TAYLOR v WHITE
110 CLR 129(Decision by: DIXON CJ) Court:
Judges:
DIXON CJKITTO J
TAYLOR 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)
Decision by:
DIXON CJ
This is an appeal from an order of the Full Court of the Supreme Court of Queensland setting aside an order of Gibbs J. and declaring that certain payments made in the voluntary liquidation of E.J. Taylor & Son Pty Ltd were preferences, viz. PD500 paid on 17th June 1959, PD500 paid on 20th July 1959 and PD2,500 paid on 30th July 1959, and ordering that the now respondents, viz. the liquidators of E.J. Taylor & Son Pty Ltd (in liquidation) do recover against the now appellants the sum of PD3,500: Re E.J. Taylor & Son Pty Ltd. [F1]
The chief ground of appeal to this Court is that the payments of PD500 on 17th June and PD500 on 20th July and PD2,500 on 30th July 1959 were made in the ordinary course of business, and that the Full Court were wrong in holding the contrary and setting aside the affirmative findings of Gibbs J.
By s. 275 of The Companies Acts 1931 to 1960 of the State of Queensland it is provided that any payment which would, if made by an individual, be deemed in his bankruptcy a preference, shall if made by a company, be deemed, in the event of its being would up, a preference of its creditors, and be invalid accordingly. For the purpose of the provision the commencement of the winding up is deemed to correspond with presentation of the bankruptcy petition in the case of an individual. By s. 95 of the federal Bankruptcy Act 1924-1960 which is thus so to speak incorporated, a 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. This provision is qualified by sub-s. (2) of s. 95 which includes the provision that the rights of a purchaser, payee or encumbrancer in good faith and for valuable consideration and in the ordinary course of business shall not be affected. Sub-section (3) casts the burden of proving compliance with this qualification upon the person who relies upon it. Sub-section (4) qualifies the provision by denying good faith to a creditor who 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.
E.J. Taylor & Son Pty Ltd, the company in liquidation, conducted the business of building contractors. It had been formed in September 1954 as a family company. Indeed there were only two shareholders, E.J. Taylor and his wife, and both were directors. As might be expected, Mrs. Taylor took no part in the actual management of the company which was left in the hands of her husband, Edwin Joseph Taylor. Mrs. Taylor had a mother, Florence Catherine Quinn, who was an invalid. Indeed she died at the age of eighty-two on 1st September 1960. For two years before her death she was senile and confined to her bed and understood little that was going on around her. Her daughter held a wide power of attorney, dated 17th October 1955, for the management of her affairs. The not inconsiderable expense of nursing Mrs. Quinn andlooking after her was paid from her banking account on which, of course, Mrs. Taylor was able to draw. Mrs. Quinn had a house which was sold in 1957. Of the purchase money PD4,000 became available for investment. E.J. Taylor suggested to his wife that the sum might be lent to his company at eight per cent per annum interest, and this was done. The loan was the subject of an acknowledgment dated 26th July 1957 and signed by Mr. and Mrs. Taylor as directors. It acknowledged that the company was indebted to Mrs. Quinn in the sum of PD4,000 and that the company agreed to repay the sum in full within six months from the date of a notice in writing to the company delivered at its registered office advising that repayment of the sum of PD4,000 was to be made. The company agreed to pay interest in the meantime at eight per cent per annum payable monthly. The evidence is that Mrs. Taylor spoke to her husband about replenishing her mother's bank account somewhere early in 1959 and that he suggested that she, as attorney under power, make a written demand on the company. There was a letter dated 30th January 1959 to the secretary of the company in which her mother is made to say: "I wish to advise that I would like the repayment of PD4,000 which I lent your company on 26th July 1957". Early in 1959 the bank account was overdrawn and according to the evidence Mrs. Taylor requested her husband to make arrangements for some payment into the account. On 10th March 1959 a payment of PD160 as interest was made by the company. Early in April Mrs. Taylor again asked her husband to repay some of the indebtedness and on 8th April a sum of PD500 was paid in by cheque signed by E.J. Taylor. A cheque signed by Mrs. Taylor made a further payment of PD500 into the account on 17th June 1959, and on 20th July PD500 was likewise paid in and the balance of the debt, viz. PD2,500, was paid on 30th July. These two cheques were signed by E.J. Taylor, her husband. According to Taylor's evidence the payments of 17th June, 20th July and 30th July were made without any request from his wife, and the learned judge (Gibbs J.) so found. According to the evidence of Taylor business in the building trade is always in difficulties-"in one day and out the next". Be this as it may, the learned judge said that he had "no hesitation in finding that on 20th July Taylor knew that the company was insolvent". On that day he drew in his own favour a cheque for PD1,250 on account of moneys that he had lent the company. An estimate of the position prepared on 4th August 1959 showed a deficiency of PD23,475. A meeting of creditors was called and on 17th August 1959 a formal meeting of the company's shareholders resolved that thecompany should go into voluntary liquidation. The judge found "that it was not until 3rd August 1959 that Mrs. Taylor knew that the company was insolvent. However, said his Honour, "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." Gibbs J. concluded "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. I find therefore", said his Honour, "that the liquidators have established that the payments were preferences within s. 95 (1) of the Bankruptcy Act. The question that then arises is whether the respondents have satisfied the onus that lies upon them of showing that Mrs. Quinn received the payments in good faith and for valuable consideration and in the ordinary course of business (s. 95 (2) and (3)). 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 (see In re Drabble Brothers [F2] ). The crucial question in the case is whether there was any lack of good faith on the part of Mrs. Taylor."
His Honour proceeded to discuss Mrs. Taylor's position and came to the conclusion that she neither knew nor ought reasonably to have suspected that the company could not pay its debts as they became due from its own money. His Honour further held that the payments were made in the ordinary course of business. Gibbs J. ended his judgment as follows: "I accordingly find that the respondents have satisfied the onus that lies upon them of showing that Mrs. Quinn was a payee in good faith and for valuable consideration and in the ordinary course of business. The application by the liquidators therefore fails as to all the payments and should be dismissed with costs."
On appeal to the Full Court of the Supreme Court (the Chief Justice, Jeffriess J. and Hart J.) this decision was reversed as to the last three payments, viz. the PD500 paid on 17th June, the PD500 paid on 20th July and the PD2,500 paid on 30th July 1959, on the ground that the finding that these payments were made in the ordinary course of business was against the evidence and the weight of evidence. I agree in this conclusion. In addition, I have great difficulty in sustaining the finding that the payments were made in good faith. I am inclined to think that on the facts Mrs. Taylor had reason to suspect that the company was unable to pay its debts as they became due and that the effect of the paymentsto her mother would be to give a preference, a priority or advantage over other creditors. As to the question whether the rights of Mrs. Quinn could be considered the rights of a payee in good faith and for valuable consideration and in the ordinary course of business, I have even more difficulty. Mrs. Quinn's daughter must be taken to represent her and the question applies to the daughter. She may be considered a payee for valuable consideration but I cannot see how the expression "in the ordinary course of business" applies to this transaction at all. I do not doubt that "in the ordinary course of business" refers to "business" as a general conception and is not restricted to the conduct of any particular business such as the business carried on in a shop or merchant's office or the like, but is referring to the transaction of business as a known and recognized activity pursued by anybody engaged in an attempt to win or earn or "make" money or a living in a systematic or regular way. But this seems to me to have been a family transaction in which a son-in-law, with the help of his wife, decided to borrow money from his mother-in-law for his company and then attempted to effect its repayment in the face of approaching disaster. The time-honoured phrase "in the ordinary course of business" is meant to refer to transactions regularly taking place in a sustained course of activity or some usual process naturally passing without examination. It must be remembered that the provisions relating to preference have a course of history which substantially begins with an attempt to invalidate transactions made in contemplation of bankruptcy or insolvency and calculated to disturb the ratable distribution of the debtor's assets or their proceeds which the law designed. There is attributed to the Court of Common Pleas of 1770 a statement of principle which perhaps explains this. "There is no case where ever such a preference as this was allowed. The same spirit of equality ought to warm the Courts of Justice, which warmed the Legislature when they made the bankrupt-laws; and if we should let this deed stand, we should tear up the whole bankrupt-laws by the roots": Linton v Bartlet. [F3] In Rust v Cooper, [F4] Lord Mansfield after restating the general principle to be "that a fraudulent contrivance, with a view to defeat the bankrupt laws, is void, and annuls the act" [F5] refers to the "common course of business." He says: "There is a fundamental distinction between an act like this, and one done in the common course of business. The statutes have relation back only to the act of bankruptcy ... If, in a fair course of business, a man pays a creditorwho 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". [F6]
In the present bankruptcy law good faith apparently seems to have been considered not enough by itself to protect payments unless they took place in the ordinary course of affairs. Here it is plain that Mrs. Taylor thought her husband ought to secure enough money out of that lent by her mother to carry on the fragile life of the old lady, and the husband apparently took the additional view that she should not share in the disaster which overshadowed him. I can see no ordinary course of business in all this.
I think the appeal should be dismissed.