TAYLOR v WHITE

110 CLR 129

---

(Judgment by: MENZIES J) Court:

Judges: DIXON CJ
KITTO J
TAYLOR J

MENZIES JWINDEYER 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:
MENZIES J

The respondents, the liquidators of E. J. Taylor & Son Pty Ltd , commenced proceedings to have it declared that payments totalling PD4,000 made by the company to Mrs. Florence Catherine Quinn (who died and whose estate is represented by the appellants) amounted to a preference within the meaning of s. 275 of The Companies Acts 1931 to 1960 (Q.) and were invalid accordingly. The application was heard by Gibbs J. who found that the payments in question (1) were for valuable consideration because they were in satisfaction of a debt owing by the company to Mrs. Quinn and (2) were in good faith because she did not know, and had no reason to suspect, the facts that the company was unable to pay its debts as they became due and that the effect of the payments would be to give her an advantage over other creditors. Accepting these findings which were unchallenged, the only question with which we are now concerned is whether the payments in issue were made in the ordinary course of business. Gibbs J. held that they were but his decision on this point was reversed by the Full Court as to payments totalling PD3,500. The finding of Gibbs J. on the point now at issue was expressed shortly as follows:"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 debtor 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." His Honour's reference to the company having paid the debt before it was obliged to do so is explained by the facts.

On 26th July 1957 Mrs. Quinn lent the company PD4,000 to be repaid in full "within six months from the date of notice in writing delivered to the registered office of the Company advising that repayments of the sum ... is to be made." Interest at 8 per cent was payable monthly-that is PD26.13.4 per month. Interest, it would seem, was paid for some time but must have fallen into arrears not later than October 1958, for on 10th March 1959 a sum of PD160 was paid by way of interest. In the meantime, on 30th January 1959 Mrs. Quinn's attorney, her daughter Mrs. Taylor who was also a director of the company, wrote to the secretary of the company as follows: "I wish to advise that I would like repayment of PD4,000 which I lent your Company on 26th July 1957." Then followed these payments on account of the money lent: 8th April 1959, PD500; 17th June 1959, PD500; 20th July1959, PD500; 30th July 1959, PD2,500. These dates show that PD1,500 was paid on dates earlier than that by which the company was bound to pay (i.e. 30th July 1959). What happened about interest after 10th March 1959 was not disclosed.

The reason for the notice to repay was that money was needed to pay the nursing and medical expenses necessary for Mrs. Quinn's care. Before April 1959 these expenses were about PD18 per week and thereafter they were about PD30 per week. They were paid out of Mrs. Quinn's banking account which, on 27th January 1959, was in credit to the extent of PD117.

From its incorporation in 1954 there were but two directors of the company, E. J. Taylor and his wife, Mrs. Quinn's daughter and attorney. Mrs. Taylor's evidence was that she did not remember even seeing a balance sheet or a bank statement of the company. Her husband and the company's secretary and the company's accountant each swore that he did not show Mrs. Taylor any balance sheet or bank statement. How the provisions of s. 139 of The Companies Acts 1931 to 1960 (Q.) requiring every balance sheet of a company to be signed by two directors were complied with was a matter not explained.

The financial position of the company during the period in which the payments in question were made is sufficiently indicated by stating that in August 1959, at the end of the period, the company owed about PD9,000 to unsecured creditors who will not receive more than two shillings in the pound; on 31st March 1959, at the beginning of the period, it owed unsecured creditors PD107,354, of which PD31,342 had then been owing for more than three months.

Gibbs J. made the following findings that seem to me of importance in deciding this appeal:

(1)

"It is not in dispute that the four payments totalling PD4,000 were made, that they were in favour of a creditor, that they had the effect of giving the creditor a preference over the other creditors or that the payments were made within six months of the commencement of the winding up, which commenced when the resolution was passed on the 17th August, 1959 (Section 233 of The Companies Acts)".

(2)

"I think that I should conclude, on the balance of probabilities, that from April onwards the company was unable to pay its debts as they became due out of its own money, within the meaning of the section".

(3)

"I am not prepared to find that Taylor was aware before the 20th July that the company was insolvent".

(4)

"I have no hesitation in finding that on the 20th July Taylor knew that the company was insolvent".

(5)

"Mrs. Quinn died on the 1st September 1960, aged 82. For the last two years of her life at least she was bedridden and senile and her sight was bad. She could comprehend only very little of what was going on about her. Her daughter managed her affairs ... It is clear that Mrs. Quinn herself had no knowledge of any of these transactions. However, in the circumstances of the case, since Mrs. Taylor had the widest authority to manage Mrs. Quinn's affairs, her knowledge and state of mind should be imputed to Mrs. Quinn".

(6)

"I find that the payments on the 17th June, 20th July and the 30th July were made by the company without any request having been made by Mrs. Taylor. After the payment was made on the 17th June Mrs. Quinn's account was PD604. 3. 0 in credit; the third payment on the 20th July brought the credit balance up to at least PD914".

(7)

"I do accept that it was not until the 3rd August 1959, that Mrs. Taylor knew that the company was insolvent. However, I also find that before that date Mrs. Taylor knew that the company was experiencing difficulties although she hoped that it would be able to surmount them".

(8)

"On 20th July, Taylor, besides drawing the company's cheque for PD500 in favour of Mrs. Quinn, also drew, on behalf of the company, in his own favour, a cheque for PD1,250 in repayment of moneys that he had lent to the company".

The onus of proof that the payments were made in the ordinary course of business was, of course, upon the appellants and accordingly I am not sure that his Honour's carefully expressed negative statement (3) above helps the appellants very much.

At this point it is, I think, necessary to examine the relevant portion of the text of s. 95 of the Commonwealth Bankruptcy Act, for what s. 275 of The Companies Acts, 1931 to 1960 (Q.) does is to invalidate any payment made by a company before its winding up which, if it had been made by an individual, would, in a bankruptcy upon a petition presented upon the date of the commencement of the company's winding up, be deemed in that bankruptcy to be a fraudulent preference-that is a payment avoided as against the trustee in bankruptcy by s. 95 of the Bankruptcy Act.

What s. 95 avoids inter alia are payments made in particular circumstances "in favour of any creditor or of any person in trust for any creditor" having a particular effect. The word "creditor" is not defined, so it bears its ordinary meaning, and it is importantto keep in mind that what are avoided are certain transactions between the person who becomes bankrupt and a creditor or a trustee for a creditor: see Robertson v Grigg [ 63 ], per Dixon J. [ 64 ]. There is no doubt that the payments which the company made here to Mrs. Quinn would, if made by an individual who became bankrupt when the liquidation of the company commenced, fall within s. 95 (1) unless excluded therefrom by s. 95 (2). It is this latter sub-section that is therefore particularly important for present purposes and it is desirable to set it out together with s. 95 (3):"(2) Nothing in this section shall affect-(a) the rights of any person making title in good faith and for valuable consideration through or under a creditor of the bankrupt; or (b) the rights of a purchaser, payee or encumbrancer in good faith and for valuable consideration and in the ordinary course of business. (3) The burden of proving that the provisions of the last preceding sub-section have been complied with shall lie upon the person who relies upon their having been complied with".

What s. 95, sub-s. (2) (a), protects is the rights of a person making title in the circumstances there stated through or under a creditor to whom sub-s. (1) applies. On its face it does not relate to a person who obtains title from a person making title through or under a creditor nor does it relate to a person who is himself a creditor. Section 95 (2) (b) protects the rights of "a purchaser, payee or encumbrancer" and, in conformity with s. 95 (2) (a), one might have expected this provision to refer not to a creditor but to a purchaser, payee or encumbrancer from a creditor. Section 95, sub-s. (4), however, makes it clear that if sub-s. (2) (b) is not exclusively concerned with the rights of creditors, it does comprehend the rights of creditors, for the words in sub-s. (4) "a creditor shall not be deemed to be a purchaser, payee or encumbrancer in good faith" clearly enough, in referring back to sub-s. (2) (b), indicate that the earlier sub-section is dealing with the rights of creditors. It follows from this and from what has already been said that s. 275 of The Companies Acts, 1931 to 1960 (Q.), incorporating as it were s. 95 of the Bankruptcy Act 1924-1960 (Cth), would protect the rights of Mrs. Quinn and her estate in receiving the payments in question if she is to be regarded as a payee "in the ordinary course of business".

The conception of a creditor receiving from his debtor payment of a debt due and payable otherwise than in the ordinary course of the payee's business is somewhat odd. A payee who has no business might be so described so that such a creditor could neverhave his rights protected by sub-s. (2) (b), but that seems highly unlikely. The oddness is quite as apparent if attention is given to the word "purchaser" in sub-s. (2) (b). Is a purchase of a house for a home by a private creditor necessarily outside the protection of sub-s. (2) (b) while a finance company, being a creditor, which buys a house in the course of its business, is capable of bringing itself within the protection of the sub-section? The same difficulty arises with the third class of creditor referred to in sub-s. (2) (b)-that is an encumbrancer. It seems most unlikely that the business actually carried on by the creditor should be examined to see whether the payment was in the ordinary course of business. Similar considerations make it unlikely that all that should be looked at to determine whether a transaction is "in the ordinary course of business" is the business of the person making the payment. It is not surprising, therefore, that the courts have rejected out of hand the notion that to determine what is in the ordinary course of business requires an investigation into what is normal or usual in the business of the debtor or the creditor: see Robertson v Grigg [ 65 ] per Gavan Duffy C.J. and Starke J. [ 66 ] and per Evatt J. [ 67 ]; Burns v McFarlane [ 68 ] per Rich, Dixon and McTiernan JJ. where their Honours, speaking of the expression "in the ordinary course of business", said: "It does not require an investigation of the course pursued in any particular trade or vocation and it does not refer to what is normal or usual in the business of the debtor or that of the creditor" [ 69 ]: see also per Starke J. [ 70 ]; Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liquidation) [ 71 ], per Latham C.J. [ 72 ], per Rich J. [ 73 ] and per Williams J. [ 74 ]. It is therefore clearly established that the determination of what is meant by "in the ordinary course of business" must take into account considerations other than the businesses carried on by the creditor and the debtor.

The authorities, it seems to me, show that the payments here in question occurred in the ordinary course of business if there were nothing about them that was unusual according to ordinary business standards. In other words, the payments were in the ordinary course of business if the company and Mrs. Quinn, as represented by Mrs. Taylor, were, with regard to them, acting in accordance with the standards of honesty and fairness which are ordinarily accepted by the business community. In Robertson v Grigg [ 75 ] Gavan Duffy C.J. and Starke J. said: ". . the test under s. 95 of the ordinary course of business is not whether the act is usual or common in the business of the debtor or of the creditor, but whether it is `a fair transaction, and what a man might do without having any bankruptcy in view"' [ 76 ]. In Burns v McFarlane [ 77 ] Rich, Dixon and McTiernan JJ. said, supporting the finding that what was done was in the ordinary course of business: "The transaction considered as a whole presented the appearance of a perfectly fair and honest attempt to place the finances of Woon's business on a sound basis" [ 78 ] and Starke J. said that in Robertson v Grigg [ 79 ] it was held "that the test under s. 95 of the ordinary course of business was not related to any special business carried on by the debtor or creditor but was whether the transaction was fair and what a man might do without having any bankruptcy in view" [ 80 ]. In Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (In Liquidation) [ 81 ] Rich J. said:"It is, therefore, not so much a question of fairness and absence of symptoms of bankruptcy as of the everyday usual or normal character of the transaction. The provision does not require that the transaction shall be in the course of any particular trade, vocation or business. It speaks of the course of business in general. But it does suppose that according to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of business as carried on, calling for no remark and arising out of no special or particular situation" [ 82 ]. It is true that all the statements I have quoted are not exactly to the same effect but my reading of them as a whole leads me to the conclusion which I have already stated. I should perhaps add that because the section under consideration treats a payment "in good faith" as different from a payment "in the ordinary course of business" and so requires a construction of each phrase which leaves some room for the other, I have not found much help from decisions in cases where this distinction did not have to be observed.

Applying the standard which I think s. 95 lays down, I agree with the Full Court that the payments here in question were not in the ordinary course of business. The company was insolvent when they were made, owing unsecured creditors about PD90,000, of which little would be paid. The company was completely controlled by Mr. and Mrs. Taylor, a son-in-law and daughter of Mrs. Quinn, who was represented by Mrs. Taylor who, if she knew no more, knew that, when the payments were made, the company was in financial difficulty. The last two payments, made on the 20th and the 30th July respectively and totalling PD3,000, were made and were made to prefer Mrs. Quinn when Taylor knew that the company was hopelessly insolvent. In these circumstances, for the favoured unsecured creditor owed PD3,500 to be paid twenty shillings in the pound because of her special position leaving the others owed PD90,000 or thereabouts to receive two shillings in the pound if they are lucky, seems to me something that was entirely outside the ordinary course of business.

In my opinion this appeal should be dismissed.