Bankruptcy-Fraudulent preference-Transfer while insolvent but prior to filing
petition-Must be bona fide on both sides-Preference as the deb/or's
dominant object

Statute--Construction-Marginal notes to ordinances

1. It is a recognised practice that the marginal notes to an ordinance
are not to be referred to for the purpose of constructing the ordinance.

2. The protection of certain transactions afforded by section 51 of the
Bankruptcy Ordinance 1929 extends only to those transactions where there
is good faith both on the part of the bankrupt and the person to whom
he has made the payment or transfer.

3. Where a transfer is attacked as fraudulent under section 50 of the
Bankruptcy Ordinance 1929, it must not only be shown that the debtor
was insolvent, but also that the substantial object of the debtor was to
give a preference to the creditor to whom the transfer was made.

4. Where a debtor made a transfer of liquor stocks to a creditor, partly

1 Phipson on Evidence. 5th ed .• p, 103; ct. 10th ed .• s. 679.
* Court: Flaxman J.

in reaction to threats of legal proceedings. and partly in the desire to dis-
pose of his liquor to a license holder as he had been ordered to do
by the governor following a criminal conviction, the substantial purpose in
making the transfer was not the giving of a preference to the creditor, and
the transaction was therefore not fraudulent under section 50 of the Bank-
ruptcy Ordinance 1929.

Kekkos Ioannides v. Receiver in Bankruptcy of Aristotelli David AC-APP-

11-1933, 2 S.L.R. 70 followed.

Ex parte Hall (1882) 19 Ch.D. 580 referred to.
In re Simms [1930] 2 Ch. 22 followed.

Bankruptcy Ordinance 1928,55.50, 51.

English Bankruptcy Act 1914, s. 45.

Revision

December 24, 1938. Flaxman J.: This is a claim in the bank-
ruptcy of Spiros D. Mendoros for transfer to the Official Receiver for
the benefit of creditors generally of a stock of liquors transferred by
the bankrupt to Yervant Margossian in fraud of creditors within the
meaning of section 50 (1) of the Bankruptcy Ordinance shortly before
the date of the debtors' petition for bankruptcy.

It is common ground that the goods in question, to the value of
£E.79.780 m/rns were delivered to Margossian by the debtors on or
about October 6 or 7, 1938, whilst their petition was filed on the 13th
of that month.

~. Spiro Mendoros states that the transfer was agreed upon on Oc-
tober 1 in response to pressure by Margossian, who threatened to en-
force a claim by action if it was not settled without delay. As a re-
sult of a conviction, or convictions, obtained against bim in July 1938,
his liquor licence had been withdrawn and he had been instructed by
the Governor to dispose of his stock of liquor to a licence holder.

In reply to the Official Receiver's claim Mr. Margossian seeks the
protection of section 51 (i ) and (ii) of the Bankruptcy Ordinance.
This section enacts, inter alia, that nothing in the Bankruptcy Ordi-
nance shall invalidate in the case of a bankruptcy any transfer by
the bankrupt for valuable consideration provided

(i) the transaction takes pJace before the date of the petition
on which the order of adjudication is made; and

(ii) The person to, by or with whom the transaction was made,
executed or entered into by the bankrupt has not at the time
of the transaction notice of any available act of bankruptcy
committed by the bankrupt.

In this case it is clear that the transaction took place before the
date of the petition for adjudication. and I find it is not sufficiently
shown in evidence that the person (Margossian) with whom the trans-
action was entered into by the bankrupts had at the time notice of
any .available act of bankruptcy committed by the bankrupts. For
these reasons it would at first sight seem that the claim of the Official
Receiver must fail.

Now Mr. May, in the course of a careful argument, submits that
there is a further requirement; that the transaction must be a bona
fide one, and that in this case it was certainly not bona fide on the
debtors' part. There must be good faith on both sides. He makes
particular reference to the marginal note to section 51 which reads
"Protection of bona fide transactions without notice." And as evidence
of the inequitable nature of the dealing he points out that whereas
Mr. Procos, who had brought his claim to judgement and an order for
sale in execution, was deprived of his rights by the effect of the filing
of the petition before completion of his sale while Margossian, with
no judgement in his hands, was able to obtain full satisfaction of his
claim to the prejudice of Procos and tbe creditors generally.

It is, I think, recognised practice that the marginal notes to an
ordinance are not to be referred to for the purpose of constructing
the ordinance, but Mr. May's argument is one that in the interests of
'. bankruptcy law in this country requires careful consideration.

He says that good faith on both sides is a prerequisite to the
taking of advantage of the section. I have to determine whether
or not this submission is correct; and then, if necessary, to determine
whether this particular transfer was bona fide or not.

There are a number of decisions upon the first point under Eng-
lish law. The provisions of section 45 of the Bankruptcy Act 1914
are substantially the same as those of section 51 of the Sudan Ordi-
nance. In commenting upon section 45 of the Act Williams' Bank-
ruptcy Practice, p. 303, reads "This section re-enacts section 49 of the
Act of 1883, which was substituted for sections 94 and 95 (1) of the
Act of 1869 .. The qualifying words 'i~L~oo~_~aith' which appear in
those sections and also in section 46 of this Act are omitted in this
section, although the words 'bona fide' still appear in the marginal
note. But in spite of this omission, if the payment is made in bad
faith it may be avoided as contrary to the policy of bankruptcy law."!

1 Compare Williams on Bankruptcy, 17th ed., page 370. where it is stated,
"It was at one time thought that a payment made in bad faith could be avoided

The case of In re Simms, (1930) 2 Ch. 22 is an authority upon
the quality of meaning to be attached to the bona fides required by
section 45 of the Act. In this case it was decided that section 45 of
the Bankruptcy Act protects only transactions which are bona fide.

That this principal of Bankruptcy law should be followed in this
country I have no doubt. To ignore it would be to ignore justice,
equity and good conscience. I accordingly hold that tbe protection
afforded by section 51 of tbe Bankruptcy Ordinance, extends, as the
marginal note indicates, to bona fide transactions alone.

It is now necessary to consider whether this transaction, tbe facts
of wbich are substantially admitted, was a bona fide one. There is no
evidence before me to prove that it was not bona fide on the part of
the creditor. Did the debtors act with similar good faith? The bad
faith alleged is that the debtors in transferring the goods intended to
give Mr. Margossian a preference over their other creditors; and it
cannot be denied that in the result the creditor has obtained a pref-
erence unwarranted by his rights. Nor can it reasonably be denied,
although the bankrupts assert otherwise, that tbey were insolvent at
the time of the transfer and knew it.

It is in the act of preference in this ise that the fraudulent nature
of the transfer is said to lie. Spiro Mendoros says that the transfer
was due to pressure by the creditor and that he had no intention of
giving him a fraudulent preference,

In general, if a payment is made under pressure from a creditor

a preference is negatived, unless, as held in Ex parte Hall (1882)
19 Ch.D. 580 (quoted by Mr. May), payment was made after action
had been threatened, but in circumstances which made the threat an
empty one. It is not a sufficient inducement for a debtor to act under
pressure from a creditor if the debtor knows he is just about to become
bankrupt. The pressure in such a case would not exert a sufficient
influence upon him to justify the payment.

Applying this test to this case I am not satisfied that the debtors'
act in settling this creditor's claim was solely due to the effect of the
pressure exerted by Margossian's agent, although that pressure on the
part of the creditor may have been due to a proper and natural
desire to obtain payment of a sum due. The debtors were insolvent,
and Spiro Mendoros must have known it.

as contrary to the policy of bankruptcy law, but in Re Seymour « 1937) Ch.
668). Clauson I. declined to follow Re Badham (10 Mor. 252).

This of course does not conclude the matter. Even if it be
found that the bankrupts had not sufficient reason to give way to pres-
sure it is still necessary to consider their motive in making the transfer
of the goods. In the consideration of this question I am bound by the
decision of the Court of Appeal in Kekkos loannides v. Receiver in
Bankruptcy of Aristotelli David AC-APP-1l-1933, 2 S.L.R. 70, to
which I have been referred by the learned counsel for Mr. Margossian.

In this decision the Court of Appeal held that it was not suf-
ficient for an order setting aside a transfer on the grounds of fraudulent
preference to be made because it is shown that at the time of the-
transfer the debtor was insolvent. In the course of the judgement the
learned Chief Justice Owen stated:

"The trustee . . . must show that the desire to prefer (i.e.,
to the exclusion of his other creditors) was the debtor's domi-
nating impulse, that the transaction was carried out with the sub-
stantial view of giving one creditor a preference over the others.
Preference implies an act of free will; therefore, whether or not
the payment was voluntary is relevant in considering the state of
mind of the debtor. A voluntary payment is an act moving from
the debtor; it is a payment by the act and will of the party
making it, and if therefore there is anything to interfere with or
control this will, it cannot be a voluntary payment . . . It is the
duty of the trustee to show that, in spite of all this, the dominant
view or object of the debtor was the intention to prefer this
creditor to the others. . . . The evidence seems to me to show
no more than . . . the desire to give in to pressure brought
upon him to fulfil an antecedent obligation incurred in the ordi-
nary course of his trade. This is not fraudulent preference within
the meaning of the section.

"I do not say that this transaction was not fraudulent from
beginning to end. It might well have been. What I do say is
that there is no evidence of it, and no evidence upon which the
learned judge could find that the dominant view of the debtor was
to prefer this particular creditor."

It is thus necessary to consider whether the dominant impulse in
the mind of Spiro Mendoros at the time of making the transfer was to
give Mr. Margossian a preference over other creditors. In general I
think it is an exceedingly difficult thing to arrive at a conclusion as to
what was the dominant or operative motive of a man doing any par-