COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
GENERAL DIVISION
Lee J.(1)

CWDS
  Bankruptcy - preference - whether equitable assignment effected by lessors
to co-lessor of right to receive rent - payments under lease made to assignee
co-lessor by insolvent lessee - whether assignor lessors were creditors -
whether payment made "in favour of a creditor".
  Bankruptcy Act 1966 Pt.X; ss.122, 188, 309; sub-ss.122(1), 231(2);
para.194(1)(b)
  Brown, Shipley and Co. v Kough (1885) 29 Ch 848
  Comptroller of Stamps (Vict.) v Howard-Smith (1936) 54 CLR 614
  Hughes v Pump House Hotel Company, Limited (1902) 2 KB 190
  Melsom v Vanpress Pty. Ltd. (1990) 3 ACSR 109
  Re Timbatec Pty. Ltd. and Companies Act (1974) 4 ALR 12
  Tooth v Brisbane City Council (1928) 41 CLR 212

HRNG
PERTH
#DATE 12:6:1991
  Counsel for the Applicants:                      Mr L. Christensen
  Solicitors for the Applicants:                   Phillips Fox
  Counsel for the Second and Third Respondents:    Mr T. Galic
  Solicitors for the Second and Third Respondents: Kott Gunning

ORDER
  The application against the second and third respondents be dismissed.
  The applicants pay the second and third respondents' costs of the
application.
  The application otherwise adjourned for further submissions in respect of
orders against the first respondent.

NOTE:  Settlement and entry of orders is dealt with in Rule 124 of the
Bankruptcy Rules.

JUDGE1
  The applicants ("the trustees") are trustees of the property of debtors,
Domenick and Sharon Palumbo ("the debtors"), appointed under deeds of
assignment of property.  The deeds were executed by the debtors on 19 May 1989
pursuant to a special resolution requiring the debtors to do so, passed at a
meeting of creditors called on behalf of the debtors under Pt.X of the
Bankruptcy Act 1966 ("the Act").
2.  The authorities signed by the debtors under s.188 of the Act directing a
registered trustee to call a meeting of the creditors of the debtors were so
signed on 4 May 1989.  Pursuant to para.194(1)(b) of the Act a meeting called
pursuant to an authority provided under s.188 of the Act shall be held not
earlier than fourteen days after the notices to creditors are delivered or
sent by post.  Section 309 of the Act provides that a notice sent by post
shall be deemed to have been served at the time at which it would be delivered
in the ordinary course of post.  According to the minutes of the meeting of
creditors called pursuant to the authorities signed by the debtors, the
meeting was held on 19 May 1989 and the notice to creditors was dated 5 May
1989.  No issue was raised on the hearing of this application as to whether
the delivery or posting of notices to creditors on 5 May 1989 complied with
the requirements of para.194(1)(b) of the Act.
3.  Until March 1989 the debtors carried on business in partnership as
restaurateurs.  The debtors sold that business in about April 1989. Prior to
the sale the debtors failed to pay rent which had fallen due between November
1988 and March 1989 under the lease of the premises on which the restaurant
operated.
4.  At the settlement of the sale of the business the debtors directed that a
sum of $20,189 be paid to the lessor, Nulka Pty. Ltd. ("Nulka"), from the
proceeds of sale to discharge the arrears of rent and other outgoings.
5.  The direction was contained in an authority signed by the debtors. The
authority did not identify to whom it was addressed but it may be assumed that
it was directed to an agent acting in the dual capacities of agent for the
debtors on the settlement of the sale and agent for the lessor, Nulka.
6.  The authority read as follows:
     "We Domenic (sic) Palumbo and Sharon Palumbo hereby give an
      irrevocable authority for the sum of $20189.12 to be deducted from
      the proceeds of sale due to us of the Oasis Bistro/Inn at
      settlement, from Ebut Pty Ltd and authorise these moneys to be
      paid to Nulka Pty Ltd."
7.  The trustees seek a declaration under s.122 of the Act that the payment
referred to above is void against them as a payment made by the debtors in
favour of a creditor within six months of the date of a special resolution
requiring the debtors to execute deeds of assignment. Sub-section 231(2) of
the Act applies s.122 to a deed of assignment executed under Pt.X of the Act.
8.  The trustees allege that the debtors were unable to pay their debts as
they became due from their own money and that the payment was a payment in
favour of a creditor which had the effect of giving that creditor a
preference, priority or advantage over other creditors.
9.  The application was not commenced until 30 May 1990.  The respondent to
the application was Nulka.  The trustees' case in support of the application
was that the debtors:
   (a) conducted a business on premises held under a lease with Nulka;
   (b) were in default under the terms of the lease;
   (c) were unable to obtain Nulka's permission to assign the lease;
   (d) obtained Nulka's agreement to terminate the lease and grant a
       lease to the purchasers of the business subject to and
       conditional upon the debtors paying to Nulka the moneys due under
       the lease;
       (e) paid to Nulka $20,189 on 18 April 1989 by an authority
           directing that sum to be deducted from the proceeds of sale;
       (f) were unable to pay their debts as they fell due from their
           own moneys and had insufficient assets to meet the claims of
           creditors in full.
10.  The following correspondence between the debtors and Nulka's agent and
Nulka and the debtors was relied upon by the trustees:
                                          "23rd March, 1989
         Mr G. Grubb
         Grubb Real Estate
         77 Mill Point Rd
         SOUTH PERTH
         Dear Graham,
         Re: Bistro Inn Restaurant Settlement of rental arrears and rates.
         As per our telephone conversation of the 23rd March, 1989.  You
         will recieve (sic) full settlement of all arrears owing by us.
         As we are not able to meet all our creditors in full from the
         proceeds of the sale of the restaurant, I think you should be
         aware that you are getting preferential treatment as the agent
         acting for the landlord, i.e. Nulka Pty Ltd.
         I hope there will be no hold up of the lease to the new
         proprietors, so that settlement can proceed on time.
         Yours faithfully,
         (signed)
         DOMENICK. T. PALUMBO"
         "14 April 1989
          Mr D. Palumbo and Ms S. Palumbo
          Dear Mr Palumbo and Ms Palumbo
          Upon payment of $20,189.12 on the 14th April, 1989, we
          acknowledge settlement and that we have no further claim to
          (sic) Domenic (sic) Palumbo and Sharon Palumbo in relation to
          Oasis Bistro/Inn.
          Yours sincerely
          (signed)
          G.C. GRUBB
          for NULKA PTY LTD".
11.  Graham Grubb, a director and apparent controller of Nulka, was the
principal of Grubb Real Estate and Finance the managing agent for the property
to whom rent had been paid at all material times.
12.  Nulka did not contest the application to recover the payment made to it
by the debtors.
13.  On 19 November 1990 the trustees applied to the Court for leave to join
Eric John Kerr and Lavinia Kerr ("the Kerrs") as respondents to the
application.  The application was supported by an affidavit in which it was
said that Nulka was the lessor of the property on which the debtors conducted
their business and that "other lessors" were the Kerrs.  An order was made on
26 November 1990 joining the Kerrs as further respondents.
14.  Apart from adding the Kerrs as respondents no further order was sought to
amend the application by varying the relief requested therein.
15.  Upon being joined as respondents the Kerrs opposed any order being made
against them by denying that they had received any payment from the debtors,
either directly or indirectly, and by stating that the payment referred to had
been made to Nulka alone.
16.  The Kerrs tendered affidavits in support of their opposition to the
application.  That evidence was supplemented by viva voce evidence provided in
cross-examination.
17.  I am satisfied that the relevant background facts are as follows.
18.  In early 1984 the Kerrs and Nulka purchased a commercial property part of
which was subsequently demised to the debtors by lease. The Kerrs on the one
hand and Nulka on the other made equal contributions of capital to part of the
purchase price paid for the property.  The balance was obtained from
borrowings secured by mortgage. The Kerrs were not otherwise engaged in
commerce, being an Anglican priest and housewife respectively.  It appears
that the investment in this property was an isolated business venture.  By
1987 the rental income from the commercial property was insufficient to meet
mortgage commitments and other outgoings and the projection for the venture
was "hopeless".
19.  In 1987 the Kerrs orally agreed to assign to Nulka their interest in the
property as tenants in common and, in particular, their right to receive any
income from the property.  In consideration for that assignment Nulka agreed
to meet all outgoings and expenditure in respect of the property including the
Kerrs liability in respect of mortgage repayments.
20.  It was part of the arrangement between the Kerrs and Nulka that if the
property were sold at a "windfall" price more than sufficient to discharge
mortgage liabilities and to repay Nulka for the additional outgoings it had
discharged, the Kerrs would be entitled to participate in a return of their
capital and in any profit over and above that contribution.  But otherwise the
Kerrs would cease to be entitled to receive financial statements in relation
to the operation of the property or take any part in the conduct of the
property.
21.  Pursuant to that arrangement Nulka considered itself to be beneficially
entitled to all rent payable under the lease from mid-1987 onwards and the
managing agent received rent on Nulka's behalf thereafter.
22.  By 1989 the property incurred annual losses in the vicinity of $40,000
per annum.  The property was sold in March 1990 for a consideration which
involved the assumption by the purchaser of the vendors' liability to repay
the amounts outstanding under the mortgages, approximately $500,000.
23.  Although the debtors denied that they had any knowledge of the assignment
from the Kerrs to Nulka of any beneficial interest in the rent, it may be
noted that the debtors' letter to the managing agent, set out above,
identified Nulka as the "landlord" and further that the authority provided by
the debtors directed that the sum of $20,189 to be deducted from the proceeds
of sale of the business be paid to Nulka. Furthermore, the letter releasing
the debtors from any further liability was provided by Nulka only.
24.  All of these matters tend to suggest some awareness on the part of the
debtors that Nulka held the whole of the beneficial interest of the lessors
under the lease.
25.  In broad terms the elements of a preferential payment under s.122 of the
Act may be described as:
    a)    a payment made by, or on behalf of, a debtor in favour of
          a creditor;
    b)    inability on the part of a debtor to pay debts as they
          become due from his or her own money at the time the
          payment is made;
    c)    a preference, priority or advantage to a creditor over
          another creditor effected by the payment;
    d)    the payment to be made within six months of the execution
          of a deed of assignment.
26.  There was no issue that at the relevant time the debtors were unable to
pay their debts as they became due from their own moneys and I am satisfied
that such was the case.  There was also no issue that the debtors had made a
payment in favour of Nulka and that the payment was made to a creditor and
effected a preference to that creditor.  The payment was made within six
months of the execution of the deed of assignment by the debtors.
27.  The only issues remaining were those raised in the notice of opposition
of the Kerrs, namely, whether the Kerrs were creditors; whether a payment was
made in their favour; and whether they were preferred over other creditors by
that payment.
28.  I find the salient facts in respect of the Kerrs' opposition to the
application to be as follows.
29.  Payment of the sum of $20,189 was made by the debtors directly to Nulka
and not to the managing agent on behalf of Nulka and the Kerrs. The Kerrs
received no part of the sum paid to Nulka and under the terms of their
agreement with Nulka they were not entitled to receive any part of that sum.
At the time of payment of the arrears of rent and at all material times
thereafter, the outgoings and expenditure required to be paid in respect of
the property exceeded the income it generated.  That shortfall was discharged
by Nulka.
30.  The trustees submitted that the arrangement between the Kerrs and Nulka
did not amount to an equitable assignment but was an authority to receive
rental payments and apply them to outgoings incurred in respect of the
property.  Alternatively, the trustees submitted that the Kerrs received a
benefit from the application of the rental payments by Nulka in that it
decreased their exposure to losses.  Furthermore, it was said that such a
benefit was received by the Kerrs as creditors in that the Kerrs had an
entitlement to prove in any bankruptcy of the debtors.
31.  I am satisfied that an equitable assignment was effected to Nulka of the
Kerrs' right to receive the benefit of any rental payments or other income
under the lease.
32.  The events of mid-1987 were a clear departure from existing arrangements
under which the managing agent collected rentals and applied them on behalf of
the lessors to outgoings incurred in respect of the property and accounted to
the lessors in respect thereof.  In mid-1987 the Kerrs intended and did assign
their entire right to receive income under the lease.  It was not a mere
mandate or authority to dispose of the income they remained entitled to
receive.  There was an unequivocal demonstration of intention to vest in Nulka
the right in property created by the lease.  (See Comptroller of Stamps
(Vict.) v Howard-Smith (1936) 54 CLR 614 per Dixon J. at p 622.)  The course
of dealings between the parties reflect that intention and reinforce the
conclusion that the intention was carried out.  (See Brown, Shipley and Co. v
Kough (1885) 29 Ch. 848 per Chitty J. at pp 854-855.)
33.  There was no qualification upon the assignment making it dependent upon
any statement of accounts.  Nor was it conditioned by a retention of any
beneficial interest.  The Kerrs intended to vest in Nulka the whole of their
interest in any entitlement to receive rent under lease.  (See Hughes v Pump
House Hotel Company, Limited (1902) 2 KB 190.)
34.  The effect of the assignment and of Nulka's undertaking to the Kerrs to
discharge all outgoings in respect of the property made Nulka the single
creditor of the debtors.
35.  The payments of rent were made to the party which had the sole beneficial
entitlement to receive such payments and that part of the payments made by the
debtors to Nulka which amounted to the reimbursement of disbursements was in
respect of disbursements made by Nulka.
36.  The state of the debtors' knowledge of the agreement between the Kerrs
and Nulka does not provide the answer as to whether the payment was made "in
favour of" the Kerrs as creditors of the debtors. It is not essential for the
purposes of the Kerrs' opposition to the application that it be shown that the
debtors had knowledge of the assignment from the Kerrs to Nulka of the right
to receive the benefit of the rent payable under the lease.  Of course notice
of the assignment would have bound the conscience of the debtors to pay rent
to Nulka only and would have prevented the debtors from obtaining a good
discharge by making such a payment to the Kerrs.  (See Tooth v Brisbane City
Council (1928) 41 CLR 212 at pp 222.)  But lack of notice did not convert the
Kerrs to creditors of the debtors causing Nulka to be the recipient of a
payment in their favour.
37.  Whether lack of notice would require Nulka to join the Kerrs to prosecute
an action against the debtors or to prove in the debtors' bankruptcy is beside
the point.  It was the fact that the sole entitlement to pursue and retain any
beneficial interest in the sum paid was vested in Nulka and it was Nulka which
sought and received the payment.
38.  The payment was directed expressly to Nulka and was made in favour of
Nulka as the creditor.  No part of that payment to Nulka was made in favour of
the Kerrs and it certainly had no effect of giving the Kerrs a preference over
other creditors.  The Kerrs had no entitlement in equity to the sum received
and, therefore, no preference could have been delivered to them whatever
meaning or width of meaning is to be attributed to the expression "in favour
of" for the purposes of sub-s.122(1) of the Act.  (See Re Timbatec Pty. Ltd.
and Companies Act (1974) 4 ALR 12; Melsom v Vanpress Pty. Ltd. (1990) 3 ACSR
109).
39.  The application will be dismissed as against the Kerrs and an order made
that the trustees pay the Kerrs' costs of the application.  I will hear
counsel on the trustees' claim for interest before making orders against
Nulka.