TAYLOR v WHITE
110 CLR 129(Judgment by: KITTO J) Court:
Judges:
DIXON CJ
KITTO JTAYLOR J
MENZIES J
WINDEYER J
Subject References:
Corporations
Liquidation
Preference
Protection of payments made in good faith and in the ordinary course of business
Legislative References:
Companies Act 1931 (Qld) - s 275
Bankruptcy Act 1924 (Cth) - s 95
Judgment date: 25 February 1964
MELBOURNE (HEARD IN BRISBANE)
Judgment by:
KITTO J
Before Gibbs J. in the Supreme Court of Queensland the respondents as liquidators of a company in voluntary liquidation sought a declaration that four payments made by the company within six months before the commencement of the winding up to a Mrs. Quinn (now deceased) were void as against the liquidators, and an order that the appellants, the executors of the will of the deceased, pay to the liquidators the total amount of the payments.
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 shallaffect 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.
The learned Judge, after a full review of evidence, made findings of fact which reduce the problem for our consideration to a small compass. The company was a family affair, its only shareholders and only directors being a Mr. and Mrs. Taylor. Mrs. Quinn was Mrs. Taylor's mother. Being an invalid she gave Mrs. Taylor a power of attorney to manage her affairs. In exercise of her powers as attorney Mrs. Taylor in July 1957 lent PD4,000 of Mrs. Quinn's money to the company, the company agreeing by a document dated 26th July 1957 to repay the amount in full, with interest at 8% per annum payable monthly, within six months from the date of notice in writing to repay. On 30th January 1959 Mrs. Taylor gave the company notice in writing to repay the PD4,000. In February 1959 Mrs. Taylor orally asked her husband to arrange for a payment into Mrs. Quinn's bank account because it was then in debit. He did so, a payment of PD160 for interest being paid into the account on 10th March 1959. This was apparently by no means the first payment of interest. The evidence was that several earlier payments had been made, and although they do not seem to have been made with strict regularity each month there is nothing to suggest that there was anything in relation to interest which either aroused any suspicion in Mrs. Taylor's mind that the company might be insolvent or ought reasonably to have done so. The giving of the notice to repay the loan had the effect that the last day for repayment was 30th July 1959. Three instalments were in fact paid at earlier dates: PD500 on 8th April 1959, PD500 on 17th June 1959 and PD500 on 20th July 1959. The balance, PD2,500, was paid on the last day of the six months, 30th July 1959. The first PD500 was repaid in response to a specific request by Mrs. Taylor which she made because Mrs. Quinn's bank account was nearly depleted and money was needed for her current expenses. The other three payments were made without any further request.
All four payments were made when the company was unable to pay its debts from its own moneys, and each of them had the effectof 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, [F7] affirmed sub. nom Butcher v Stead. [F8] 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.
There remained only the one question: had the executors proved that on each occasion Mrs. Quinn was a payee in the ordinary course of business? Gibbs J. held that she was. Upon this point, and upon this point alone, the Full Court of the Supreme Court reversed his decision as regards the last three payments, though not in regard to the first. From the Full Court's judgment the appeal to this Court is made.
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; [F9] Burns v McFarlane, [F10] and Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd, [F11] 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) [F12] "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 knewthat 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.
In the Full Court, Mansfield C.J. held that the first of the four payments was made to a payee in the ordinary course of business. His Honour gave as his reason that the payment was the outcome of a request to a debtor, made by a creditor who was in low financial circumstances, to pay portion of a debt which was due although payment could not have been legally enforced until 30th July. "As such", his Honour said, "it fell into place as part of the undisturbed common flow of business, and is not excluded from that category by the existing relationship between Mr. Taylor as the company's agent and Mrs. Quinn and her daughter, or by the fact, known to Mr. Taylor but not to Mrs. Taylor, that the company was in financial difficulties". Up to this point his Honour seems to have interpreted s. 95(2) in the same sense as Gibbs J. But his Honour went on to hold that the other three payments were not payments to a payee in the ordinary course of business, because they were unsolicited payments to one of a number of creditors at a time when the payer knew that he was in serious difficulties, and his Honour thought that in those circumstances the family relationship involved assumed a significance which it lacked in the case of the first payment. The only new element, however, was the fact that the payments had not been specifically solicited, though in fact they were made in response to the notice of 30th January 1959. It is not altogether clear why his Honour thought that that was a sufficient point of distinction; but this may be left on one side, for his Honour does seem to have regarded as material the payer's knowledge of his own financial difficulties, and it is to that that I propose to address myself.
Jeffriess J. did not deliver separate reasons for judgment. Hart J., the other member of the Full Court, agreed with Gibbs J. that Mrs. Taylor took the payments (i.e. for Mrs. Quinn) "in all good faith", but considered that as the last payment was "designed by the debtor (meaning by Mr. Taylor) to save what he could from the wreck of the family company for his family at the expense of the other creditors", it was not a payment "made" in the ordinary course of business. His Honour referred to several well-known cases, and it will be necessary to examine them; but Ipause to say at once what it seems to me has happened to s. 95(2) if his Honour's approach to the problem be accepted. The language of the sub-section has been deserted, and its apparent purpose has been defeated; for the burden on the payee of proving that he was a payee in the ordinary course of business has become a burden of proving that the debtor was a payer in the ordinary course of business, and a protection intended for a creditor by reason of his merits has been made to depend on an absence of demerit in the debtor.
The authorities in this Court upon which the Full Court relied begin with Robertson v Grigg, [F13] where the meaning of the expression "payee in the ordinary course of business" is discussed in the joint judgment of Gavan Duffy C.J. and Starke J. and in the judgment of Evatt J. Their Honours interpreted the expression not as referring to any particular business in which either the payer or the payee was engaged but as concerned with the character of the payment-"whether it is a fair transaction and what a man might do without having any bankruptcy in view". It is, I think, a misreading of the judgments to gather from these words, or from the judgments generally, that the expression looks at the payment from the debtor's point of view. The words quoted surely mean that if the payee is to be protected by s. 95(2), the payment must have presented itself to him as a fair payment to accept, and what a debtor might offer who was uninfluenced by any prospect of bankruptcy. What is required, in my opinion, is the quality of ordinariness from a business point of view in the acceptance of the payment. After all, s. 95 (2) does not describe the payment. It describes the payee. He is required to be a person receiving the payment in good faith; receiving it for valuable consideration; receiving it in the ordinary course of business.
The next case in this Court is Burns v McFarlane. [F14] There, as in Robertson v Grigg, [F15] the question did not arise from whose standpoint the payment has to be considered, for on the facts as found the payment in that case wore the same appearance from either point of view.
The third case is Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd. [F16] That was a case in which the payee was found to be not a payee in good faith, and therefore, as Latham C.J. said, [F17] it was unnecessary to determine the precise meaning of the words "in the ordinary course of business". Rich J., however, amplified what had been said concerning those wordsin Burns v McFarlane [ 18 ], observing that s. 95 (2) supposes that "according to the ordinary and common flow of transactions in affairs of business, there is a course, an ordinary course. It means", he said, "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" [ 19 ]. I do not read these words as meaning that in applying the concept they describe a court is to inquire into the state of the payer's mind at the time of the payment, and treat his knowledge and his intentions, though unknown to the payee, as part of the "situation". Williams J. [ 20 ] in the passage already quoted, made it clear that he for one was not unmindful of the fact that the expression he was explaining was used in the Act as descriptive of the payee. His Honour's words show plainly that he did not consider that in judging of the usualness of the transaction of payment it would be material to inquire whether there was a belief on the part of the debtor that he might be insolvent.
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 [ 21 ] 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 [ 22 ]. 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 [ 23 ] was likewise not in the voluntary class. A good illustration may be seen in Cosser v Gough [ 24 ] 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 [ 25 ] 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 [ 26 ] 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 [ 27 ] 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 " [ 28 ]. (The italics are mine).
What is important to notice is that an intent on the part of a debtor who knew he was insolvent to give a preference to one creditor over the others was not one of the circumstances to be considered for the purpose of deciding whether the transaction was in the ordinary course of business and therefore not voluntary. The position thus reached was described by Bacon C.J. in Ex parte Blackburn; In re Cheesebrough [ 29 ]: "It has, however, never, that I know of, been suggested that a payment in the ordinary courseof trade, the honouring bills of exchange presented at their maturity, or the payment of debts which had become due in the usual and customary manner, or payments made in fulfilment of a contract or engagement to pay in a particular manner or at a particular time, were open to any objection on the ground of their being voluntary, even although they were made without any express demand by the creditor, unless, indeed, the creditor had at the time notice of an act of bankruptcy committed by the debtor. To hold otherwise would be to embarrass and impede the most ordinary every-day transactions of commerce, and to make it impossible for creditors to know when the payments received by them in good faith and in common course could be maintained by them or not" [ 30 ].
That was the point. And accordingly when s. 92 of the Bankruptcy Act, 1869, made the old objective tests, the spontaneity of the payment and contemplation of bankruptcy, no longer decisive of validity, and adopted as the test for the future whether the payment (etc.) had been made "with a view of giving such creditor a preference over the other creditors", a proviso was added to obviate the inconvenience and injustice that would result in some cases if nothing mattered but the debtor's state of mind. The proviso was that the section should not affect the rights of a purchaser, payee, or incumbrancer in good faith and for valuable consideration. Henceforth "in the ordinary course of business" as a test of whether a payment satisfied the old objective criteria was irrelevant. Of course there was a use that could still be made of the expression, for to say that the act of a debtor in making a payment was an act done by him in the ordinary course of business would amount to denying that he did it with a view of preferring the payee over the other creditors: cf. per Lord Blackburn in Tomkins v Saffery [ 31 ]. "The mere fact" said Vaughan Williams J. in In re Eaton & Co ; Ex parte Viney [ 32 ], "a man in business, when insolvent, meets a bill of exchange raises no inference of an intention or view to prefer the holder of the bill, because in the ordinary course of business a man must either meet his bills or put up his shutters". The expression thus came to be used in a context which treated it as explanatory of the debtor's state of mind.
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 viewof 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 [ 33 ] 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.
I would therefore regard as irrelevant in the present case, on the question whether the appellant was a payee in the ordinary course of business, the financial condition of the company at the times when the payments were made, the state of Taylor's knowledge at those times, and the intention with which Taylor caused the payments to be made; for these things were all unknown both to Mrs. Quinn and to Mrs. Taylor. I would also regard as irrelevant the fact that Mrs. Taylor knew that the company was having financial difficulties, for the finding has been made that she did not know it was insolvent. There is many a company in the community known to be having financial difficulties. To hold that a creditor of such a company who knows that fact but knows nothing more cannot be a payee of his debt in the ordinary course of businesswould surely be out of the question. Moreover I would regard as of no significance the fact that the first three payments of PD500 each were made during the six months instead of being kept, like the balance, until the last day. The payment of the debt by such instalments does not seem to me to be out of the ordinary for a transaction of the kind. Finally, in my opinion, the family relationship has nothing to do with the question whether Mrs. Quinn was a payee in the ordinary course of business. In brief, I think, with all respect to those who differ, that the question in such a case as the present becomes blurred, so that immaterial considerations are allowed to affect the answer, if it is put in the form whether the payment was in the ordinary course of business. The question the section asks is whether the payee was a payee in the ordinary course of business.
In my opinion the appeal should be allowed and the judgment of Gibbs J. should be restored.