by the dishonour of one cheque on 13th December 1960 and another on 28th December 1960, though the first of these was honoured on 21st December 1960 and the second on 16th January 1961. His Honour considered that the burden lay upon the appellant of satisfying him that the reason to suspect which the appellant had on 15th October 1960 had ceased to exist before the eight payments now in question were made, and he held that the burden had not been discharged.

[87]

The final payment, a payment of £2,700 made on 16th January 1961, needs special consideration. It was paid by a cheque which was dishonoured three times before it was met, and although the first two dishonours, on 28th December and 3rd January respectively, might by themselves have been insufficient in the special circumstances of the case to suggest inability to pay debts as they became due, it seems to me that by the time the third dishonour had taken place, namely on 12th January, there was reason for such a suspicion. But there was no reason to suspect that this was due to anything but overstocking for the Christmas trade and unexpectedly restricted sales. In other words, there was no reason to suspect that the situation would last long, or that it could not have been immediately rectified if the company had been willing to take drastic measures to realize sufficient stocks regardless of its own plans. If the situation had dragged on for a substantial time, and a payment had then been offered to the appellant, the proper inference might have been that the appellant had reason to suspect both that the company could not pay its debts as they became due and that the payment would prefer the appellant over other creditors. But that is not what happened. On 16th January 1961 the cheque was re-presented and met. The circumstances to be considered are those which existed and were known to the appellant on that date, including the fact that so far as the appellant was aware no other creditor had had a cheque of the company's dishonoured. From those circumstances it seems to me that a reasonable person in the position of the appellant would have concluded that the temporary difficulty, disturbing while it lasted, had been surmounted, and that there was no longer any reason, if there ever had been any, to be suspicious of the company's solvency. In fact, as his Honour found, the business man who was in charge of the appellant's business did not form any suspicion relevant to s. 95, and went on thereafter supplying more goods to the company on credit. While that is not the test under sub-s. (4), it is not without confirmatory value.

[91]

It was evident to the appellant by the date of the payment that throughout the preceding week the company could not have paid its debts as they became due without such a disturbance of its arrangements that the potential injury to its credit due to the dishonour of a cheque seemed to it to be preferable. The bank manager's statements showed that to make a payment of so large an amount as £10,083 5s. 5d. while meeting other commitments required some adjustment of the company's affairs. But the implication should not be overstated. It was clear that without a few days' grace the company would have to take steps which it was not prepared to take, but non constat that it was actually unable to take them. Moreover, the dishonour of the cheque was an isolated occurrence so far as the appellant had any reason to suppose (leaving aside the dishonour in July, which had by then lost any real significance it ever had); and although the appellant knew that the company was constantly incurring substantial debts to other suppliers of stocks, it had learned nothing whatever to suggest that any other creditor was having difficulty in obtaining payment. The learned Judge said in his judgment that the appellant knew that the company had other creditors, and added: "although it did not know that any cheques given in favour of other creditors had been dishonoured, it had reason to suspect that this might have been so". If I may say so with respect, this suggests that the word "suspect" is not being given its true force. To say that there was reason to suspect that other creditors' cheques "might have been" dishonoured is only to say that what had occurred over the appellant's cheque provided a reason for wondering whether it might have been so; and that, as I have said earlier, falls short, in my opinion, of a reason to entertain a suspicion that it actually was so. When, in the circumstances I have described, the few days' grace having been given, the cheque is met without further difficulty, it seems to me that it would be out of accord with business reality to hold that the appellant not only had had in the past reason to suspect that the payer was unable to pay its debts as they became due but at the time of the payment had reason to suspect that that was still so. I should have thought that the only suspicion for which the circumstances as known to the appellant on 2nd December 1960 really provided reason was a suspicion that the company, in its endeavours to obtain all the credit it could coax out of its various suppliers, was treating The Egg Marketing Board as the least likely to take extreme action, and so was paying other creditors first.

[97]

With great respect, I am unable to take that view. To a reasonable business man the facts I have mentioned might have been expected to suggest, not an inability to pay debts as they became due, but an understandable disinclination on the part of the company's general manager, Hennessy, to sell stocks improvidently or to forego the attractions of expansion of business for the sake of overcoming what might well be a temporary shortage of cash brought about by a general restriction of bank credit in the community, a consequential unexpected drop in retail sales, and by reason of these events the disappointment of expectations that had led to heavy purchases of stock. Inability to pay debts is one thing; but willingness to accept the possible damage to one's credit which the dishonour of a cheque may cause, rather than to take drastic steps by which all debts can be paid is quite another thing. I do not say that the learned primary Judge failed to recognize the distinction; but he laid stress upon the fact that the appellant's Brisbane manager, a Mr. Campbell, regarded the dishonour of the cheque on 19th December 1960 as a danger signal and, in his evidence, described his decision to continue trading with the company as a risk, though a reasonable risk. The dishonour undoubtedly was a danger signal, but would a reasonable man in Campbell's position not only have thought that the possibility of the company's being insolvent had to be considered but have formed an actual suspicion that the company was in fact insolvent? Or would he have dismissed the possibility as not sufficient to found a suspicion in the circumstances? With great respect, I think the latter. His Honour said that Campbell admitted in effect that he should have suspected that other creditors were also receiving cheques that were dishonoured. He had in fact no reason for such a suspicion. No doubt he had ample reason to believe that the company was buying stocks constantly from other suppliers and was therefore incurring debts to them; and he might well have wondered whether his company was the only one which had had a cheque of the company's dishonoured. But there is no reason to suppose that he had heard even so much as a whisper to suggest that the dishonour of the cheque for £3,082 3s. 5d. was not an isolated occurrence. It is true that Campbell thought that to continue trading with the company on credit was a risk, though a reasonable risk; but too much can be read into a statement of that kind. I do not understand it to mean more than that Campbell realized when the cheque was dishonoured that he had to make up his mind what view to take of it, and that when he considered it in the light of all the information he had he decided that there was not enough to justify a real suspicion of insolvency, and accordingly he proceeded to give credit which he would not have given had he formed such a suspicion. But whether or not that is what Campbell meant in giving his evidence, it describes the manner in which, in my opinion, a reasonable business man in his position would have regarded the matter. The true inference from the circumstances of each of the payments now in question seems to me to be that the appellant had no reason to suspect either of the matters mentioned in s. 95 (4).

[105]

His Honour's judgment sets out all the circumstances, including the relevant dates, which with the dishonour of the earlier cheque gave rise to the inference stated. In short, when £5,500 approximately was owing, a cheque dated 14th December 1960 for £3,082 3s. 5d. was on 19th December dishonoured with the notation "Present again in a few days". The cheque was re-presented on 22nd December and again dishonoured. It was paid on 6th January 1961. His Honour held that from 20th December, when it knew that the cheque for £3,082 3s. 5d. had been dishonoured, the appellant was not a payee in good faith of cheques for £9,455 0s. 10d. paid from 20th December 1960 to 31st January 1961. His Honour's view that a retailer of goods whose circumstances are such that he is reduced to the desperate expedient of giving his wholesale supplier a bad cheque ought thereafter, until his solvency is established, at least to be suspected of inability to pay his debts, is not one with which I can disagree. Although it may be possible to imagine a case where inquiry would allay the suspicion naturally engendered by the dishonour of a cheque in the circumstances stated, I find it impossible to think that, upon dishonour of the cheque, the supplier could do otherwise than suspect that the reason for the dishonour was simply lack of funds. What debtor, able to pay, would, except in error, give his creditor a cheque that would be dishonoured? I cannot suppose that it would occur to a creditor that a debtor, being able to pay his debt, had deliberately passed a cheque that would be dishonoured simply as a means of obtaining further credit. In fact, the debtor here was hopelessly insolvent on 19th December, and I agree that what happened on that day gave the appellant a compelling reason for suspecting that fact. I therefore agree with his Honour's conclusion and his reasons for the conclusion that the appellant is not to be deemed to have been a payee in good faith of the payments now in question.

[109]

In these circumstances, I do not think that the payments in question ought to be regarded as giving no preference. Surely the January figures give a very strong indication to the contrary. Richardson's Case [1] was a very special case in that the payments there in question were made by a debtor to his bank, not to reduce the debt owing to the bank, but to be dispersed forthwith by the bank honouring cheques to be drawn by arrangement upon the account. In other words, the payments into the account were measured exactly by the payments to be made out of the account so that the account would remain as it was, notwithstanding the payments in and the payments out. As the Court said of these payments: "They were not, in our opinion, payments made to the bank independently of the arrangement by Price with Commins that the latter should honour cheques outstanding, but, on the contrary, they were made only to enable him to meet cheques which Price had given or was about to give. If Commins, as representing the bank, had accepted the amount deposited with him on any occasion and had forthwith closed the account he would have been guilty of a breach of faith with Price. Doubtless Price could not have complained legally of such a breach of faith; for during the six months, and apparently for some time before, Price's banking transactions were rooted in dishonesty. But what is important here is the severability of the deposits from the payments out of the account; the payments out which were entered as subsequent, whatever the actual sequence. It was rightly remarked by counsel for the respondent bank that Commins was not seeking to get money into the account for the benefit of the bank but out of it for the benefit of Price" [2] . It is true that the Court said: "A running account of any debtor who has reached insolvency must present difficulties under s. 95. A debtor who pays something off his grocer's account in order to induce the shopkeeper to give him further supplies of groceries can hardly be held, as it seems to us, to give the grocer a preference, if that was the clear basis of the payment. If the grocer credited the money as a payment for the future deliveries instead of the past deliveries of groceries he would in the end be in exactly the same position and yet he could not be attacked as having received a preference" [1] . It is to be observed, however, that the Court had in mind a case where the payments to be made would not exceed the value of the groceries to be supplied, for the statement is: "If the grocer credited the money as a payment for the future deliveries instead of the past deliveries of groceries he would in the end be in exactly the same position and yet he could not be attacked as having received a preference". In the present case it seems to me that it was intended that, upon each occasion in the future when the appellant was to receive a cheque from its debtor, its position would be improved, notwithstanding current supplies and that the object of the arrangement was to bring about a reduction of an existing liability. Every payment having that effect would improve the position of the creditor and it is sufficient that the payment actually made should give the creditor some advantage over other creditors. I consider that payments made in the carrying out of such an arrangement could constitute preferences, and his Honour's finding that they were is not one that should be disturbed. 1. (1952) 85 C.L.R. 110. 2. (1952) 85 C.L.R., at p. 132. 3. (1952) 85 C.L.R., at p. 133.

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Judgment (131 paragraphs)

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