Sandell v Porter

The partnership operated profitably, according to Mr. Sandell's account of things, in the financial year 1962-1963 and expected to do likewise during 1963-1964. This expectation on his part continued until the end of 1963 by which time the bankrupts appear to have realized that the building operations on which they were engaged were not turning out as profitably as they had expected.

By October 1963 they had increased the number of buildings they were contemporaneously constructing and it would seem that by this time, if indeed it had not been in that situation earlier, the partnership was substantially undercapitalized.

The partnership then had insufficient ready cash to pay its building sub-contractors pending the receipt of the "progress payments" from the building owners via the financier who was making the loan to the building owner. This temporal gap was said to be one experienced by builders generally. There is no evidence to suggest that in October 1963, or for that matter at any other specific time, the amount of the progress payments actually due to the partnership was less than the amount due by the partnership to the sub-contractors. Nor is there any evidence as to the extent of the temporal gap between the due date for payment of the sub-contractors and the receipt of the progress payments.

However, it must be taken that by 2nd April 1964 the evident undercapitalization and lack of liquidity of the partnership, together with the lack of profit, if not the actual loss, in the building operations, had brought on insolvency. On that date a proposal for a compounding with creditors made by the bankrupts to a meeting of creditors was not accepted whereupon a petition for sequestration was presented by a trade creditor on 10th April 1964 and a sequestration order made thereon on 26th May 1964.

The statement of affairs filed in the bankruptcy disclosed joint assets of £23,479 12s. 2d. and joint liabilities of £25,925 19s. 6d. and a total surplus of assets over liabilities of the separate estates of the partners of £2,119. Proofs of debt to an amount of £27,282 11s. 6d. have been lodged. No information was vouchsafed to the Court as to the amount of the debts admitted to proof, nor as to the actual or anticipated realization of either joint or separate estates.

On 21st September 1963 Mr. Sandell asked his wife, the appellant, if she would lend the partnership £300 to enable them to pay the sub-contractors on the due date pending receipt of a progress payment which was said to be delayed, apparently whilst the necessary inspections of the building work took place. She agreed to do so "provided it was paid back". No question of the payment of interest was raised between the spouses nor was any precise date of repayment fixed: but the proper inference, in my opinion, from the evidence is that the amount was to be repaid when the progress payment was in hand.

Between October 1963 and January 1964 there were repayments to and further advances by the appellant. The greatest amount of money advanced at any one time was £1,000 and the largest amount outstanding due by the partnership to the appellant was £1,135 on 23rd October 1963. As at February 1964 the appellant was owed £644.

Throughout the period of the loans and apparently prior thereto the appellant was employed by the partnership in performing general office work and in keeping the cash book of the partnership. She continued to write up this book until Christmas 1963 when she ceased to do so as she had then broken her arm. Apparently she did not have access at any time to the private ledger or the journal of the partnership.

In or about March 1964 the bankrupts delivered to the appellant twenty-six promissory notes, each for the sum of £39 given by one of the building owners, in payment of his contribution to the total contract price of the home built by the partnership for him. The appellant accepted these in satisfaction of the partnership's debt to her and for interest upon the advances she had made. At the time of the institution of the present proceedings, she had received payment of some of them.

The respondent trustees moved the Federal Court of Bankruptcy for declarations that all the repayments made by the partnership to the appellant from and including 15th October 1963 to 14th February 1964, the date of the last payment to her by the partnership, were void as against him as preferences within s. 95 of the Bankruptcy Act 1924-1960 Cth, and for an order for the payment by the appellant to him of the sum of £3,650, being the total of these repayments. He also sought a declaration that the delivery of the promissory notes to which I have referred was void as against him as such a preference and for an order for the payment to him of the moneys received by the appellant from the maker of the promissory notes and for the delivery to him of the outstanding promissory notes.

The Federal Court of Bankruptcy made the declarations and orders as asked. No question arises in this appeal as to the propriety of the orders made in respect of the promissory notes and their produce but the appellant appeals from the declaration and order as to repayments of money lent by her to the partnership. The appellant takes three points. First, that it was not established that at the date of the making of any of such repayments the partnership was insolvent. Secondly, that she had maintained with the partnership a "running account" within the concept spoken of by the Court in Richardson v. The Commercial Banking Co. of Sydney Ltd. [1] so that the only preference she obtained by the repayments, bearing in mind the subsequent advances, was the difference between the balances due at the opening and closing dates, i.e. 15th October 1963 and 14th February 1964 - leaving aside and completely out of account the amount recovered by her through payment of the promissory notes, and, third, that in any case she was a payee for valuable consideration in the ordinary course of business and in good faith.

The learned Judge in Bankruptcy accepted the respondent's submission that insolvency at the relevant dates was proved. He regarded the loans by the appellant as isolated transactions unconnected with and not dependent upon the relevant repayments and held that the appellant took the repayments with knowledge of the insolvency of the partnership.

The evidence of insolvency as at 15th October 1963, the date of the first of the impugned payments, consisted of:

(2) the admissions by the appellant and the evidence of her husband that at least as early as 15th October 1963 the partnership was unable to pay its debts on their due dates out of its own moneys; and

(3) evidence that a debt of £141 16s. 0d. was due and unpaid by the partnership at 15th October and was still unsatisfied at the date of sequestration.

An essential step in making out that a payment is a preference within s. 95 is to establish by evidence to the satisfaction of the Court that the payer was at the time of the payment insolvent. Insolvency is expressed in s. 95 as an inability to pay debts as they fall due out of the debtor's own money. But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor's assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.

In this case, the information offered the Court by the respondent was, to put the matter at its highest, of the most tenuous kind. The respondent attempted by his own statement of the conclusion to evidence insolvency. The paragraph of his affidavit stating that the partnership was at or before July 1963 insolvent was objected to, and only admitted subject to objection. It was, in my opinion, clearly inadmissible and was probably so treated by the learned Judge in Bankruptcy.

The admission of the appellant and the evidence of her husband on which the respondent principally relied consisted of their assent to the proposition, put to them in terms, that at least by October 1963 the partnership could not meet its debts on their due date from its own moneys. Whilst in terms these admissions and this evidence verbally followed the language of s. 95 it is, to my mind, quite plain that all the appellant and her husband were saying was that by October the partnership, though a progress payment adequate to cover them had been earned and was currently expected, could not out of other moneys then in hand pay the sub-contractors on the due date for payment of their accounts. But such a situation, if nothing more appeared, did not necessarily betoken insolvency, particularly if the progress payment came within a short time of the due date for payment of sub-contractors. It is evident that the small loans of the appellant did bridge the time lag in the receipt of the progress payments and that at least for some time after 15th October 1963 the amount of the progress payments allowed of the repayment to the appellant of the moneys advanced by her, or at any rate, of by far the greater proportion thereof. Whilst it seems that ultimately lack of capital, together with the insufficient profitability of the building operations of the partnership brought insolvency, the admissions of the appellant and the evidence of her husband did not, in my opinion, establish the time at which that insolvency arrived. In particular, in my respectful opinion, they did not establish that the partnership was insolvent at 15th October 1963. Thus the first two pieces of evidence relied upon by the respondent fail, in my opinion, to establish the essential fact of insolvency of the partnership at relevant times.

There remains the evidence of an unpaid debt, unpaid from 15th October throughout. No doubt the existence of this debt would be most material in proof of the preferential effect of the payments to the appellant. But standing alone - and having regard to what I have said it really does stand alone - the nonpayment of the debt of £141 11s. 6d. does not establish an inability to pay that debt at the relevant times. However much it may lead to a suspicion that the debtor is not merely unwilling but in fact unable to pay it, the continuance of the unpaid debt of itself does not establish the fact of that inability: in particular, it does not establish that fact as at any particular time.

The appellant made and maintained the submission before the Federal Court of Bankruptcy that it was not established that the partnership at the times of making the payments challenged by the respondents was insolvent. But the matter was not discussed before the learned Judge in Bankruptcy to the extent and with the detail it has been before this Court. The learned Judge in Bankruptcy did not have the benefit of the argument which this Court has heard. In my opinion, having regard to the matters I have mentioned, it was not established before the Court of Bankruptcy that the partnership was insolvent on 15th October 1963 or, for that matter, at any specific time prior to 2nd April 1964.

Although one may suspect that the trustee by proper detailed evidence might have been able to establish that at some point before the meeting of creditors and at the time of the making of some one or more of the repayments to the appellant the partnership was in fact insolvent within the meaning of s. 95 of the Bankruptcy Act, in my opinion, there is no ground for directing a new trial of the proceedings.

As the views I have expressed are sufficient to dispose of this appeal, I find no need to express any opinion upon the other matters debated on the hearing of the appeal.

The appeal should be allowed and the declaration and orders of the Federal Court of Bankruptcy in so far as they relate to the repayments by the partnership to the appellant of moneys lent should be set aside and in lieu thereof the respondent's application in respect of such repayments be dismissed.

I agree with the reasons for judgment of the Chief Justice.

I agree in the conclusion of the Chief Justice that the evidence given did not sufficiently establish that the bankrupts were insolvent within the meaning of s. 95 at any of the times when the impugned repayments were made. On this ground I consider the appeal should be allowed.