Velensky v. Canadian Credit Men's Trust Association Ltd., [1960] SCR 385

Supreme Court of Canada

Velensky v. Canadian Credit Men's Trust Association Ltd., [1960] S.C.R. 385

Date: 1960-03-18

Bernard Velensky, Harry Velensky and Jake Budovitch Appellants;

and

The Canadian Credit Men's Trust Association Limited (Trustee In Bankruptcy) Respondent.

1959: November 13; 1960: March 18.

Present: Cartwright, Abbott, Martland, Judson and Ritchie JJ.

ON APPEAL FROM THE SUPREME COURT OF NEW BRUNSWICK APPEAL DIVISION.

Bankruptcy—Fraudulent payment—Voidability—Guarantee returned to guarantors—Trustee's claim against guarantors—Power to order payment direct to trustee—The Bankruptcy Act. R.S.C. 1952. c. 14. s. 64(1).

The appellants had guaranteed a bank loan to a company. Two months before the company was declared bankrupt, it deposited in its account at the bank a sum sufficient to cover the loan. The bank charged the note against the company's account and returned the guarantee to the guarantors. The trustee in bankruptcy attacked the payment to the bank, but the action was dismissed by the trial judge. The trustee's appeal as against the bank was dismissed, but allowed as against the guarantors who were ordered to pay to the trustee the amount of the guarantee, on the view that the company had intended to give the guarantors a preference, that the latter had intended to receive a preference but that the bank had no such intention. The guarantors were granted special leave to appeal to this Court on the question as to whether there was power under the Act to order payment by the guarantors directly to the trustee.

Held: The appeal should be allowed and the action dismissed.

Accepting, for the purpose of this appeal, the findings of fact made by the Court of Appeal, the question to be determined was whether or not the effect of s. 64(1) of the Bankruptcy Act was to render the payment fraudulent and void as against the trustee. There was only one payment and it was either good or void. It could not be good as between the bank and the trustee and at the same time void as between the guarantors and the trustee. Therefore, since no appeal

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was taken from the judgment declaring good the payment as between the bank and the trustee, that question was now res judicata. The trustee's only right was to have the payment declared void and consequently to recover the amount of the payment. It was too late for such an order.

APPEAL from a judgment of the Supreme Court of New Brunswick, Appeal Division, reversing in part a judgment of Anglin J. Appeal allowed.

R. V. Limerick, Q.C., for the Appellants.

No one appearing for the respondent.

The judgment of the Court was delivered by

Cartwright J.:—This is an appeal by Bernard Velensky, Harry Velensky and Jake Budovitch, brought by special leave granted by my brother Taschereau, from a judgment of the Appeal Division of the Supreme Court of New Brunswick. The appeal to the Appeal Division was brought by the Trustee in Bankruptcy of Bernard Motors Limited, hereinafter referred to as "the trustee", from a judgment of Anglin J. The appeal was allowed as against Bernard Budovitch, Bernard Velensky, Jake Budovitch and Harry Velensky, hereinafter referred to collectively as "the guarantors" and was dismissed as against the Provincial Bank of Canada, hereinafter referred to as "the Bank". By the judgment of the Appeal Division it was ordered that the four guarantors pay to the trustee as a joint and several liability the sum of $10,000.

The notice of motion brought by the trustee before Anglin J. asked for numerous items of relief, all of which were refused by that learned judge. The trustee appealed to the Appeal Division as to only two of these items and asked in its notice of appeal for an order:

(1) declaring fraudulent and void as against the trustee of the bankrupt the payment of the sum of $10,000.00 by the bankrupt to the Provincial Bank of Canada on the second of October, 1953, or, alternatively, the' charging by the Provincial Bank of Canada on the second day of. October, 1953, of the sum of $10,000.00 against the account of the bankrupt with the said bank, in full payment and satisfaction of a promissory note made by the bankrupt under date of the twelfth day of February, 1953, payable on demand, with interest, at the rate of 6% (six per cent) per annum to the order of Bernard Budovitch endorsed by Bernard Budovitch and Bernard Valensky, and payment of which had been guaranteed by the said Bernard Budovitch and Bernard Valensky and by Harry Valensky and Jake. Budovitch;

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(2) directing the said Provincial Bank of Canada, Bernard Budovitch, Bernard Valensky, Harry Valensky and Jake Budovitch, jointly and severally to pay forthwith to the trustee of the bankrupt the said sum of $10,000.

Anglin J. reached the conclusion that the presumption in favour of the trustee raised by s. 64 of the Bankruptcy Act had been rebutted and that the intention of Bernard Motors Limited, hereinafter referred to as "the company", was not to give a preference to either the Bank or the guarantors.

The Appeal Division took a different view as to the inferences which should be drawn from the evidence. Its members were unanimously of opinion that there was an intention on the part of the company to give a preference to the guarantors and an intention on the part of the guarantors to obtain such a preference. Bridges J., with whom Jones J. concurred, was of opinion that the company also intended that the Bank should receive a preference. All three members of the Court were of opinion that the Bank had not intended to receive a preference.

As in my opinion even on the view of the evidence most favourable to the trustee the appeal succeeds, I propose to accept for the purposes of this appeal the findings of fact made by the Appeal Division. These are fully set out in the reasons of Bridges J. and Richard J. and I shall attempt to give only a brief summary.

Bernard Budovitch was the president and a director of the company; Bernard Velensky was its secretary-treasurer and a director; the management of the company's business was in their hands. Jake Budovitch is the father of Bernard Budovitch and Harry Velensky is the father of Bernard Velensky.

On February 12, 1953, the company borrowed $10,000 from the Bank on a promissory note for that amount signed by the company payable to Bernard Budovitch and endorsed by him and Bernard Velensky. On February 16, 1953, the four guarantors executed a guarantee in favour of the Bank whereby they jointly and severally guaranteed payment of all present and future debts and liabilities owing by the company to the Bank. Under the terms of the

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guarantee the liability of the guarantors and of each of them was limited to $10,000. The guarantee contained the following clause:

Provided always that the undersigned, or any one or more of them (if more than one) or the respective executors, administrators or legal representatives of any of the undersigned, may at any time determine their or his further liability under this guarantee by notice in writing to be given to said Bank, but said determination by any one or more of the undersigned or by the respective executors, administrators or legal representatives of any of the undersigned shall not prevent the continuance of the liability hereunder of any others or other of the undersigned or of their or his respective executors, administrators or legal representatives.

On October 2, 1953, the company was, and had been for some weeks, an insolvent person as defined in the Bankruptcy Act. On that day Bernard Budovitch made a deposit of $9,531.99 in the account of the company at the Bank and following this deposit the amount standing to the company's credit was $11,527.

In the afternoon of October 2, 1953, after the deposit had been made, Jake Budovitch and Harry Velensky went to the Bank and, the manager being absent, saw W. H. Anthony, the assistant manager. They asked him to charge the $10,000 note to the company's account and to return the guarantee to them. Anthony did not consider they had the authority to direct him to do this; he telephoned to the company's office, asked for "Bernie", spoke to either Bernard Budovitch or Bernard Velensky, told, the person to whom he was speaking of the request of Jake Budovitch and Harry Velensky and received the answer "Well, I guess you might as well". Anthony thereupon charged the note against the company's account and, a few days later when it was received from the head office of the bank, returned the guarantee to Jake Budovitch and Harry Velensky.

On December 1, 1953, a receiving order was made against the company and later the Canadian Credit Men's Trust Association was duly elected trustee.

On this state of facts, the question as to what are the rights of the trustee turns on the effect of s. 64(1) of the Bankruptcy Act, which reads as follows:

64. (1) Every conveyance or transfer of property or charge thereon made, every payment made, every obligation incurred, and every judicial proceeding taken or suffered by any insolvent person in favour of any creditor or of any person in trust for any creditor with a view of giving such creditor a preference over the other creditors shall, if the person

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making, incurring, taking, paying or suffering the same becomes bankrupt within three months after the date of making, incurring, taking, paying or suffering the same, be deemed fraudulent and void as against the trustee in the bankruptcy.

This subsection must be read in the light of subs. (3), which provides:

(3) For the purpose of this section, the expression "creditor" shall include a surety or guarantor for the debt due to such creditor.

The applicable words of subs. (1) as interpreted by subs. (3) are:— … every payment made … by any insolvent person in favour of any creditor … with a view of giving such creditor (which expression includes a surety … for the debt due to such creditor) a preference over the other creditors shall, if the person making … the same becomes bankrupt within three months after the date of making … the same, be deemed fraudulent and void as against the trustee in bankruptcy.

Applying these words to the facts as found by the Appeal Division, it appears that the payment of $10,000 was made by an insolvent person, the company, in favour of a creditor, the bank, with a view of giving the four guarantors (sureties for the debt due to the bank) a preference over the other creditors—which four guarantors, if that is important, also had the intention of being preferred— and the person making the payment, the company, became bankrupt within three months.

In these circumstances the task of the Court was to determine whether or not the effect of s. 64(1) was to render the payment of the $10,000 fraudulent and void as against the trustee.

I can find nothing in the section or in the jurisprudence to warrant declaring the payment good as between the bank and the trustee and at the same time void as between the guarantors and the trustee.

There was only one payment and it must be either good or void. If, as the Appeal Division appear to have held, it would not be void as against the bank unless the bank had the intention of being preferred and so it is good as between the bank and the trustee, then the debt to the bank has been paid and there can be no liability on the part,

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of the guarantors. They guaranteed only the payment of whatever (up to $10,000) was owing to the bank and on this view nothing was owing.

With respect, I incline to the view that it having been found as a fact that the intention of the insolvent was to prefer both the bank and the guarantors and that the intention of the latter, although not of the former, was to be preferred, it should have been held that the payment was void, the bank should have been ordered to repay the $10,000 to the trustee and left to exercise its rights against the guarantors. I do not, however, have to reach a final conclusion as to this because it is too late to make any such order. It is now res judicata that as between the bank and the trustee the payment is good and no appeal has been taken from the judgment so declaring. The debt to the bank for the payment of which the guarantors were sureties has been paid in full and as a result they are discharged.

I am unable to construe s. 64 as giving any rights to the trustee in regard to a preferential payment other than the right to have such payment declared void and the consequential right to recover the amount of the payment. The question from whom the amount of the payment can be recovered does not arise unless and until the payment has been declared void.

I agree with the statement in Halsbury, 3rd ed., vol. 2, p. 560:

If a payment or other disposition, of property, otherwise valid, be made in circumstances that amount to a fraudulent preference, the payment, at the time it is made, is a good payment, and so remains unless and until it is set aside as a fraudulent preference.

In my view, as the payment to the bank (which is the only payment in question) has not been (and cannot now be) set aside, the question whether had it been so set aside an order for payment could have been made directly against the guarantors does not arise and I think it better to express no opinion upon the conflicting views expressed in In re G. Stanley & Co.1 on the one hand, and in Re Lyons2 and Re Conley3, on the other.

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I would allow the appeal, set aside the order of the Appeal Division as against the three appellants and restore the order of Anglin J. as to them. The appellants should have their costs in the Appeal Division and in this Court against the trustee.

Appeal allowed with costs.

Solicitors for the appellants: McNair & McNair, Fredericton, and Limerick and Limerick, Fredericton.

Solicitors for the respondent: McKelvey, MacCauley, Machum & Fairweather, St. John.