Richardson v Commercial Banking Co of Sydney Ltd

This is an appeal by the Official Receiver, as trustee of the estate of Harold Joseph Price, a bankrupt, from an order of the Federal Court of Bankruptcy declaring that, with one exception, various payments made by the bankrupt into his banking accounts with the respondent bank did not, as was alleged by the Official Receiver, constitute preferences within the meaning of s. 95 of the Bankruptcy Act 1924-1946. The exception is a deposit of £390 made on 17th October 1947, which the order declared to be a preference and void. Against this part of the order the respondent bank cross appeals. The order of sequestration was made on 12th November 1947 on a petition presented by the bankrupt himself on that day. The period therefore of six months within which a preference priority or advantage must have been given by a debtor, if its validity is to be open to attack under s. 95 (1), extends back to 13th May 1947 from 12th November 1947.

The bankrupt was a solicitor of the Supreme Court of New South Wales who had practised in the city of Sydney for about thirteen years. Although he practised in the city his banking business was done at the branch of the respondent bank at the suburb of Marrickville. There he had a private account, an "office" or ordinary business account and a trust account. He said that he began with the private account and then in 1937 opened the other two accounts. The reason he gave for banking in the suburbs was a ripening friendship with the local manager, one Commins, a friendship which proved disastrous. To Commins, however, it must for a time have been useful. For Price put a great deal of business in the way of the local branch. But Price, who was a gambler, got into deep water and resorted to all the time-honoured devices for keeping his head above the surface. He had lodged some securities for an overdraft upon his office account but he continually overdrew. He placed cheques drawn on his trust account, and in this and other ways he contrived to misappropriate sum after sum of his clients' and other trust moneys. Sometimes he paid trust moneys into his office account. There were occasions when he transferred moneys from his office account to his trust account. This, he said, was done for the most part to meet cheques he had given to clients upon the trust account. He borrowed money from clients and, with Commins' help, from customers of the branch of the respondent bank. He resorted freely to the use of accommodation cheques, sometimes other peoples' sometimes his own. He gained some advantage in the practice of this device by the possession of accounts in two other banks. In all this he expected the assistance and protection of his friend Commins and the latter seems to have done the best he could for him. But the head office kept a critical and suspicious eye on Price's accounts and it is evident that Commins would not honour cheques when the result would be to place the account too heavily in debit, and so disclose upon the record that he was doing more for his friend than for his bank. By the time the period of six months was reached with which this appeal is concerned a definite practice had been established between them for dealing with the daily situation. It was a course they followed for about two years before the sequestration order. Invariably, said Price, shortly before two o'clock in the afternoon, he would ring up Commins, when the cheques had come from the other banks for collection. There would then be a consultation as to what cheques could be dishonoured without too much danger, what could be met and how. "Where they were cheques it was very desirable to meet", he said in evidence, "that is dangerous cheques, if I had £500 in and I wanted £1000, I would have to try and see where I could get further money from. I discussed it with him; perhaps I would go to so and so or I had seen so and so that morning and that I could get a couple of hundred from him that afternoon or something like that". He added that the position of the trust account would be considered when the cheques in for collection were cheques upon the office account. Price was asked to tell the Court in general the conversations between Commins and himself about paying moneys. In answer he gave an example as follows: - "The account would be overdrawn by say £700 and there would be £300 worth of cheques coming in during the day." I would speak to him and I would not have the £300, I would probably say to him, "I have £100 in the office. I will get that out." He would say: "That will not be enough". I would say: "I cannot get any money from this one and that one", and he might say, "How about McEwan" or mention some other name and I would say, "I will see if I can't do something with them". He would say: "If you do not get me word that you can get £150 somewhere about five o'clock I will send all your cheques back". Nearly every day some one would go out to Marrickville with whatever Price had said he could lodge. The hours of business having ended, the amounts so lodged would for the most part be credited next day. The order of the entries in the passbook, even on the same day, often did not coincide with the order of events. Price said that when he gave his word about his obtaining money Commins accepted it because in those matters Price always told him the truth. He did what he said he would do or, if it became impossible, he told Commins. Commins and Price apparently regularly saw each other before the day's work began and no doubt this meant that Commins was fairly well informed in advance of what the day was likely to produce. In the end, as might be expected, Price was arrested for criminal misappropriation. This was on 16th October 1947 and his bank accounts were closed next day.

It does not appear that any very definite or exact limit had been placed upon Price's overdraft. Price thought that Commins had fixed £600 and later £650. But Commins' instructions were to keep it within the amount of liquid securities held and that only temporary drawings in excess were to be allowed. The value of the security held by the respondent bank has been fixed at £680 by agreement between the parties.

The case for the appellant, the Official Receiver, is that when the office account was overdrawn to a greater amount than this sum and a deposit was made having the effect of reducing the amount overdrawn, then to the extent which the excess over £680 was so paid off, it amounted to a preference within the meaning of s. 95. There were four occasions when the trust account was overdrawn. Deposits were made by which the debit balances were extinguished. To the extent that the deposits had this operation the Official Receiver claims that they too were preferences within s. 95. Further, he relies upon the effect of s. 90 in giving the bankruptcy a relation back to the earliest act of bankruptcy within six months of the petition and upon that of s. 91 in including in the property of the bankrupt vested by s. 60 in the Official Receiver all property belonging or vested in him at the commencement of the bankruptcy. But the act or acts of bankruptcy upon which reliance is placed for this purpose are the very preferences attacked under s. 95. They extend back to the commencement of the period of six months. These would indeed, if established, be acts of bankruptcy by virtue of s. 52 (c). But the Official Receiver's second ground raises the same issues as his first, subject, however, to this theoretical qualification. It might be that he established his allegations that an early payment into one of Price's accounts amounted to a void preference and failed in his allegations as to later payments. Then there might be some point in his reliance on the relation back of the bankruptcy to the earlier payment which he had succeeded in showing to be void as a preference. It may be that even so the payments out of the bank accounts as discharges of the banker's liability would qualify for protection under s. 96A as made pursuant to the ordinary course of business. But payments into the account, deposits, stand on a different footing. If they be preferences they are void unless good faith is made out in the sense required under s. 95 (2) and (4). It is hardly necessary to say, in view of the foregoing account of the part played by the local manager Commins, that the respondent did not deny, but, on the contrary, admitted that Commins not only had reason to suspect but knew that the bankrupt was unable to pay his debts as they became due during the relevant period. Thus it will be seen that the appeal turns upon the question whether the deposits in the office account reducing the overdraft within the limit of the security, namely, £680, or any of the four deposits in the trust account made when it was overdrawn, amount to preferences within s. 95 (1).

The material words of that sub-section provide that every payment made by any person unable to pay his debts as they become due from his own money in favour of any creditor having the effect of giving that creditor a preference, a priority or an advantage over the other creditors shall, if the debtor becomes bankrupt on a bankruptcy petition presented within six months thereafter be void as against the trustee in bankruptcy. Under this provision it is of no importance whether the debtor does or does not spontaneously voluntarily or intentionally give the preference (S. Richards & Co. Ltd. v. Lloyd [1] ): "It looks to the effect of the transaction and not to the intent, or state of mind, of the debtor" (per Starke J. [2] ).

1. (1933) 49 C.L.R. 49. 2. (1933) 49 C.L.R., at p. 62.

In considering what is the effect of the transaction impeached under s. 95, in this case a deposit, or each of a succession of deposits, to the credit of an overdrawn current account or an overdrawn trust account at a bank, there are two things that it is important to have clearly in mind. One of them is the kind of "effect" which the provision treats as decisive. It must be "the effect of giving the creditor a preference, a priority or advantage over the other creditors": it is then void in bankruptcy if the sequestration is within six months. Section 95 supposes a bankruptcy, and it is in relation to that bankruptcy that the question arises whether, over the other creditors, a preference priority or advantage has been given to the particular creditor. Section 52 (c), on the other hand, propounds the hypothetical question whether in the event of bankruptcy such an effect would be produced. The bankruptcy or the petition must of course be within six months: s. 55 (1) (c).

The second thing is that the effect is a consequence of the payment and that where the payment forms an integral, an inseparable, part of an entire transaction its effect as a preference involves a consideration of the whole transaction. In applying s. 95 (1) to the facts relating to the various deposits it is convenient to begin with the four payments into the trust account that are challenged.

The first of the four occasions within the six months when the ledger account shows a debit balance in the trust account is on 25th July 1947. It arose, however, from a mistake on the part of Commins or his bank clerks in debiting a cheque to the wrong account, and an adjusting entry put the matter right. This item may therefore be put aside.

The second of the four occasions was on 1st September 1947 when, as a result of debiting a cheque for £2,025, the trust account was shown as overdrawn by £1,994 2s. 9d. Next day there was a deposit by Price of £2,024 14s. 0d., which put the account in credit again. This deposit is said to be a payment having the effect of giving a preference, a preference to the extent of £1,994 2s. 9d. From the evidence it appears that on the same day as the cheque for £2,025 was honoured and debited, namely, 1st September, Commins was given the deposit to cover it consisting of a bank cheque of £1,946 2s. 4d. and three other cheques. They were transmitted to him in the manner already described so that the cheque on the trust account might be honoured. It is therefore obvious that there was no preferential payment of an existing debt, no preference over other creditors brought about by the transaction. It may clearly enough be inferred, too, that the moneys involved were all trust moneys and, whether properly applied or not, neither the payments in or the payment out belonged to Price. But that involves a matter for separate discussion over another or other items.

The third occasion was on 16th September 1947, when a payment out of £8,169 13s. 1d. and another of £10 put the trust account in debit £1,142 4s. 10d. On the same day, by a cheque for £1,150 drawn on the office account and debited to that account and credited to the trust account, the debit balance of £1,142 4s. 10d. was turned into a small credit balance. The corresponding result in the office account was a debit of £1,792 14s. 1d. It would be tedious as well as needless to recount the details of the entire transaction to which these entries relate. The short effect is that Price at his peril had to account for £8,169. He told Commins of his need to do so and discussed ways and means. He required a bank cheque for the amount for which he was liable. To cover it he borrowed £4,096. There was at the same time £2,743 at the credit of the trust account. Commins took from him an office account cheque in blank to wait till the end of the day to see how much more was needed. He gave Price the bank cheque for £8,169 and afterwards filled in the blank cheque for £1,150. Upon these facts clearly there could be no preference. The actual result was to increase the amount owing by Price to the bank by £1,150.

The fourth occasion when a debit balance was shown in Price's trust account was on 15th October 1947, the eve of his arrest. The account debits under that date a cheque for £2,029 7s. 4d., producing a debit balance of £2,003 14s. 3d. Next day a credit of £2,300 appears. This is what is said to effect a preference. Here again the evidence is that, because he had to obtain a bank cheque or to meet his own cheque for the amount debited, £2,029 7s. 4d., Price set to work to find money and did so by borrowing it. He placed the amount of £2,300 in Commins' hands on the afternoon of the same day, 15th October 1947, though the credit appears as of the next day. Again there is no case of preference. So far as the trust account is concerned the case of the Official Receiver appears to us clearly to fail.

The office account presents a very much larger number of items which are said to amount to preferences. The account was very active and, within the six months before the bankruptcy petition it was frequently overdrawn to a greater amount than the agreed value of the security, £680. The Official Receiver claims that payments into the account in reduction of this excess resulted in giving a preference to the respondent over other creditors. But so far as a payment into the office account operated to reduce the overdraft below the value of the security he does not claim that it gave a preference. He does not do so because he takes it that the respondent bank obtained no advantage over other creditors from the payment of an indebtedness on overdraft for which it was in any case adequately secured.

The Official Receiver put forward several alternative methods for ascertaining the amount of the void preferences which he alleged. One was to take a point of time at which the amount of the overdrawings rose above £680 and then take the point at which the overdraft next fell below that figure, and to find the highest sum which the overdraft reached between those two dates. The difference between the latter sum and £680 was treated as the amount to which the respondent bank had been preferred by the deposits. Another method was to treat each payment into the account while the overdraft stood above £680 as a preference, or in the case of a deposit reducing it below £680 as a preference pro tanto. The result was to produce a larger total, because a deposit reducing the overdraft, but not below £680, would be counted as a preference, although afterwards another payment out of the account increased the overdraft before the point of time when at length it was again reduced below £680. Such movements in the account were disregarded by the first method. A third alternative method disregarded payments into the account representing trust moneys, protestando however that this should not be done.

We have come to the conclusion that, with the exception of the item of £390 paid in as the account closed, which was held by the learned Judge of the Court of Bankruptcy to be a void preference, none of the deposits had the effect of giving the respondent bank a preference priority or advantage over the other creditors of Price. 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. This is true, we think, for the whole period up to Price's arrest. And that is one reason why the last payment, that of £390, credited next day stands on a different footing from the others. A not unimportant fact is that no cheque of Price's was ever dealt with by Commins' clerks or tellers in the ordinary course of banking business. They were all referred to him to be dealt with personally. In considering whether the real effect of a payment was to work a preference its actual business character must be seen and when it forms part of an entire transaction which if carried out to its intended conclusion will leave the creditor without any preference priority or advantage over other creditors the payment cannot be isolated and construed as a preference. Nor can it matter that in the particular circumstances, whether because of illegality or for any other reason, the law could not be invoked if the creditor did falsify the understanding or expectations of the debtor which formed the basis of the payment. If the creditor does carry on his relations with the debtor on the intended footing and so obtains in the result no preference priority or advantage over other creditors from the payment, the fact that it was open to him, without exposing himself to any legal remedy at the suit of the debtor, to interrupt the course of dealing or the progress of the transaction and thus secure for himself a preference, is not enough to show that the payment had the effect of giving such a preference priority or advantage. For ex hypothesi that was not its final effect in fact. In this case it may be remarked that when Price was arrested and his account was closed, the overdraft was greater than at the beginning of the six months.

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 shop keeper 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. But without stating any principle with an application beyond the facts of this case, it is enough to decide that the payments into the office account possessed in point of fact a business purpose common to both parties which so connected them with the subsequent debits to the account as to make it impossible to pause at any payment into the account and treat it as having produced an immediate effect to be considered independently of what followed and so to be adjudged a preference.

Many of the deposits attacked as preferences were dealt with by the evidence specifically and the circumstances were gone into in detail. Others were left unexplained, except for what appeared on the face of the accounts. It would unnecessarily lengthen this judgment to deal with each item separately. The items fall, we think, into easily recognizable classes and it is enough to deal with the classifications. First there is a class of items where the particular circumstances leading to the making of the deposit appear pretty clearly from the evidence and show that the deposit was intended to cover, and did no more than cover, specific cheques which had come in or were coming in. In the greater number of cases within this class the deposit consisted of a cheque upon the trust account and under this head we think there can be no preference. A second class differs from the first only in the fact that the amount of the deposit more than sufficed to cover the particular cheques presented or impending the dangerous character of which was the prime purpose for the search for funds. The evidence does not explicitly deal with the application of the residue. A deposit to the credit of the office account made in the beginning of October 1947 provides an illustration at once of the boldness of the depredations committed in order to meet what were considered dangerous cheques, and of the fact that the whole purpose of Commins and of Price was to find means not of paying off the bank but of carrying on from day to day by honouring as many cheques as possible. On 1st October the office account was in debit to the extent of £1,535. Between 29th September and that date various cheques had been dishonoured and marked "present again". They amounted to more than £1,400. Other cheques were about to be presented. Price was acting for a purchaser of land who was ready to pay the balance of purchase money, £5,000, through him. It was decided by Commins and Price, so the latter said, to rely on this as a source of funds. Price gave Commins a cheque upon his trust account for £2,500, which Commins placed to the credit of the office account. To meet it a cheque for £5,000 was obtained from the client, a warrant of clearance for this cheque was hastily obtained and by taxi the cheque was conveyed to Marrickville and credited to the trust account so as to be there to meet the cheque for £2,500. It was a Thursday and it was not until the next Tuesday that the cheques presented amounted to £2,000 and before they exceeded £2,500 two more days passed. Now, we think that no question can arise about this sum of £2,500 so far as concerns the dishonoured and other cheques which Commins and Price had in view. The evidence does not tell us with particularity what they were. But it may be inferred that the sum of £2,500 was fixed by reference to the immediate necessities. On Saturday 11th October 1947 another deposit of £2,250 was made, from what source does not distinctly appear. But the inference is quite certain we think that so far as Commins and Price were concerned it was made as a result of an arrangement to meet large amounts entered as of Friday, that is, the previous day. We think that the only reasonable conclusion is that the whole £2,500 was paid to the credit of the office account in order to meet cheques coming in, that is to say, in order to enable Commins to sustain Price's pressing demands upon the office account.

Still another class of item is that which is left bare of direct evidence and where all that appears is that a deposit of an amount was made, the ostensible operation of which, if the sequence of entries accords with the sequence of the events which they purport to record, is to reduce an indebtedness on overdraft which exceeded the value of the security, namely, £680. Four items were picked out by the Official Receiver. An assumption was first made that the primary call or charge on each of these deposits were the cheques debited on the same day. An alternative assumption was made that it consisted of the cheques debited on the previous day. On the first assumption there would still be enough to reduce the excess over £680 overdrawn on each of the four occasions to make a total of £2,621 4s. 10d.; on the alternative assumption of £730 10s. 7d. With no more information before the Court than this, it was said that preference was the only inference. In this conclusion we cannot agree. It must be borne in mind that no systematic attempt was made to prove all the facts as to each item on the credit side of the office account. In a very few banking days the influence of these deposits disappeared in consequence of the payment of cheques. There is the specific evidence of Price of the daily character of the consultations between him and Commins as to the cheques to be returned and those to be honoured and as to the course pursued. The burden of showing that a preference resulted is upon the Official Receiver, and we know that in the result there was none actually enjoyed by the bank. To infer that at a point the bank obtained one but that it was freely sacrificed by the spontaneous making of further advances by honouring cheques would we think be wrong. The true reading of the circumstances, we feel little doubt, is that the deposits were made on the footing that so far as the respective deposits would carry, the cheques coming in would be honoured, if it was not decided in consultation that to dishonour them was a safe and better course.

The respondent bank contended that no deposit to the credit of the office account out of trust moneys could be considered a preference because they were not moneys which would have been available to creditors and the respondent bank could obtain no preference over other creditors by receiving them in purported reduction of the overdraft. This argument must be dealt with in relation to the item of £390, the last paid to the credit of the office account and the subject of the cross appeal. Indeed, it can best be dealt with in connection with that item. But if correct it would have a very considerable effect on the result of the appeal, even if the view we have already expressed were wrong. For very large sums were paid into the office account from trust moneys, £16,803 we were told. A table used in argument definitely traces deposits amounting to £14,313 and shows that they came from the trust account. Before dealing, however, with the argument it is better to state the facts as to the £390. It was the cheque of a Mrs. Turner and it represented the balance of purchase money for a cottage she had bought. She handed it to Price on the day of his arrest, 16th October 1947, and he told Commins he had received it and would send it to him. Price was then arrested and it was decided at once that his office account should be closed. He says that he told Commins that the cheque should not now be paid into the account, but Commins pressed him for it and in the end in his absence managed to cajole his female clerks into giving it to him. Without this cheque the account would have closed with a debit of £1,210. It is clear enough that to pay it in could no longer serve any purpose of keeping Price afloat. It was done in Commins' own interest to reduce the overdraft.

If it had been Price's own money, the effect would have been to give a preference to the respondent bank over other creditors. The question whether such a use of other people's money is within s. 95 is not easy. In Price's hands the cheque and its proceeds were subject to a trust and Commins knew this. It is correct that if the cheque or its proceeds had been preserved and had remained identifiable they never would have been assets available to Price's creditors. The Official Receiver as trustee of his bankrupt estate could have made no title to them. Again, if in an identifiable form the money represented by Mrs. Turner's cheque had come to the latter's hands, it would have been subject to her right to follow it specifically.

On the other hand, Price having converted it, for we may take it that there was a conversion of the cheque for which he was at least vicariously responsible, Mrs. Turner, if she were unwilling to undertake the burden of proof involved in fixing the bank with accountability to her, could claim upon Price and after his bankruptcy prove in his estate and so add to the claims upon the assets. Again, unless the respondent bank be accountable to her for the proceeds of the cheque, and no attempt was made to show that a claim upon the bank has been made or admitted, then Price's debt to the bank has been reduced pro tanto; and to that extent the bank has an advantage over other creditors. Further, if the payment is declared void and the money is paid to the Official Receiver, non constat that Mrs. Turner may not then claim on that very ground to trace the proceeds of the cheque into his hands.

In the particular instance of Mrs. Turner the identification of the fund applied as payment into Price's office account is much more certain and easier than in many other cases, the money there having passed through the trust account. In cases where it cannot be identified or in which Commins acting within the scope of his authority as branch manager of the respondent bank cannot be fixed with knowledge, the owner of the funds misappropriated has no other course than to prove in the bankruptcy.

On the whole it appears to us that the payment of a cheque representing trust funds into the office account, were it otherwise to operate to give a preference to the bank, would be within s. 95. It is within s. 95 because, although the same moneys could never but for the misappropriation have been available to the bankrupt's creditors, there would be a preference, priority or advantage effected in favour of the bank as a creditor, in making a payment to it, when other creditors must prove and other creditors suffer the disadvantage of being exposed to the competition upon the assets of the proof of the defrauded owner of the funds. If the payment to the bank is undone at the suit of that owner, that would be another matter. If it is undone at the suit of the Official Receiver, then the owner may or may not be able to follow the moneys into his hands. That is a question involving matters of law and of fact and we are not now called upon to decide it in either branch. But for the reasons we have given we do not think that there was a preference as to any deposit but that of Mrs. Turner's cheque. Thus upon the view we take of the case, the question of the consequence of the payment coming from trust funds arises for decision only in relation to that item.

In our opinion it does not prevent its being a preference.

For these reasons we think the decision of the learned Federal Judge in Bankruptcy was right.

The appeal and cross appeal should be dismissed with costs. Costs to be set off.