Bankruptcy-Fraudulent preference-Intent to prefer-Statutory and common
law rules

In 1932 1he bankrupt obtained the backing of the defendant, his sup-
pliers, which enabled him to secure a contract for the construction of build-
ings for the Egyptian Irrigation Service. By April 30, 1933, it had be-
come apparent that the bankrupt had suffered heavy losses on the contract.
On the following day this information was conveyed to defendants and
thereupon various building materials, tools and scaffolding were transfered
from the bankrupt's stores to the defendant's stores. There was not on May I,
1933, a question of bankruptcy. The bankrupt filed his petition in June
1933 and was adjudged a bankrupt in December. On May 2, 1933, de-
fendants advanced £E.58 to the bankrupt to enable him to meet the claims
of workmen. The Official Receiver attacked the transfers of property to the
defendants as fraudulent preferences.

Held: (i) A transfer of property can only be avoided under section 49
of the Bankruptcy Ordinance 1929 if there was either mala fides or the
want of valuable consideration, neither of which could be shown in this
case.

(ii) In order for a transfer to be a fraudulent preference within the
meaning of section 50 of the Bankruptcy Ordinance 1929, there must be a
dominant purpose to prefer the creditor over others, and where it appears
that the debtor made the transfer in the hope that this creditor would "see
him through" his financial difficulties, .jhe receiver attacking the transfer has
not discharged his burden of proving the intent to prefer.

(iii) There was no right to have the transfers set aside under common
law principles as there was no adequate showing that the sole reason for the
conveyance by the debtor was to delay, hinder or defeat his creditors, or
that the creditor concurred in such fraudulent intent.

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

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

In re Carl Hirth [1899] 1 O.B. 612 distinguished.
In re Jukes [1902J 2 O.B. 58 distinguished.

In re Eaton & Co. [1897) 2 O.B. 16 not approved.

Ex parte Lancaster (1884) 25 Ch.D. 311, 319 dictum of- Cotton L.J. ap-
proved.

* Court: Halford J.

In re Ramsay [1913] 2 K.B. 80 distinguished.

Ex parte Fisher (1872) 7 eh. App, 636 distinguished.
Bankruptcy Ordinance 1928. 55. 4, 49, 50, 51.

The English Bankruptcy Act 1914, s. 44.

Action

Advocates: 1\1r. Claxton ... for plaintiff; Mr. Francoudi ...
for defendant.

June 20, 1934. Halford J.: In this action the Official Receiver,
as receiver of the bankruptcy of John Borg, is seeking to set aside
three transactions whereby the bankrupt transferred to his principal
creditors, the defendant company, goods to the value of some £E.234,
sold them other goods for some £E.26 and further sold them scaffold-
ing and tools for £E.89 odd, on the' ground that these transactions
amount to a fraudulent preference and/or a fraud against the bank-
rupt's either creditors.

Few points of fact are in dispute between the parties. It is
common ground that Borg, a civil engineer, had no capital of his
own in this country in 1932; that the subject had been broached
between him and A. Kfouri, managing director of the defendant
company, of the latter financing him; that when the Egyptian Irrigation
Service put out tenders for the erection of buildings at Gordon's Tree,
Borg, after consultation with the defendants and agreeing with them
the prices at which they would supply him with materials, was the
successful tenderer; that the 2% cash deposit, required to accompany
the tender, was furnished by the defendants; and that 011 October 5,
1932, an agreement was entered into by the parties whereby, inter
alia, in consideration of Borg assigning to the defendants all monies
payable by the Egyptian Irrigation Service under the contract, the
defendants undertook not only to finance him but to supply materials
at fixed rates.

Nor is it in dispute that later in October 1932, when both the
debtor and defendants were informed by the Director of Works that
there might be modifications in the specifications, it was decided that
the orders for supplies should be maintained in their original form,
but it was arranged, without there being any obligation on either
side, that any surplus material should be taken over by the defendants;
that certain small modifications relating to verandahs were in fact
subsequently made and that the surplus Marseilles tiles not required
as the result thereof were disposed of by the defendants; that as

the result of final measurements, it was evident on April 30, 1933,
that Borg had made a heavy loss and that on the following day, May 1,
he communicated this fact to Kfouri; that thereupon goods to the
value of some £E.26 as well as scaffolding valued at £E.89 odd
were sold by Borg to defendants; that goods also to the value of some
£E.234 were transferred by Borg to the defendants, but there is a
dispute as to the date of the transfer; and finally that in June, Borg,
being unable to meet his creditors, petitioned for an adjudication
order and was adjudicated bankrupt in December 1933.

I think it only fair to the defendants to add that on May 1,
1933, the crucial date, there was no question of Borg's bankruptcy.

It is further agreed that the materials and goods transferred by
Borg to the defendants represented practically the whole of his avail-
able assets in the Sudan; that there were negotiations with a view
to the defendants providing further financial assistance to enable Borg
to payoff his pressing debts; and that in fact they advanced him
£E.58 on May 2 to pay painters and workmen; that on May 5
they consulted Mr. Francoudi on the subject of Borg providing security
for further advances as the result of which a letter of enquiries was
drafted and signed by Borg and his wife and sent to Malta, but
nothing further came of it.

The points in dispute between Borg and the defendants are the
following:

1. As to Borg's finances, Kfouri insists that at all material times
   he was under the distinct impression that Borg himself was
   entitled to a legacy of £E.2000 or £E.3000 from a relative
   in Malta, whereas Borg declares he always stated that the
   supposed legatee was his wife.
2. As to the date of the transfer of the £ E.234 worth of goods,
   Kfouri maintains that, as the result of the arrangements made
   on the subject being mooted by modifications in the specifica-
   tions, these represented surplus material which from February
   onwards had been removed bit by bit from Borg's stores at
   Gordon's Tree to the defendants' stores, where as Borg insists
   that they were so removed as the result of the interview with
   Kfouri on May 1.
3. As to the approximate amount of Borg's liabilities as stated
   by him on May 1, Kfouri denies that a sum of £E.1 sao was
   ever mentioned as is alleged by Borg.

I regard the first and third points as of no importance. On the
second the defendants have failed to prove that the goods were
received in their stores at the time they allege. Although they have
explained the procedure they adopt in checking goods in and out of
store, in my view, a stock book containing entries in support of their
allegations would have gone far to corroborate their story. This
they cannot produce. On the other hand Borg has satisfied me that
these goods were delivered ex his store at various dates in May 1933.
The fact that the dates as recorded in the store books do not cor-
respond in every instance with the dates on the carter's chits and
that the entries are not always made under consecutive I,. _'<. are
details which I do not regard in any way as detracting fr.-rn the
general value of the evidence. Nor is the fact that the credit note
is signed by Borg under date May 3 of importance; I am prepared
to accept his explanation that he must have made a mistake in the
date. I find as a fact that these goods were delivered by Borg to
the defendants during May 1933.

I now come to the various questions of law which have been
raised on the pleadings.

The parties agree that these three transactions either stand or
fall together, that is to say that whether the £ E.234 transaction be
termed a transfer or a sale, it's legal effect is the same as the £ E.26
and £E.89 deals which were admittedly sales.

The plaintiff's case is that these facts and findings of fact amount
in law to:

(1) A fraudulent preference within the meaning of section 50¹
of the Bankruptcy Ordinance 1928. He admits that there must exist
a dominating purpose on the part of the debtor to prefer. The
debtor said that be agreed to the transactions in order to reduce his

1 The relevant portions of which read:

"50. (1) Every transfer of property ... made ... by any person
unable to pay his debts as they become due from his own nw::cj', ir, f.,'.our
of any creditor ... with a view of giving that creditor a preference O\'(~
the other creditors, shall if the person making ... the same is adjudged
bankrupt on a petition presented within three months after the date of
making ... the same, be deemed fraudulent and voidable against the re-
ceiver and may be annulled by the court.

(2) This section shall not affect the rights of any person making title
in good faith and for valuable consideration through or under a creditor of
the bankrupt."

debt. Intent to prefer must be gathered from the circumstances as
no debtor could admit such intention.

Further the second proviso of section 51² of the Ordinance takes
the case out of the scope of this section because the defendants knew
that the materials transferred represented the vast bulk of the debtor's
assets which was equivalent to notice of an act of bankruptcy under
section 4³ of the Ordinance and he cites authority in support.

(2) A fraud on creditors under:

(a) Section 49-l of the Ordinance, there being an apparent
lack of good faith;tbe only element of a sale being the reconvey-
ance of the property to the vendor; as well as want of valuable
consideration.

(b) Common law, the object being to defeat and delay other
creditors. He cites further authority in support.

111e defendants contend as to (1) that there is no evidence of a
dominating impulse on the part of the debtor to prefer. His whole
action was based on the hope of the defendants "seeing him through"
and this in law negatives any presumption of preference.

• The relevant portions of which read:

"5 J. Subject to the forgoing provisions of this ordinance ... nothing
in this ordinance shall invalidate

(c) any transfer by the bankrupt for valuable consideration; ...

Provided that ...

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

3 The relevant portions of which read:

"4. A person commits an act of bankruptcy in each of the following
cases namely: . . ,

(b) If ... he makes a gift or transfer of his property or any part
thereof with intent 10 defeat or delay his creditors;

(c) If ... he makes any transfer of his property or any part thereof,
or creates any charge thereon which would ... be void as a fraudulent
preference if he were adjudged bankrupt; ...

(g) If he gives notice to any of his creditors that he has suspended
or is about to suspend payment of his debts:"

«The relevant portions of which read:

"49. Any transfer of property, not being a transfer ... made in fa-
vour of a purchaser or incumbrancer in good faith and for valuable con-
consideration, ... shall, if the transferor becomes bankrupt within two
years after the date of transfer, be voidable against the receiver in bank-
ruprcy,

(2) Under (a) Both mala fides and want of valuable considera-
tion must be proved and both elements are lacking here. (b) At
the common law fraud must be proved and there is no evidence thereof.

I propose first dealing with the second issue. I agree with the
submission on behalf of the plaintiff that if he can succeed in proving
either mala fides or want of valuable consideration, all these transac-
tions which he impeaches, become voidable as against the receiver
under section 49⁵ of the Ordinance.

But in the first place, where is there evidence of mala fides?

The plaintiff has referred me to a case in which the transfer was
made to a third party with a view to avoidance of the costs of an
action; In re Carl Hirth [1899] 1 Q.B. 612, whereas here the
transfer was admittedly made to a creditor to reduce the debt.

The facts in this case also are distinquishable from those of
In re Jukes [1902] 2 Q.B. 58. There the creditor who took over
substantially the whole of the debtor's stock in trade after pressing
the debtor for payment, knew that another creditor was also threaten-
ing proceedings.

I can find neither mala fides nor want of valuable consideration
as required by section 49⁶ which was never intended to be applied
to circumstances such as those at present under review.

For the transaction to be set aside under the common law, it must
be shown that the sale reason for the conveyance by the debtor was
to delay, hinder or defeat his creditors and that the purchaser con-
curred in such fraudulent intent. See Kerr on Fraud, 6th ed., p. 266.
The evidence in this case all points to the fact that the debtor was
endeavouring to raise money to payoff his creditors and that it was
furthest from his intentions to delay or defeat their claims. He admits
that he was anxious to reduce his debt to the defendants, but I cannot
disregard the evidence of his "hopes that they would see him through."
For what other reason could he, proprio motu, have approached them
on May I? I can find no evidence of any sort or kind of fraud
within the meaning of the old statutes and common law.

I have now to decide whether the transactions impugned are
fraudulent preferences within the meaning of section 50⁷ of the
Ordinance. I have already found that these transactions, which in-

5 Ibid.
• Ibid.

7 Bankruptcy Ordinance 1928 (see n. 1 of this case).

valved the transfer of practically the whole of Borg's available assets
to the defendants, were made at a period when he knew he was
insolvent. He has stated that his object was to reduce his indebtedness
to the defendants, hut has admitted that he hoped they would assist
him in paying off his pressing creditors and it is common ground
that at or shortly' after the date at which the transfers were agreed
to, Kfouri did give him to understand that he would see him through.

Both parties agree that for the transactions to be covered by

. this section of the Ordinance, it must be shown that the dominating
impulse of the debtor was to prefer. If the transfer were made as
the result of anything in the hature of a threat or demand by the
creditor, this would at once negative any intent to prefer on the
part of the debtor. Cj., Kekkos Ioannides v. Receiver in Bankruptcy
of Aristotelli David AC-APP-1l-1933.⁸

There is very 1ittle difference between the wording of this section
of the Ordinance and that of section 44 of the English Bankruptcy
Act 191,:. After a careful review of the authorities, it appears to m~
that the courts in England are still disposed to follow the old law in
holding that to constitute a fraudulent preference not only should the
transfer be voluntary on the part of the debtor, but that it be made
in contemplation of bankruptcy.

If the latter be an essential condition, it is admitted that Borg
never contemplated bankruptcy on May 1, 1933, when the agreement
to transfer was made, and in this event it is unquestionable that the
plaintiffs claim would fail.

But assuming that such condition is not now required, was the
voluntary transfer made with intent to prefer?

It has been argued by the plaintiff that once he has proved

 insolvency, the burden shifts on the defendants of proving that the                         

transfer was not made with intent to prefer. He cites In re Eaton

& c«, [1897J 2 Q.B. ]6.

I cannot agree with this proposition. The law, as I read it, obliges
the plaintiff in any event to give some evidence of intent to prefer.
ci., Williams Bankruptcy Practice 12th ed., p. 296, in which he refers
to Cotton LJ.'s judgement in Ex parte Lancaster (1884) 25 Ch.n. 311,
at top of p. 3 19, as still enunciating the true practice.

Now it is admitted that if the transfer were made on a definite

• Reported at 2 S.L.R. 70.

promise by the defendant to see Borg through, there can be no
question of fraudulent preference; it is urged that if such promise
were made, it was made on the day following the agreement to transfer.

I agree that direct evidence of an intent to prefer can rarely,
if ever, be found in such cases as these. The only .direct evidence
before me is Borg's statement that he was anxious to reduce his debt
to the defendants and on that evidence taken in conjunction with the
fact that he knew he was insolvent at the time and that by this
transfer he was divesting himself of the bulk of his available assets,
I am asked by the plaintiff to find that he intended to make a
fraudulent preference within the meaning of section 50⁹ in favour of
the defendants.

I cannot do so. That he was ingratiating himself with the
defendants is clear, but his object is transparent.. Further financial
help was refused him on May 1. The defendants advanced him
£E.58 on May 2 and said they would help him out. From the
moment when his carts were transferring his assets to the defendants'
stores, he was soliciting their help in meeting what he knew would
be pressing claims.

Apart from the fact that I refuse to be bound by any decision
of Phillimore J., the facts of In re Ramsay [1913] 2 K.B. 80, to
which the plaintiff refers me, do not bear comparison with the present.
In that case collateral facts were admitted to show the debtor's
state of mind, namely to prefer.

Nor in Ex parte Fisher (1872) 7 Ch.App. 636 do the facts
bear any relation to those under review, where funds were required
by Borg, not to enable him to continue his business, but to settle
pressing claims.

I find as a fact on a review of all the circumstances attendant
on the transfers by the bankrupt at present impugned, that his object
was not only to reduce the defendants' debt, as he says, but principally
to obtain funds from the only person who was in a position to advance
them immediately-funds which were not, or might not have been
so available had his last remaining assets remained undisposed of-
to meet what he knew would be the pressing claims of his smaller
and especially native creditors.

On this finding, these transactions cannot in law be treated as

• Bankruptcy Ordinance 1928 (see n. I of this case).