Re EJ Taylor & Son Pty Ltd [1964] HCA 11

[1964] HCA 11

High Court of Australia|1964-07-01|Before: Windeyer JJ, Gibbs J

View original source

At a glance

Source facts

Court

High Court of Australia

Decision date

1964-07-01

Before

Windeyer JJ, Gibbs J

Source

Original judgment source is linked above.

Judgment (63 paragraphs)

[1]

The application was made under s. 275 of The Companies Acts, 1931 to 1960 Q. which provides (inter alia) that any payment which would, if made by an individual, be deemed in his bankruptcy a preference, a priority or an advantage over the other creditors shall, if made by a company, be deemed, in the event of its being wound up, a preference, priority or advantage of its creditors [sic], and be void accordingly. For the purposes of the section the commencement of the winding up is to be deemed to correspond with the presentation of the bankruptcy petition in the case of an individual. By virtue of s. 95 (1) of the Bankruptcy Act 1924-1960 Cth, so far as here material, a payment by a debtor in favour of a creditor within six months before the presentation of a bankruptcy petition on which he becomes bankrupt is void as against the trustee in bankruptcy if certain conditions are fulfilled. The conditions are that at the time of the payment the debtor was unable to pay his debts as they became due from his own money, and that the payment had the effect of giving that creditor a preference, a priority or an advantage over the other creditors. But sub-s. (2) of s. 95 provides that nothing in the section shall affect the rights of a "payee in good faith and for valuable consideration and in the ordinary course of business". Sub-section (3) places the burden of proving that the provisions of sub-s. (2) have been complied with upon the person who relies upon their having been complied with; and sub-s. (4), so far as material, provides that a creditor shall not be deemed a payee in good faith if the payment was made under such circumstances as to lead to the inference that the creditor 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 payment would be to give him a preference, a priority or an advantage over the other creditors.

[2]

[3]

All four payments were made when the company was unable to pay its debts from its own moneys, and each of them had the effect of giving Mrs. Quinn a preference, priority or advantage over the other creditors. The winding up of the company commenced on 17th August 1959, so that all the payments were within the statutory six months period. The liquidators were therefore entitled to the relief they sought in respect of each of the four payments in respect of which it was not proved by Mrs. Quinn's executors that in the sense of s. 95 (2) of the Bankruptcy Act she was a payee in good faith, a payee for valuable consideration, and a payee in the ordinary course of business. As Mrs. Quinn herself by reason of her state of health had known nothing of the relevant event, and Mrs. Taylor had acted as her attorney throughout, Gibbs J. considered, and rightly, that the proofs necessary to satisfy s. 95 (2) had to be furnished as if Mrs. Taylor had been the payee in her own right. Gibbs J. was in fact satisfied of them all. That the four payments were for valuable consideration in the relevant sense there could be no doubt; for the past consideration consisting of the making of the loan was enough for the purposes of s. 95 (2): Ex parte Butcher; In re Meldrum [1] , affirmed sub. nom Butcher v. Stead [2] . Whether Mrs. Quinn was a payee in good faith on each of the four occasions was a question requiring careful consideration of what Mrs. Taylor knew and had reason to suspect as to the company's affairs. The earliest period as at which it was found that the company was in serious financial difficulties was April 1959; and it was not until 20th July 1959 that even Mr. Taylor, although he all along was in de facto charge of the company's affairs, became aware that the company was actually insolvent. Of course he knew from April onwards that the company was in difficulties, and his wife seems to have understood in a vague way that that was so. But although she was a director and in fact signed some of the relevant documents, her husband never discussed the business of the company with her; and the learned Judge, after both of them had given evidence and been fully cross-examined, was satisfied that she did not know that the company was insolvent until 3rd August 1959, i.e. after all the payments had been made. His Honour found that Taylor caused the last two payments to be made knowing that the company was insolvent and with the intention of preferring Mrs. Quinn over the other creditors, but that Mrs. Taylor neither knew nor had reason to suspect at any material time that the company was unable to pay its debts as they became due. He accordingly found that in respect of all the payments Mrs. Quinn was a payee in good faith. This finding the liquidator accepted. He could do no other, for the finding depended very much upon evaluation of the oral testimony, and was reached after careful consideration of the whole case.

[6]

The learned members of the Full Court accepted the findings of fact which Gibbs J. had made. Their reversal of his decision really resulted from their taking a different view of the meaning of the expression "a payee in the ordinary course of business" in s. 95 (2) of the Bankruptcy Act. The primary Judge had fully recognized, on the authority of what had been said in three cases in this Court, Robertson v. Grigg [1] ; Burns v. McFarlane [2] , and Downs Distributing Co. Pty. Ltd. v. Associated Blue Star Stores Pty. Ltd. [3] , that the expression does not refer to any particular business, either of the debtor or of the creditor, but refers to what Rich J. had called in the lastmentioned case "the everyday usual or normal character of the transaction". His Honour took the view that a payee is a payee in the ordinary course of business in this sense, even though the payment to him is unfair in that it pays off one creditor at the expense of the others, if "in itself" it calls for no special remark and is a transaction (in the words of Williams J. in the Downs Distributing Company's Case [4] ) "into which it would be usual for a creditor and debtor to enter as a matter of business in the circumstances of the particular case uninfluenced by any belief on the part of the creditor (the emphasis is mine) that the debtor might be insolvent". But Gibbs J. did not consider that "the circumstances of the particular case" to be taken into account in deciding whether a payee is a payee in the ordinary course of business include the state of mind of the payer where the payee knows nothing of it. If this view of the law be wrong, it seems clear enough that his Honour's conclusion was wrong, at least in regard to the final payment; for Mr. Taylor, who was the company's agent in relation to the payments, knew when making the second and third payments that the company was having its difficulties; and at the time of the last payment he not only knew that it was insolvent but intended a preference in favour of his mother-in-law Mrs. Quinn. As I have said, however, it was found and must be accepted that Mrs. Taylor in fact knew nothing of all this; and the conclusion reached by Gibbs J. must, I think, stand unless the question whether a payee is a payee in the ordinary course of business is a question to which the knowledge and intention of the payer, though unknown to the payee, is relevant.

[15]

I turn to the English authorities. The law as to the avoidance of fraudulent preferences was developed by the Judges as a branch of the law of public policy [4] upon the basis that where a transaction "is fraudulent, and done with no other view whatsoever but to defeat the equality of the bankrupt laws, it is void on account of such intended fraud": Rust v. Cooper [5] . The question to be decided was therefore in ultimate theory a question as to the intent with which the debtor made the payment; but it was reduced by the decisions to a more concrete form. It was made to depend upon two inquiries: (i) was the transaction voluntary (in the sense of spontaneous or gratuitous) on the part of the debtor, (ii) and did he carry it out in contemplation of bankruptcy? If Yes to both, no more need be shown in order to make the transaction void. The first inquiry was purely objective in relation to the debtor. A payment made by reason of pressure from the creditor was not voluntary. A payment which, considered without regard to the debtor's mental processes, was sufficiently explained as an occurrence in the ordinary course of trade, or of business, or (in one case) in the ordinary course of the debtor's mode of maintaining his family: Abell v. Daniell [6] was likewise not in the voluntary class. A good illustration may be seen in Cosser v. Gough [1] where Lord Kenyon placed in direct contrast a payment made by a debtor "officiously" on the eve of his bankruptcy and a payment in the ordinary course of trade. An early use of the expression "in the ordinary course of business" as the opposite of "voluntarily" occurs in Alderson v. Temple [2] where Lord Mansfield recalled a case in which a conveyance by a trader of all his effects for the payment of one or more bona fide creditors "of the most meritorious kind" had been held void, and stated as the reason: "because it was not an act in the ordinary course of business". Then a little later in the judgment in Alderson v. Temple [3] comes the passage which Gavan Duffy C.J. and Starke J. set out in their joint judgment. I shall not repeat it, but I must observe that to read it in its original setting is to see that Lord Mansfield was merely contrasting a payment which cannot be accounted for as other than the debtor's own idea with a payment which is explained by its consonance with the ordinary course of trade. A passage from Rust v. Cooper [4] was also quoted by Gavan Duffy C.J. and Starke J. For present purposes it is desirable to make a fuller quotation. His Lordship said: "If, in a fair course of business, a man pays a creditor who comes to be paid, notwithstanding the debtor's knowledge of his own affairs, or his intention to break; yet, being a fair transaction in the course of business, the payment is good: for the preference is there got consequentially, not by design: it is not the object; but the preference is obtained, in consequence of the payment being made at that time. Suppose a creditor presses his debtor for payment, and the debtor makes a mortgage of his goods, and delivers possession; that is, and, at any time, may be, a transaction in the common course of business, without the creditor's knowing there is any act of bankruptcy in contemplation; and, therefore, good. It is not to be affected by what passes in the mind of the bankrupt " [5] . (The italics are mine).

[21]

When the Commonwealth Bankruptcy Act 1924, took up the expression it placed it in a different context. The course adopted was to make the debtor's state of mind completely immaterial to the validity of a preference, priority or advantage given to one creditor over the others. Whether the debtor has acted with a view of giving a preference or, on the contrary, has acted in the ordinary course of business matters no longer. A payment which has in fact given a creditor an advantage over the others within the statutory period is void, subject only to a provision enacted for the protection of a payee of a particular kind. It is in the definition of that particular kind of payee that the legislature has laid hold of the phrase "in the ordinary course of business", in order to express, as it had expressed in such contexts as that of the passage I have set out from Rust v. Cooper [1] an idea, in relation to the creditor's acceptance of the payment, which goes beyond his good faith but has nothing to do with the debtor's knowledge of his own financial position or any intention he may have of giving a preference. The payee must have taken the money not only in good faith - at the least without knowing, and without having reason to suspect, that the payer was unable to pay his debts as they became due and that the effect of the payment would be to give him an advantage over the other creditors - but also without there being, in his taking it, anything unusual or remarkable to make it other than an ordinary business transaction. That is how I would understand s. 95 (2). In s. 96 (1) a similar addition was made to the general provision for protecting a payment (etc.) made before sequestration: the person (other than the debtor) with whom the transaction took place must not have had notice of any available act of bankruptcy committed by the debtor or the presentation of a petition, and the transaction must have been in good faith and in the ordinary course of business. It seems inconceivable that under that section the debtor's knowledge or intention should enter into a question as to whether a transaction was in the ordinary course of business.

[31]

Under the English bankruptcy law and the earlier bankruptcy law of a number of the States of the Commonwealth provision was made for the avoidance of what were called "fraudulent preferences" and a payment by a debtor unable to pay his debts from his own money made in favour of a creditor and having the effect of giving the creditor a preference over other creditors fell within this category if made "with a view" of giving such creditors such a preference. Under these provisions lack of knowledge of the debtor's affairs on the part of the creditor was of no consequence; it was sufficient if it appeared that the "substantial, effective or dominant" intention of the debtor in making the payment was to prefer the creditor to whom the payment was made (Ex parte Hill; In re Bird [1] and Muntz v. Smail [2] ). There are decisions to the effect that once a trustee in bankruptcy proved that the debtor was insolvent at the time when the payment was made and that the payment had the effect of giving the creditor a preference the onus lay upon the latter, if he wished to support the payment, to establish that it was not made with the intention of preferring him (In re Eaton & Co.; Ex parte Viney [3] ; and In re Lake; Ex parte Dyer [4] . But these decisions are in conflict with Ex parte Lancaster; In re Marsden [5] and Sharp v. Jackson [6] and with later cases, including Peat v. Gresham Trust Ltd. [7] ). Whether any particular payment is made with a view to prefer one creditor to another or others almost invariably falls to be established under the English legislation upon consideration of evidence of the circumstances in which it was made and the intent may be inferred from a great variety of circumstances. But, perhaps, the most potent circumstance for consideration is whether the payment was made in the ordinary course of business. This expression was not intended or taken to require an examination of the character of the business of the debtor and, thereupon, a conclusion reached as to whether the impugned transaction fell within the scope of the activities usually or commonly carried on in such a business; the test was whether the transaction had found its origin in and was accounted for by ordinary business considerations. If and when this was found to be so and no other special circumstances appeared, that fact was constantly regarded for all practical purposes as being inconsistent with the contemporaneous existence of any intent "or view" to prefer the payee. The "ordinary course of business" and an "intent to prefer" were, it seems to me, treated as quite inconsistent notions so that once it was proved that a payment had in fact been made with the sole or dominant "view" of preferring a creditor it was impossible to say that it had been made in the ordinary course of business.

[34]

In considering this question it is desirable to repeat that under the old law the fact that a payment was made to a creditor in the ordinary course of business for all practical purposes negatived any suggestion that it had been made with a view to preferring the creditor. I quote from the joint judgment of Gavan Duffy C.J. and Starke J. in Robertson v. Grigg [2] : "But was he (i.e. the respondent) a purchaser "in the ordinary course of business"? These words may be traced a long way back in bankruptcy law. Thus in Alderson v. Temple [3] and Rust v. Cooper [4] , we find Lord Mansfield denying that acts in the ordinary course of business amount to fraudulent preferences. "If a bankrupt, in course of payment pays a creditor; this is a fair advantage, in the course of trade: or, if a creditor threatens legal diligence, and there is no collusion; or begins to sue a debtor; and he makes an assignment of part of his goods; it is a fair transaction, and what a man might do without having any bankruptcy in view." "If, in a fair course of business, a man pays a creditor who comes to be paid, notwithstanding the debtor's knowledge of his own affairs, or his intention to break; yet, being a fair transaction in the course of business, the payment is good; for the preference is there got consequentially, not by design." Again, Lord Blackburn, in Tomkins v. Saffery [1] says: "Now I think you must say that it is not with a view to give an undue preference, if a man makes a payment to a creditor in the ordinary course of business." And he instances the case of a man struggling on and making payments to keep his business going" [2] . This case, together with Burns v. McFarlane [3] and Downs Distributing Co. Pty. Ltd. v. Associated Blue Star Stores Pty. Ltd. (In Liquidation) [4] , are clear authorities for the proposition that the conclusion whether a payment has, within the meaning of s. 95 (2), been made in the ordinary course of business does, as was the position under the English law, not require an examination of the character of the debtor's business. In the first-mentioned case the test was stated by Gavan Duffy C.J. and Starke J. in the following words: "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" " [2] . Much the same view was expressed by Evatt J. in the same case when he said that "the "ordinary course of business" is not, I think, to be related to any special business carried on by either debtor or creditor but is concerned with the character of the impeached transaction itself" [5] . Likewise in the joint judgment of Rich, Dixon and McTiernan JJ. in Burns v. McFarlane [3] , it was said: "Unlike the expression found in the bills-of-sale legislation, viz., "transfers of goods in the ordinary course of business of any trade or calling", it does not require an investigation of the course pursued in any particular trade or vocation and it does not refer to what is normal or usual in the business of the debtor or that of the creditor" [6] , whilst Starke J. in the same case briefly recapitulated the test propounded in Robertson v. Grigg [7] "that the test under s. 95 of the ordinary course of business was not related to any special business carried on by the debtor or creditor but was whether the transaction was fair and what a man might do without having any bankruptcy in view" [1] . In the latest of these cases Rich J. carried the matter a little further when, after quoting from the earlier cases to show that the expression "does not require an investigation of the course pursued in any particular trade or vocation and it does not refer to what is normal or usual in the business of the debtor or that of the creditor" [1] , went on to emphasize that "it is an additional requirement and is cumulative upon good faith and valuable consideration" [2] . "It is, therefore", he said, "not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual or normal character of the transaction. 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 transaction 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" [3] .

[37]

However, upon consideration of the local cases to which I have referred, the learned trial judge seems to have thought that a payment must be taken to have been made in the ordinary course of business unless the payment, considered entirely apart from the circumstances which have induced it, exhibits at the time some unusual feature. He said: "Here all that occurred was that a debtor chose to pay off its debt although it could lawfully have delayed payment if it had wished, and the creditor accepted the payment. A man may pay his debts before he is obliged to do so, even though he has not bankruptcy in view. Such a payment, in itself, calls for no special remark, and it would be usual for a debtor to make and a creditor to receive such a payment uninfluenced by any belief on the part of the creditor that the debtor was insolvent." In this passage there is some adaptation of a quotation already made from the judgment of Rich J. in Downs Distributing Co. Pty. Ltd. v. Associated Blue Star Stores Pty. Ltd. (In Liquidation) [1] when he said "it means that the transaction 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" [2] . But this means no more and no less than that the transaction will be taken to have been in the ordinary course of business if after examination of the circumstances in which it took place it is found to possess these characteristics. When the circumstances in which these payments were made are examined it is seen that they were made at a time when the company owed large sums to unsecured creditors, a great deal of which had been outstanding for more than three months, that some of the payments in question were made before the company was obliged to make them, that at least from April onwards the company was unable to pay its debts as they became due out of its own money, that the payments were made to Taylor's wife's mother almost immediately before liquidation and that the last two payments at least were made with the intention of preferring Mrs. Quinn over the other creditors. In these circumstances it is, I think, impossible to say that they "fall into place as part of the undistinguished common flow of business done" [2] . Nor do they appear, in the language of Gavan Duffy C.J. and Starke J. in Robertson v. Grigg [3] , as "what a man might do without having any bankruptcy in view" [4] . To my mind the express finding that the last two payments were made with the intention of preferring Mrs. Quinn alone precludes the conclusion that they were made in the ordinary course of business and consideration of the circumstances in which the payment of 17th June 1959 was made leads me to the conclusion that it must share the same fate.

[58]

The conception of a creditor receiving from his debtor payment of a debt due and payable otherwise than in the ordinary course of the payee's business is somewhat odd. A payee who has no business might be so described so that such a creditor could never have his rights protected by sub-s. (2) (b), but that seems highly unlikely. The oddness is quite as apparent if attention is given to the word "purchaser" in sub-s. (2) (b). Is a purchase of a house for a home by a private creditor necessarily outside the protection of sub-s. (2) (b) while a finance company, being a creditor, which buys a house in the course of its business, is capable of bringing itself within the protection of the sub-section? The same difficulty arises with the third class of creditor referred to in sub-s. (2) (b) - that is an encumbrancer. It seems most unlikely that the business actually carried on by the creditor should be examined to see whether the payment was in the ordinary course of business. Similar considerations make it unlikely that all that should be looked at to determine whether a transaction is "in the ordinary course of business" is the business of the person making the payment. It is not surprising, therefore, that the courts have rejected out of hand the notion that to determine what is in the ordinary course of business requires an investigation into what is normal or usual in the business of the debtor or the creditor: see Robertson v. Grigg [1] per Gavan Duffy C.J. and Starke J. [2] and per Evatt J. [3] ; Burns v. McFarlane [4] per Rich, Dixon and McTiernan JJ. where their Honours, speaking of the expression "in the ordinary course of business", said: "It does not require an investigation of the course pursued in any particular trade or vocation and it does not refer to what is normal or usual in the business of the debtor or that of the creditor" [5] : see also per Starke J. [6] ; Downs Distributing Co. Pty. Ltd. v. Associated Blue Star Stores Pty. Ltd. (In Liquidation) [7] , per Latham C.J. [1] , per Rich J. [2] and per Williams J. [3] . It is therefore clearly established that the determination of what is meant by "in the ordinary course of business" must take into account considerations other than the businesses carried on by the creditor and the debtor.

[60]

The authorities, it seems to me, show that the payments here in question occurred in the ordinary course of business if there were nothing about them that was unusual according to ordinary business standards. In other words, the payments were in the ordinary course of business if the company and Mrs. Quinn, as represented by Mrs. Taylor, were, with regard to them, acting in accordance with the standards of honesty and fairness which are ordinarily accepted by the business community. In Robertson v. Grigg [1] Gavan Duffy C.J. and Starke J. said: " 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" " [1] . In Burns v. McFarlane [2] Rich, Dixon and McTiernan JJ. said, supporting the finding that what was done was in the ordinary course of business: "The transaction considered as a whole presented the appearance of a perfectly fair and honest attempt to place the finances of Woon's business on a sound basis" [3] and Starke J. said that in Robertson v. Grigg [4] it was held "that the test under s. 95 of the ordinary course of business was not related to any special business carried on by the debtor or creditor but was whether the transaction was fair and what a man might do without having any bankruptcy in view" [5] . In Downs Distributing Co. Pty. Ltd. v. Associated Blue Star Stores Pty. Ltd. (In Liquidation) [6] Rich J. said: - "It is, therefore, not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual or normal character of the transaction. 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 transaction 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" [7] . It is true that all the statements I have quoted are not exactly to the same effect but my reading of them as a whole leads me to the conclusion which I have already stated. I should perhaps add that because the section under consideration treats a payment "in good faith" as different from a payment "in the ordinary course of business" and so requires a construction of each phrase which leaves some room for the other, I have not found much help from decisions in cases where this distinction did not have to be observed.