TAYLOR v WHITE
110 CLR 129(Decision by: TAYLOR J) Court:
Judges:
DIXON CJ
KITTO J
TAYLOR JMENZIES 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)
Decision by:
TAYLOR J
The question in this appeal is whether certain payments made by E. J. Taylor & Sons Pty Limited to Florence Catherine Quinn, now deceased, constituted preferences within the meaning of s. 275 of The Companies Act 1931 to 1960 (Q.). The payments in question are three in number, PD500 paid on 17th June 1959, PD500 paid on 20th July 1959 and PD2,500 paid on 30th July 1959, and it was held by Gibbs J. that, in relation to these payments, and an earlier payment of PD500 made on 8th April 1959 and within six months preceding the commencement of the company's winding up, Mrs. Quinn was, in the language of s. 95 of the Bankruptcy Act 1924-1960 (Cth), a "payee in good faith and for valuable consideration and in the ordinary course of business". Accordingly he dismissed the application of the liquidator for a declaration that the payments constituted preferences but on appeal the Full Court reversed his decision except as to the payment on 8th April 1959 and this payment is not now in question.
The business of the company was that of building contractors and at all material times Edwin Joseph Taylor and the respondent Christable Janet Taylor were its only directors. Mrs. Quinn, to whom the payments were made and who died on 1st September 1960 at the age of eighty-two, was Mrs. Taylor's mother and Mrs. Taylor and the other respondent, Vincent Patrick Quinn, are the executors of Mrs. Quinn's will. It appears that Mrs. Taylor was not an active director of the company and, according to the learned trial judge, she had little, if any, knowledge of the company's affairs. "Although she was a director", his Honour said, "Mrs. Taylor took little part in the management of the affairs of the company. Meetings of directors were not held and Mrs. Taylor was not consulted about the company's affairs. She took telephone messages and occasionally signed cheques when her husband was not available but those were practically the only duties she performed for the company, although she received not inconsiderable fees as a director".
The four payments originally challenged, which aggregated PD4,000, were made in repayment to Mrs. Quinn of an amount lent by her to the company in 1957. But at this time Mrs. Taylor held a power of attorney from her mother and under its authority managed her affairs. Gibbs J. found that Mrs. Quinn was bedridden and senile for some few years before her death and that she could comprehend only very little of what was going on about her. She required nursing attention both by day and by night and the expense of caring for her was heavy. It was in these circumstances that Mrs. Taylor, acting under her power of attorney, advanced the sum of PD4,000 to the company in 1957. What happened was that Mrs. Quinn's house was sold in that year and the sum of PD4,000 became available for investment. She discussed the matter with her husband and at his suggestion that sum was lent to the company on 26th July 1957. In return for a cheque drawn on her mother's account Mrs. Taylor received from the company a written document which acknowledged receipt of the sum of PD4,000 and evidenced an agreement by the company to repay the amount of the loan in full "within six months from date of notice in writing delivered to the registered office of the company". In the meantime the company agreed to pay interest at the rate of PD8 per cent per annum monthly.
By January 1959 Mrs. Quinn's resources had been almost depleted and Mrs. Taylor spoke to her husband with a view to obtaining repayment of some part of the loan. His reply was that she should write to the company about it and, accordingly, on 30th January 1959, she made a demand in writing upon the company for the repayment of the sum of PD4,000 in accordance with the company's undertaking. Nothing was paid by the company until 10th March 1959 when a cheque for interest in the sum of PD160 was paid into Mrs. Quinn's account. After a further conversation with her husband towards the end of March or early in April 1959 when Mrs. Taylor again asked for repayment of some part of the debt a payment of PD500 was made on account of the principal sum. This amount was also paid by the company into Mrs. Quinn's account. The next payment on 17th June 1959 was effected by acheque which was actually signed by Mrs. Taylor but she says that she has no recollection of having signed it. Then followed a further payment of PD500 by the company to Mrs. Quinn's account on 20th July 1959 and the balance of PD2,500 was paid on 30th July 1959. According to Mrs. Taylor's evidence she made no request to her husband in respect of any of the last three payments and she did not know whether she had been notified that some of the payments had been made. It was found as a fact by the learned trial judge that the payments on 17th June, 20th July and 30th July were made by the company without any request from Mrs. Taylor.
It is obvious that some months before the payment of 17th June was made the company was in serious financial difficulties, and it was found as a fact by the learned trial judge that from April onwards it was unable to pay its debts as they became due out of its own money and that when the company made the last two payments Taylor knew that the company was insolvent. Further his Honour expressly found that the last two payments were made by Taylor with the intention of preferring Mrs. Quinn over the other creditors. Indeed, by 4th August 1959 an accountant employed by the company had prepared an estimated statement of the company's assets and liabilities and three days later, on 7th August 1959, he arranged to call a meeting of the company's creditors. Ten days later, on 17th August, a meeting of the company was held and it was resolved that it should go into voluntary liquidation.
The extent of Mrs. Taylor's knowledge of the financial position of the company was investigated in the original proceedings. It is unnecessary to review this evidence in detail but it is clear that Mrs. Taylor did know that the company was experiencing difficulties although she hoped, as the trial judge found, that it would be able to surmount them. However, it was found in her favour that the payments were not made under such circumstances as to lead to the inference that she knew or had reason to suspect that the company was unable to pay its debts as they became due or that the effect of the payment would be to give Mrs. Quinn a preference, a priority or an advantage over the other creditors. This finding was not seriously challenged and the only question for us is whether the learned trial judge's finding that Mrs. Quinn was a payee in the ordinary course of business should be restored.
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 debtsfrom 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 [ 34 ] and Muntz v Smail [ 35 ]). 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 [ 36 ]; and In re Lake; Ex parte Dyer [ 37 ]. But these decisions are in conflict with Ex parte Lancaster; In re Marsden [ 38 ] and Sharp v Jackson [ 39 ] and with later cases, including Peat v Gresham Trust Ltd [ 40 ]). 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.
Section 95 of the Commonwealth Act initially, at least, casts the net a little wider than the English legislation. If upon the evidence all that appears is that a payment has been made to a creditor by a person unable to pay his debts as they become due from his own money and that the payment has the effect of giving that creditor a preference, a priority or an advantage over the other creditors, the section operates to avoid the payment as against the trustee if the debtor becomes bankrupt on a bankruptcy petition presented within six months after the making of the payment (S. Richards & Co Ltd v Lloyd [ 41 ]). But the operation of s. 95 (1) will be defeated if the payee establishes that he was a payee in good faith and for valuable consideration and in the ordinary course of business (sub-s. (2) and (3)). It is clear, therefore, that as far as s. 95 (1) is concerned the intention of the debtor, and for that matter, that of the creditor, is an irrelevant consideration though the extent of the latter's knowledge will be most material in relation to the issue of good faith. How far the debtor's intention in making the payment is relevant to the question whether the payment was made in the ordinary course of business has, perhaps, not been directly decided in relation to s. 95 but if it has no bearing on that issue the surprising result will follow that a payment which constituted a fraudulent preference under the English bankruptcy law and that of a number of the States of the Commonwealth may well escape the operation of s. 95 though it was designed, as I have already said, to cast a somewhat wider net.
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 [ 42 ]: "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 [ 43 ] and Rust v Cooper [ 44 ], 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 havingany 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 [ 45 ] 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" [ 46 ]. This case, together with Burns v McFarlane [ 47 ] and Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liquidation) [ 48 ], 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' " [ 49 ]. 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" [ 50 ]. Likewise in the joint judgment of Rich, Dixon and McTiernan JJ. in Burns v McFarlane [ 51 ], 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" [ 52 ], whilst Starke J. in the same case briefly recapitulated the test propounded in Robertson v Grigg [ 53 ] "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" [ 54 ]. 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" [ 55 ], went on to emphasize that "it is an additional requirement and is cumulative upon good faith and valuable consideration" [ 56 ]. "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" [ 57 ].
With these observations in mind it is important to emphasize once again that the section contemplates that a payee may be a payee in good faith and yet not in the ordinary course of business (cf. sub-ss. 2 (a) and 2 (b) of s. 95). In other words it may clearly appear that the payment was not made or incurred 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 or that the effect of the payment would be to give him a preference, a priority or advantage over other creditors and yet he may not be a payee in the ordinary course of business. Indeed he may not know that he has received the payment and there is evidence in the present case which shows that all or some of the payments now in question were paid into Mrs. Quinn's bank account without her knowledge and, possibly, without the knowledge of her attorney, Mrs. Taylor. To my mind, s. 95 appears as an attempt to rationalize the old law and to accept the view that a payment made by a debtor in the ordinary course of business negatives any design or intent to prefer the creditor and to afford a complete answer where the payment is so made, provided also that he is also a payee in good faith within the meaning of the section.
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) [ 58 ] 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" [ 59 ]. 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" [ 60 ]. Nor do they appear, in the language of Gavan Duffy C.J. and Starke J. in Robertson v Grigg [ 61 ], as "what a man might do without having any bankruptcy in view" [ 62 ]. 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.
In my opinion the appeal should be dismissed.