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Federal Court of Australia |
COURT
IN THE FEDERAL COURT OF AUSTRALIACATCHWORDS
BANKRUPTCY - Set off - A guarantor's liability arose under the guarantee before the date of winding up of the principal debtor - Payment by guarantor after winding up - whether guarantor may set off payment against principal debtor.Bankruptcy - Set off - Whether Statutes of Set off (2 Geo. II C.22 s.13 and 8 Geo. II C.24 s.5) supplanted by Bankruptcy Act 1966 (Cth) S 86.
Bankruptcy Act 1966 (Cth) S.86.
Companies - Winding up - Mutual debts and credits - Claim by appellant company in liquidation to recover moneys borrowed from finance company for use of respondent - Respondent guarantor of loan after winding-up order - Finance company called up guarantee - Finance company secured creditor of respondent - Finance company realized security and recovered all moneys owed to it by appellant company - Entitlement of respondent to claim set-off against appellant company - Time when set-off arose - Companies Act 1978 (N.T.), s. 291 (2) - Bankruptcy Act 1966 (Cth), s. 86 - Statutes of Set-Off - 2 Geo. 2c. 22, s. 13 - 8 Geo. 2c. 24, s. 5. On 18th October, 1976, the respondent executed a mortgage in favour of Esanda Ltd. over certain land owned by it to secure any specified financial accommodation made by Esanda to the appellant. The respondent also executed a guarantee in favour of Esanda. On 26th November, 1976, the appellant obtained a loan from Esanda in the sum of $100,000. At the request of the appellant the moneys were disbursed to discharge a prior mortgage over the land. The respondent, prior to and after the loan from Esanda, executed other guarantees in favour of Esanda in respect of the appellant's liability to Esanda.
On 18th May, 1978, the appellant was ordered to be wound up. On 6th June, 1978, the appellant demanded repayment by the respondent to it of the sum of $100,000 used to discharge the prior mortgage over the land and borrowed by the appellant for the use and benefit of the respondent; the respondent did not meet the demand of the appellant. On 2nd August, 1979, Esanda demanded repayment of the moneys owed to it and secured by the mortgage of 18th October, 1976. Some payment to Esanda had already been made by this date and other payments were subsequently made by the respondent. In October 1979 Esanda as mortgagee sold the land and in total Esanda received all moneys owed to it by the appellant including the sum of $100,000 borrowed by the appellant for the use and benefit of the respondent. Esanda did not submit a proof of debt in the liquidation of the appellant.
By action commenced by writ the appellant sought to recover from the respondent the sum of $100,000 borrowed by it for the use and benefit of the respondent. At trial of the action it was held that the respondent could set off against such claim the amount of $100,000 paid by it to Esanda pursuant to its guarantees.
On appeal,
Held: Per Forster and McGregor JJ., Sheppard J. dissenting - Appeal
dismissed: (1) Per Forster and McGregor JJ. - Although the Statutes
of Set-Off
(2 Geo. 2 c. 22 and 8 Geo. 2 c. 24) are part of the laws of the Northern
Territory, they have no application in the present
situation. The law
concerning cross-claims between a company in liquidation and its creditors is
to be found exclusively in the provisions
of s. 86 of the Bankruptcy Act 1966
as applied by virtue of s. 291 (2) of the Companies Act 1963 (N.T.).
(2) Per Forster J. - Where, after insolvency of a principal debtor, a surety
pays off a principal creditor so that as between principals
the debt is
discharged, the surety may set off the amount so paid by him against a claim
in respect of a debt due by him to the estate.
Hiley v. People's Prudential Assurance Co. Ltd. [1938] HCA 40; (1938), 60 CLR 468, referred to.
Jones v. Mossop [1844] EngR 803; (1844), 3 Hare 568; 67 ER 506, followed.
Rowlatt on Principal and Surety (3rd ed.), p. 325; Williams & Muir Hunter on
Bankruptcy (19th ed.),p. 201, approved.
(3) Per McGregor J. - (a) If contractual obligations exist at the date of
the winding-up order, the enforcement wherof might give
rise to a probable
claim, an obligation exists which might mature or develop into a pecuniary
demand capable of being raised as a
set-off. Hiley v. People's Prudential
Assurance Co. Ltd. [1938] HCA 40; (1938), 60 CLR 468, followed. (b) On the facts in the
present case there had been "mutual dealings" within the meaning of s. 86 of
the Act prior to
the winding-up order. (c) The amount of the outstanding loan
was "due" to Esanda from the respondent prior to the winding-up order.
Meaning
of "due" in s. 86 discussed. (d) Quantification of the liability to Esanda was
completed prior to the date of the court hearing.
(e) By reason of the matters
referred to above prior to the winding-up order there was a debt due from the
respondent to the appellant
and also: (i) a sum in excess of that indebtedness
due by the appellant to the respondent which the respondent was entitled to
set
off; or (ii) a liability capable of maturing into a sum capable of
set-off. Re Moseley Green Coal & Coke Co. Ltd; Ex parte Barrett
[1865] EngR 346; (1865), 12 LT
193; 46 ER 116; Re Daintrey; Ex parte Mant, (1900) 1 QB 546; Re Fenton; Ex
parte Fenton Textile Association Ltd., (1931) 1 Ch 85, referred to. Hiley v.
People's Prudential Assurance Co. Ltd. [1938] HCA 40; (1938), 60 CLR 468, followed. Re A
Debtor; Ex parte Debtor v. Trustee of the Property of Waite, (1956) 1 WLR
1226, explained and distinguished. Re Bruce David Realty Pty. Ltd. (1968), 14
FLR 56, considered and doubted.
(4) Per McGregor and Sheppard JJ. - No independent equitable right to a
set-off exists in a situation where the provisions of s.
86 of the Act apply.
(5) Per Sheppard J. dissenting - (a) There is a distinction between a
liability which at the date of the winding-up order is uncertain
in amount and
one which is merely contingent. (b) A liability which at the date of the
winding-up order exists but is uncertain because
it has not at that time been
or been capable of quantification may nevertheless be the subject of set-off
pursuant to s. 86 of the
Act. Re Daintrey; Ex parte Mant, (1900) 1 QB 546;
Naoroji v. Chartered Bank of India (1868), LR 3 CP 444, referred to. Hiley v.
People's Prudential Assurance Co. Ltd. [1938] HCA 40; (1938), 60 CLR 468, discussed. (c) A
liability which is merely contingent at the date of the winding-up order is
not capable of being set off pursuant
to s. 86. Re A Debtor; Ex parte Debtor
v. Trustee of the Property of Waite, (1956) 1 WLR 1226, explained and
followed. Re Bruce David Realty Pty. Ltd. (1968), 14 FLR 56, referred to. (d)
In the absence of a binding Australian authority the Full Court of the Federal
Court should follow a decision of
the English Court of Appeal unless it is
satisfied that such decision is wrong. Public Transport Commission (N.S.W.) v.
J. Murray-More
(N.S.W.) Pty. Ltd. [1975] HCA 28; (1975), 132 CLR 336, referred to. (e) The
facts of the present case are indistinguishable from the facts in Re A Debtor
and notwithstanding certain misgivings
about that decision it should be
followed as it represents the law in Australia.
HEARING
Darwin, 1980, June 3 ,4; 1981, February 18. 18:2:1981Appeal from decision dismissing the plaintiff's (appellant's) claim against the defendant (respondent) on the ground that the respondent was entitled to set off against the claim the amount of $100,000 paid by it to Esanda pursuant to certain guarantees.
J. B. Waters, for the appellant.
G. E. Hiley, for the respondent.
Cur. adv. vult.Solicitors for the appellant: Waters, James & O'Neil.
Solicitor for the respondent: Danny Masters.
D. LEVIN
ORDER
The Court orders that the appeal be dismissed with costs.DECISION
In this matter the learned trial judge made certain findings of fact which were not disputed and it will be convenient to set them out."1. 29 November 1974 the plaintiff transferred to the defendant its right,
title and interest in Portion 1662 Hundred of Bagot, subject
to existing
mortgages, including a second mortgage to Esanda.
2. 17 September 1976 Jape and Greenleaf transferred to the defendant their
right, title and interest in Portion 1218 Hundred of Bagot.
3. 17 September 1976 the defendant granted a mortgage over the said property
to Jape and Greenleaf.
4. 18 October 1976 the plaintiff contracted with Esanda for loan of $100,000
and directed payment of the principal sum to be made
to Jape and Greenleaf and
their solicitors.
5. 29 November 1976 Esanda advanced the sum of $100,000 to the plaintiff and
made payment as directed by the plaintiff. Such monies
were applied in
discharge of the mortgage referred to in 3 above. Registration of discharge of
mortgage was in fact made on 26 November
1976.
6. 26 November 1976 a mortgage from defendant to Esanda over Portion 1218
Hundred of Bagot was registered. The Memorandum of Mortgage
had been executed
on 18 October 1976. It secured loans to the plaintiff as well as loans to the
defendant and contained a personal
covenant and a guarantee by the defendant
in respect of the principal and interest payable under the mortgage.
7. At the same time as the execution of the mortgage by the defendant in
favour of Esanda, i.e. on 18 October 1976, the defendant
and its respective
directors executed a form of guarantee in favour of Esanda in respect of all
sums of money for which the plaintiff
may then or thereafter be indebted or
liable or contingently indebted or liable on any account whatever, including
any account relating
to leasing, hire purchase or loan.
8. On 3 June 1977 the defendant executed a further form of guarantee in favour
of Esanda guaranteeing all sums of money for which
the plaintiff company was
then or may thereafter become indebted in the same terms as the guarantee
referred to in 7 above.
9. On 18 May 1978 the plaintiff was wound up.
10. On 6 June 1978 the plaintiff by written notice requested the defendant to
repay the sum of $100,000. The defendant failed or refused
to do so.
11. On 2 August 1979 Esanda demanded of the defendant repayment of the
principal and interest due under the mortgage referred to in
6 above, as
payments were then overdue.
12. On 16 October 1979 Esanda in exercise of its power of sale as mortgagee
entered into a contract to sell Portion 1218 Hundred of
Bagot.
13. On 16 November 1979 the sale was completed and Esanda retained out of the
purchase monies a sum of $84,475.82 being the balance
of monies owed to it by
the plaintiff.
14. Taking into account other monies paid by the defendant to Esanda on account of the plaintiff since the plaintiff was wound up, the total sum paid by the defendant to Esanda at the request of the plaintiff then totalled $212,032.56. Accordingly all liability of both the plaintiff and the defendant to Esanda has been discharged."
The plaintiff is the appellant before this court and the defendant the respondent.
In addition it should be noted that the respondent lodged a proof of debt dated 8 June 1978 in the winding-up of the appellant including the sum of $100,000 as a contingent liability from the appellant to the respondent.
The money which was borrowed by the appellant from Esanda and paid by its direction to the use of the respondent never passed through the appellant's hands. It was repaid by the respondent to Esanda pursuant to its guarantee of the appellant's debt to Esanda and it is no longer owing to Esanda by either the appellant or the respondent. Esanda apparently never demanded repayment of the $100,000 from the appellant and has not proved in the appellant's liquidation. I pause to observe that in these circumstances an intelligent but legally uninformed member of the public might be surprised to know that the question of whether the respondent should now repay the same sum to the appellant has been the subject of hard-fought argument.
The appellant sued the respondent to recover the sum of $100,000 borrowed by it and paid by Esanda to the use of the respondent. The learned trial judge decided that the respondent might set off against the claim made against it by the appellant the amount of $100,000 paid by it to Esanda pursuant to the guarantees given by the respondent to that company to secure advances to the appellant. The appellant appeals to this court against that decision.
Section 291(2) of the Companies Act 1963-1978 is as follows:
"291.(2) Subject to section 292, in the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and debts provable and the valuation of annuities and future and contingent liabilities as are in force for the time being under the law of the Commonwealth relating to bankruptcy in relation to the estates of bankrupt persons, and all persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company may come in under the winding up and make such claims against the company as they respectively are entitled to by virtue of this section."
Section 292 of the Act deals with the order of the payments to be made in priority to other unsecured debts and is for this purpose irrelevant.
Section 86 of the Bankruptcy Act (Commonwealth) 1968-1980 is as follows:
"86.-(1.) Subject to this section, where there have been mutual credits,
mutual debts or other mutual dealings between a person who
has become a
bankrupt and a person claiming to prove a debt in the bankruptcy -
(a) an account shall be taken of what is due from the one party to the other
in respect of those mutual dealings;
(b) the sum due from the one party shall be set off against any sum due from
the other party; and
(c) only the balance of the account may be claimed in the bankruptcy, or is
payable to the trustee in the bankruptcy, as the case
may be.
(2.) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the person who has become a bankrupt or at the time of receiving credit from that person, he had notice of an available act of bankruptcy committed by that person."
It follows that s.86 of the Bankruptcy Act applies with respect to the liquidation of companies as well as to the bankruptcy of persons. In this case it is the appellant which has been wound up and the respondent has lodged a proof of debt in that liquidation. There have been at the least "other mutual dealings" between the parties. It is my view that the question of equitable set off does not arise nor any rights which may accrue under the statutes of set off which are a part of the law of the Northern Territory notwithstanding that they have been repealed in the United Kingdom. The law concerning cross claims between a company in liquidation and its creditors is to be found exclusively in the provisions of the Bankruptcy Act applied by virtue of s.291(2) of the Companies Act (see in Re Daintrey (1900) 1 Q.B. 546 per Bingham J. at p.567).
It is argued by the appellant that in order for there to be a right to set off under s.86 the amount to be set off must have been due and owing at the date of the winding up whereas, in this case, at that date the respondent simply had a contingent liability to pay to Esanda pursuant to its guarantees.
In Hiley v. Peoples Prudential Assurance Co. Ltd. [1938] HCA 40; 1938 60 C.L.R. 468, Starke J. says (at p.491) -
"There are cases in the books in which sureties who have been compelled to pay a principal debt after bankruptcy have been allowed to set off the sum so paid against debts due to the bankrupt (Cf. Rowlatt on Principal and Surety, 2nd ed, (1926), p.307). But the obligation of the surety in those cases arose before bankruptcy and was an obligation which might and did in fact end in a money claim."
Page 307 appears not to be on the point but on p.325 of the 3rd edition of Rowlatt on Principal and Surety there appears the following passage -
"A surety becoming bound at the request of the principal before the bankruptcy of the latter, but compelled to pay by the creditor after the bankruptcy, is entitled to set off the sum paid against debts due by him to the bankrupt."
Jones v. Mossop [1844] EngR 803; 3 Hare 568 at 571 is cited in support of this proposition.
"Where after the insolvency of a principal debtor his surety pays off the principal creditor so that, as between the principals, the debt is discharged, the surety may set off the amount so paid by him against a claim in respect of a debt due by him to the estate."
(Williams & Muir Hunter on Bankruptcy 19th edition 1979 at p.201.) Jones v. Mossop is also cited here in support.
"As surety he had a right at any moment to 572 pay off the debts which he had guaranteed; and, as debtor upon the bond, he would have had a right to say he had paid off the debts out of the money he owed upon the bond. The only question is whether that equity was superseded by the insolvency, or whether it overrode the rights of the creditors interested under the insolvency. My opinion is that it remained notwithstanding the insolvency."
(Jones v. Mossop supra at ps. 571, 572.)
It seems to me that this case supports in principle the propositions of the two text writers mentioned and I conclude that the respondent was entitled to the set off which it claimed. The appeal should therefore be dismissed with costs.
The facts are sufficiently set out in paragraphs 1 to 10 in the judgment of Sheppard J. and need not be re-stated. For the most part they are not in dispute, though the implications therefrom are. Nor is it necessary to refer further to the arguments of Counsel summarised by his Honour or to what he describes as the "essence" of the defence to the proceedings; though I understood respondent claimed to be entitled not only to succeed by reference to the Bankruptcy Act 1966 s.86 and upon a defence of equitable set-off, but also by reference to the Statutes of Set Off 2 Geo 11C.22 s.13 and 8 Geo 11 C.24 s.5.
The finding made by the learned trial Judge in favour of the appellant's claim (leaving aside for the moment the defence) was not the subject of any cross appeal and was not attacked in argument by the respondent's Counsel. The finding on the arguments presented to him and on the evidence available was one which was open to him. It is e.g. within the statement in Bullen and Leake "Precedents of Pleadings" (Third Edition) at page 42 where it is said in reference to the common indebitatus count for money paid -
"This count is maintainable where there has been a payment of money by the plaintiff to a third party at the request or by the authority of the defendant express or implied with an undertaking express or implied to repay it."
The issue then is as to the entitlement of the respondent to claim the "set-off" referred to above. In this regard it is common ground that the sum claimed has been or is part of the monies paid by the respondent to Esanda pursuant at least to the former's guarantee in favour of that company. It is further not the subject of any challenge that, and according to the evidence of Mr. James, there will be no claim by Esanda on the appellant for further payment of that sum of money.
It will be convenient first to consider the matter lastly mentioned, viz., the defence in reliance upon the Statutes of Set off.
2 Geo. 11 C.22 s.13 reads -
"Where there are mutual debts between the plaintiff and defendant, or if either party sue or be sued as executor or administrator where there are mutual debts between the testator or intestate and either party, one debt may be set against the other."
and 8 Geo. 11 C.24 s.5 -
"that mutual debts may be set against each other notwithstanding that such debts are deemed in law to be of a different nature, unless in cases where either of the said debts shall accrue by reason of a penalty contained in any bond or specialty where the debt intended to be set off shall be pleaded in bar, in which plea shall be shown how much is truly and justly due on either side; and in case the plaintiff shall recover in any such action or suit, judgment shall be entered for no more than shall appear to be truly and justly due to the plaintiff after one debt being set against the other as aforesaid."
These Statutes were passed in 1723 and 1734 respectively.
Respondent's Counsel submits they are applicable to the Northern Territory (though repealed in the United Kingdom), a matter not challenged in argument and accepted here for that purpose; that the expression "mutual debts" in section 13 does not require for its operation that debts should arise at the same time. His submission was not developed, nor related to any local pleading requirements.
The similarity between section 13 and s.86 (below) will be apparent; yet the Statute refers only to "mutual debts". The present Bankruptcy Act 1966 s.86 must be conceded a wider coverage if only for the additional words which appear in it, giving more comprehensive rights than the right of set-off in the Statutes. (cf. Sovereign Life Assurance Company v. Dodd (1892) 2 Q.B. 573 at pp. 578 and 582). Having regard to the phrases in s.86 additional to "mutual debts" and the purpose that section was intended to serve, it is, I suggest, intended to be a code. Unquestionably, there must always be mutuality (see Re Mid Kent Fruit Factory 1896 1 Ch 567, the disapproval on one aspect of which in the case of in Re D.H. Curtis (Builders) Ltd. 1978 1 Ch. 162 at 168-169 per Brightman J. (Curtis) was not on this point.); and at least in some cases, liquidated debts. Thereafter s.86 will cover and define the relationship between bankrupt and debtor or creditor. For an example of its application rather than that of the Statutes of Set-Off see in re Daintrey; ex Parte Mant (1900) 1 Q.B. 546 at 547 (Daintrey). The wording of s.86 is wide enough to include "set-off" anyway - a phrase which appears in s.86(1)(b) and (2), as if "set off" were assumed to be part of the mechanical operation of the main statements of the section. As to "Set off" see generally Bullen and Leake "Precedents of Pleadings" (Third Edition) at page 678.
Perhaps the defence in this case anyway is rather to be expressed that the appellant's entitlement to recover no longer existed after respondent paid out Esanda than conceding money to be owed by the latter and seeking to diminish or subtract from that indebtedness an amount said to have been paid on its behalf by the respondent.
It would be a curious thing anyway if a section which had had the long history of section 86 and its English forbears should have failed to comprehend and include in its provisions all that was available under the earlier Statutes of Set off, suitably tailored for the purposes of bankruptcy.
The Statutes of Set off would not if able to be employed serve the respondent's case any more than does s.86. In my view they have no application here, and have been supplanted by s.86.
I return to consider the applicability and effect of the Bankruptcy Act 1966 s.86. This reads -
"(1) Subject to this section, where there have been mutual credits, mutual
debts or other mutual dealings between a person who has
become a bankrupt and
a person claiming to prove a debt in the bankruptcy -
(a) an account shall be taken of what is due from the one party to the other
in respect of those mutual dealings;
(b) the sum due from the one party shall be set-off against any sum due from
the other party; and
(c) only the balance of the account may be claimed in the bankruptcy, or is
payable to the trustee in the bankruptcy, as the case
may be.
(2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the person who has become a bankrupt or at the time of receiving credit from that person, he had notice of an available act of bankruptcy committed by that person."
(The Companies Ordinance s.291(2) (now reproduced in the Companies Act 1978) applies the rules of bankruptcy to companies in liquidation.) A short statement of the history of this area of the law, with some reference to its antiquity, may be quoted from Curtis at p.168 -
"So far as set off is concerned the law has for many years recognised the general principle that where there are mutual debts existing between a creditor and a bankrupt, the smaller debt is to be set against the larger debt and only the balance is to be accounted for by the creditor or relegated to proof in the bankruptcy. This principle can be traced back for at least 300 years: see Bailey v. Finch (1871) L.R. 7 Q.B. 34. It received statutory recognition in section 28 of the Bankruptcy Act 1731 which dealt with mutual credits and debts, and required the commissioners to state the balance of the account between the bankrupt and the other person. That section was replaced by section 3 of the Bankruptcy Act 1806, followed successively by section 50 of the Bankruptcy Act 1825, section 171 of the Bankruptcy Act 1849, section 39 of the Bankruptcy Act 1869, section 38 of the Bankruptcy Act 1883, and finally section 31 of the Bankruptcy Act 1914, all in much the same terms."
(As to mutuality see ibid at p.171; cf Daintrey per Bigham J. whose judgment was upheld.)
As to what was intended by the expression "mutual debts and credits", see per Brett LJ, Peat v. Jones 8 Q.B.D. 147 at 149, 150 where he said -
"It seems to me that the expression "mutual debts and credits" was intended to comprise all ordinary transactions between the two persons in their individual capacities, and that "mutual dealings" was added to get rid of any questions which might arise whether a transaction would end in a debt or not. As was said by Malins, V.-C., in Booth v. Hutchinson, the additional words were intended to give a more extended right of set-off than previously existed."
The latter phrase i.e. "mutual dealings" is wider than the former phrase (see Rose v Hart [1818] EngR 520; (1818) 8 Taunt 499 at p.506.
The expression "mutual dealings", I note, was added by the English Bankruptcy Act in 1869 to the legislation there.
The various agreements e.g. Memorandum of Contract for Loan, Mortgage signed by the "borrower" (appellant) and "mortgagor" (respondent), the guarantees given to Esanda, the payment first to pay off the Jape and Greenleaf mortgage over respondent's property, creating a liability on the one hand in respondent to pay appellant (as the learned trial Judge found) and finally on the other hand the repayment extracted from respondent by Esanda, pursuant to its guarantees, or the mortgage, extinguishing the debt owed by appellant at least for the loan, satisfy the requirements of that part of section 86 relating to mutuality and are comprehended by the expression "mutual credits, mutual debts or other mutual dealings" as used in the section.
As to when the "line is drawn", I accept, as indeed do the arguments on both sides, that it is the date for the order for winding up of the appellant plaintiff. The cases on this subject are cited in "Australian Bankruptcy Practice", 5th Edit. at p.192. See e.g. Hiley's case cited below per Rich J. at p.487 and Dixon J. (as he then was) at pp.495-6.
The contentious question seems to be as to the state of affairs at the date of the order for winding up of appellant, viz. on 18 October 1978. Accepting as I do that the respondent was indebted to the appellant in the sum of $100,000 (i.e. as found by his Honour), was there a legal entitlement so crystallised and at the date of the order for winding up, as to enable it to be available to the respondent as a defence i.e. within the expression of s.86. If so, is it a defence which can be pleaded without the necessity for proving in a liquidation. See e.g. Peat v. Jones (supra) per Jessel M.R. at p.149 -
"The Statutes, however, contemplate the set-off being allowed in the Bankruptcy Court. This being so, if the debtor were sued in a common law Court, he could apply to the Court of Bankruptcy for an injunction to restrain the assignee from suing him. Then the Courts of common law, having regard to the equity of the statute, went a step further, and allowed the debtor to plead the set-off in the Court of common law itself without being under the necessity of applying for an injunction. This practice has been recognised in a series of decisions. The legislature must be taken to have been aware of the effect of those decisions when it passed the Bankruptcy Act, 1869, and not to have intended to alter the law."
(See also Mitchell v. Purnell Motors 20 A.B.C. 200 at 204) Or did the later payment perfect the defence.
First I wish to refer to in Re Moseley-Green Coal and Coke Company (Limited)
. . . . . . Ex parte Barrett x11 L.T.N.S. 193; also
(1861-73) A11.E.R. Rep.
459 (Barrett). The facts were that Barrett, a shareholder in the company, was
surety to the mortgagee company
for the mortgagor vendor. It had been agreed
that the company should pay off the mortgage debt in May 1862. The company,
however,
did not do this but gave to the mortgagee a promissory note for
monies due at six months dated in September 1862. In October 1862,
following,
a winding up order was made. In February 1863 the mortgagee requiring payment
of his money, Barrett induced his sister
to pay off the mortgage debt and to
take a transfer of the securities including the note which shortly after fell
due and was dishonoured.
Barrett's name appeared on the list of contributories
and therefore, prima facie, he was in debt to the company in respect of the
relevant amount. He obtained a transfer of the note from his sister and then
asserted his right to set off his claim against the
company in respect of the
note in diminution of the sum due from him to the company for calls. It was
held that the payment by Barrett
to the transferee of the mortgage (i.e. his
sister) related back to the claim of the mortgagee before the winding up order
and that
Barrett was entitled to a set off in that sum against the company's
claim.
The Lord Chancellor, Lord Westbury, said, inter alia, (at p.195) -
"Then comes the mischievous thing, in winding up as in bankruptcy, of permitting a debtor to purchase up counter claims subsequently to the winding up order for the purpose of making a case of set-off; and then, whether there is not an exception in the case when there is an actual ownership of a counter claim, which, though arising subsequently to the winding up order or the bankruptcy, yet is a consequence of some anterior matter. And then comes the material question in the present case: Does the contract of suretyship, incurred as it was by Barrett anterior to the winding up order, with its attendant rights, give such retroactive force to Barrett's possession and ownership of the note as to enable him to refer it back to that contract or relation, before the winding up order was made? My present impression is that it will; that he is a bona fide possessor of the note, and therefore that he has a right to a set-off."
(His Lordship later adhered to his "present impression"). This case is referred to in authorities to which I shall refer later; but it will be noted that, as at the date of the winding up order and since the company had not paid the mortgage debt, Barrett may have been liable as surety for its payment; he was liable anyway as a contributory. Yet at that stage there was nothing owing to him at all and it follows, therefore, nothing which could satisfy the description of a mutual credit. After the winding up, Barrett then gained entitlement to the note given to the mortgagee by the company i.e. by first his sister paying off the mortgage debt and taking the transfer of the securities including the note, and then by his obtaining entitlement to the note. Only then was the note transferred to him. So the mutual debt and credit were respectively to the company by Barrett for calls and to Barrett from the company in respect of its liability for the mortgage debt evidenced by the note which had been but recently obtained by Barrett and certainly since the winding up. He was therefore entitled to the mortgage debt owed (now) by the company to him and presumably as a surety who had paid up the amount of the guarantee to require reimbursement from the company (principal debtor).
In Daintrey (earlier cited) the facts were that Mr. Mant was a Solicitor as also was Daintrey. He owed Mant 86 pounds before 24 December 1892. On that date, Daintrey committed an act of Bankruptcy, Mant having no notice thereof. On 31 December 1892 Daintrey sold his practice to Mant for a sum to be calculated as a share of profits from Mant acting for former clients of Daintrey, the sum to be for three years only calculated annually on 1 January each year. On 17 January 1893, a receiving order was made on Daintrey, when Mant then discovered the act of Bankruptcy. After three years, Mant calculated profits owed to Daintrey as 300 pounds paying this sum less 86 pounds to the Trustee in Daintrey's bankruptcy. The Trustee objected, contending that 300 pounds should have been paid in full, Mant having a right only to prove for the 86 pounds. It was held that these were "mutual dealings" under Bankruptcy Act 1883, so Mant was entitled to set off the 86 pounds. Bigham J. (Divisional Court) whose judgment was upheld in the Court of Appeal, said (568) -
"In the case before the Court. . . . the debt on the one hand, and the agreement out of which the cross debt arises on the other hand both came into existence before the date of the receiving order, and the account, must be taken by placing the one debt against the other and ascertaining the difference."
Lindley M.R. said (572) -
"Under the circumstances it is clear that when this agreement was executed very considerable sums would become payable under it."
Romer L.J. said (573) -
". . . the amount which ultimately became payable by them could not be ascertained until some time later than the date of the receiving order and it was possible the amount might be very small; but whatever sum eventually became payable. . . . . to Daintrey (was) by virtue of this agreement of December 31 1892 and of nothing else."
I note that Wright J. whose judgment in the Divisional Court was not followed had said - and those expressions were not rejected by the Court of Appeal - (547)
". . . . . and the question is whether there ought to be such a set-off of a debt due from the bankrupt before his bankruptcy against a debt to the bankrupt's estate which did not come into existence as a debt, demand, or liability until after the date of the receiving order, but was until after that date a mere possibility of indebtedness. In considering this question there are three things which it is specially important to observe. The first is that there is nothing to shew any connection between the cross demands. They are in respect of entirely separate and independent transactions. The second is that Mant was not under any obligation to carry on the business which he had bought. He might not choose to do any business, or none might be offered to him, or there might not be any profit."
His Honour seems to be stating that the sum later the subject of set off need not before the winding up order be quantified or even certain to become due.
Next it will be convenient to consider the judgment referred to extensively by both Counsel, viz. in Re Fenton; ex Parte Fenton Textile Association Ltd. (1931) 1 Ch 85 (Fenton). Fenton guaranteed advances by certain banks to a Textile association. Later he executed two deeds of arrangement in favour of creditors. The Association went into liquidation. Its Liquidator lodged a proof against Fenton's estate in respect of the sum of money due by him to the Association. Fenton's trustee rejected the proof (he wished amounts owing to be fixed by the Court) and claimed to set off various sums advanced by the banks to the association which were the subject of Fenton's guarantee. At least one bank had submitted a proof in Fenton's Estate; nothing had been paid to them.
The question for determination was whether Fenton could set off his contingent liability to the banks against the amount claimed by the Association.
It was held that Fenton or his trustee, not having paid any sums due under the guarantees to the Banks, his Trustee was not entitled under the Bankruptcy Act 1914 s.31 (equivalent to s.86) to set off the contingent liability under the guarantees against sums due from him to the Association.
There are various statements in the judgment of Lord Hanworth M.R., (the emphasis in whose judgment was somewhat different to those of the other Lord Justices), to which I would refer. He said (104) -
"The right of a surety to be protected from the liability that will fall upon him in case of default by the principal debtor is clear, and is not confined to cases in which he has paid the creditor. As soon as any definite sum of money has become payable to the creditor, the surety has a right to have it paid by the principal and his own liability in respect of it brought to an end: see the cases collected in Rowlatt on Principal and Surety, 2nd ed. p.186. . . . . The right, however, as pointed out in the latter case is for protection and does not enure to the surety so as to justify an order to pay him the sum for which he stands in peril; for the surety who has not paid the principal creditor cannot give a discharge as against the principal creditor. . . . . . . . This being the right of the surety it also seems clear that the time for ascertaining what mutual debts, credits and dealings were existing between the debtor and other persons is the date of the receiving order."
(His Lordship referred to Daintrey in respect of his last statement).
He continued (p.106) -
"In Ex parte Barrett Lord Westbury decided that where a surety, who was such before the winding-up, paid off the debt of his principal debtor after the winding-up and received the securities held by the creditor, he was entitled to be treated as being in the same position as if he had paid off the debt before the winding-up and to set off his payments so made, because he had fulfilled his contract made before the winding-up and his right arose not by reason of dealings after, but before the windingup order. The Lord Chancellor clearly laid stress not only on the fact that the liability was outstanding at the date of the winding-up, but had in fact been fulfilled by payment which turned the surety into an actual creditor, and he was, therefore, no longer merely under a contingent liability.
Then he summed up what he took from the cases to that point as follows:- (p.107)
"Thus, so far as the cases go, it had been decided that a surety is entitled to a right to prove if (a) his liability arose under a guarantee given before the date of the receiving order or winding-up order, and (b) he has in fact paid to the creditors the sum that he seeks to set off. No case has decided that he can set off his contingent liability before he has changed that, by payment to the creditor, into an actual debt due to himself. Several cases have indicated a doubt whether there could be right to prove before such a payment."
Particularly, coming after the reference to Barrett, it seems that His Lordship did not regard as crucial, that payment must be before the date of the order for winding up. At p.107, he referred to two further authorities, namely, Sampson v. Burton (1820) 2 Br. & B.89, and Rose v. Hart (supra) from which he quoted. He went on - (108
"These two cases taken together explain the intention of the statute. The intention was to confine mutual credits to precuniary demands, or to those subjects, which at some subsequent time might become of a pecuniary nature."
(Emphasis is mine.)
His Lordship continued
"To the words in previous Bankruptcy Acts, the Bankruptcy Act of 1869 added "mutual dealings" to the section, and we have to consider its exact terms to see whether a set-off can be allowed on such facts as are now present to the Court. If the contra right were one which was effective before the receiving order, though its quantum was measured afterwards the system of set-off would apply: see In re Daintrey; ex Parte Barrett; and Palmer v. Day & Sons, where an authority given before the receiving order resulted in a money claim after the receiving order."
He referred to Daintrey thus - (108)
"In re Daintrey, when the datum line was fixed by the receiving order being made, it was clear, as Lord Lindley M.R. said, that very considerable sums would become payable under the agreement entered into between the parties before the date of the receiving order, that is, if the agreement was carried into effect according to the intention of the parties. It is true that there was no express obligation by Mant to carry on the business; but if he fulfilled his agreement, he would do so and thus provide a sum payable to the bankrupt. At the date of the judgment he had carried out his agreement and there was a sum of 33 pounds due to the bankrupt."
(Emphasis is mine); the reference I suggest being to what was said in the
judgment of Wright J. which I have quoted earlier. His judgment
was not
followed though there was no criticism of the words in the passage I cited.
His Lordship continued (109)
"In the present case, as I have pointed out, the liability of Fenton at the date of the receiving order was uncertain, though he might have made his position certain by payment. The words of the section seem clearly to connote an account capable of ascertainment on either side if not immediately, yet based upon authority or liability definitely undertaken. I find it difficult to construe those words or adapt that system to dealings in which there was a debt on one side due to the other, and per contra there was not a debt or a certain liability, but one in respect of which there was a right of protection and no more; a liability which could not be turned into a direct contra money claim, unless and until the debt had been paid by the surety, who then, and not till then, would become entitled to give a discharge for the sum paid to him. This he had not done at the date of the liquidation when his rights became determined."
Next his Lordship went on to consider the question of double proof as another reason why the claim of Fenton's trustee should fail. He said (110) -
"If the trustee of Fenton's estate were allowed to set off the debt due to the banks which Fenton guaranteed, he would exercise that right in respect of the same debt for which the largest creditor bank has already proved, and the other two can prove. It would in effect be a double proof. But it would be more: it would be an allowance to Fenton's estate in full of a debt due to another which Fenton has not paid himself; with the result that Fenton's general creditors would benefit to the extent of the debt which is primarily due from the Association to the banks. The rule, therefore, against double proof also prevents Fenton's trustee from setting off this liability of Fenton's to the banks which has not crystallized into a debt due to Fenton."
Lawrence L.J. at p.112 examined the circumstances as to what may or may not be the subject of set off under the section. After referring to various authorities including Daintrey, he said (113) -
"The question therefore is, whether (assuming that there were mutual dealings within the meaning of the section and assuming that there were provable debts on both sides resulting from such dealings) there was any sum due from the estate of the principal debtor to the estate of the surety at the time when the right to set off was claimed by the trustee of the surety, regard being had to the fact that at that time nothing had been paid by or on behalf of the surety to the principal creditors and the estate of the principal debtor was still liable for the whole amount of their debts."
Returning to the Fenton case, he said (114) -
"The reason why, in my opinion such a claim (although it apparently has the requisite attributes for a set-off under the section and although it is one from which the principal debtor would be released by the order of discharge) cannot be set off is because so long as the estate of the principal debtor remains liable to the principal creditor the surety will not be permitted to prove against the estate of the principal debtor, as such a proof would be a double proof for the same debt, and would therefore be inadmissible as being contrary to the established rule in bankruptcy."
In refusing the entitlement of Fenton's trustee, he said (115)
"I am of opinion that although the claim to indemnity by the trustee of Fenton's estate is a provable debt arising out of a mutual dealing between the Association and Fenton, it cannot be set off against the debt due from Fenton's estate to the liquidator of the Association under s.31, because the mutual dealing, at the time when the account under s.31 has to be taken, has not by reason of the rule against double proof resulted in any sum becoming due from the Association to the trustee of Fenton's estate which could properly be entered on the debit side of the account."
It is apparent then that the judgment is related to the problem of double proof rather than founded upon any other basis.
Romer L.J. summed up what he described as the first question as follows (117) -
"The first question to be determined on this appeal, and one which if answered in the negative is in my opinion conclusive, is this. Is a claim by a surety, who has not paid off the principal creditor, in respect of the contingent liability to the surety of the principal debtor one that can be proved by the surety in the principal debtor's bankruptcy?"
He continued (118) -
"But I cannot agree that a surety who has not paid off the principal creditor can prove in the bankruptcy of the principal debtor so as to share in the distribution of his assets unless the principal creditor has renounced in some way his right to lodge a proof himself while preserving, of course, his rights against the surety. To allow such a sharing in the assets would be to subject the assets to two claims in respect of the same debt, and this is contrary to the well established rule in bankruptcy against double proof."
The judgment continued in a way which indicates his Honour's overall view (120) -
"The claim of Fenton against the Association in either case would be a claim in respect of the same debt as that claimed by the banks. In both cases the claim of Fenton would come within the definition of debts provable in bankruptcy contained in s.30 of the Bankruptcy Act. But so does the claim of the banks, and the only reason why Fenton is prevented from proving his claim is that his claim is in respect of the same debt as is that of the banks, and as between him and the banks the latter have the prior right of proof. I am accordingly of opinion that the claim of Fenton's trustee cannot be proved in the liquidation of the Association, there being no evidence that the banks have in any way renounced their right to prove."
In my view, on the reading at least of the judgment of Lord Hanworth M.R.,
the Fenton case does support the respondent's arguments
here; and insofar as
Lawrence and Romer LJJ have found against the Fenton trustee, they did so upon
the basis of double proof, a
matter which cannot arise in this case upon the
evidence of Mr. James referred to earlier.
However, some statements in re A Debtor (1956) 3 All.E.R. 225 appear to require in the judgment of Lord Hanworth to be read as if essentially the payment relied on by the surety would have had to have been made before the order for winding up. So I turn next to in re A Debtor even though slightly out of chronological order in referring to the authorities. There are, be it noted, factual differences between in re A Debtor, Fenton and the case before us.
Relevant facts in re A Debtor were -W guaranteed C's overdraft account to a Bank
W owed C some 100 pounds.
October 1954 Receiving Order made against W.
July 1955 W's Trustee (to recover title
deeds) paid 133 pounds to the BankOctober 1955 W's Trustee enters judgment
in discharge of C's overdraft.
against C for the 133 pounds.December 1955 W, having served a Bankruptcy
Notice on C (who failed toFebruary 1956 A Receiving Order was made
comply therewith) caused to be
issued a Bankruptcy Petition
against C.
against C.C appealed against this order contending he should have been allowed to set off against W's debt the amount due to him viz. 101 pounds.
It was expressly conceded (the concession (being) of "the first importance") on behalf of C that the relevant date for the application of s.31 was that of the receiving order against W.
So, the trustee for the surety W (plaintiff) suing the principal debtor C (defendant) for a debt which arose after the surety's receiving order was met with a claim for set off in respect of a debt incurred by the surety to the defendant (principal debtor) before the date of the surety's receiving order.
But in the case we are considering, the principal debtor (appellant) suing for a debt which arose before the date of the order for winding up of appellant is met with a claim of set off (if that be the correct term) for an amount paid by the surety (respondent) after the date of the order for winding up of the appellant (principal debtor) to discharge principal debtor's liability to the principal creditor; but in respect of a liability which arose before the winding up order.
It is necessary to bear in mind the words of Lord Evershed (p.231) viz. that the precise point with which his Lordship dealt was not raised in Fenton; and Hodson L.J., after referring to Fenton, said (p. 234) -
"The decision there turned mainly on the point that to allow the set-off would be to allow a double proof in respect of the same debt in the winding up of the association, and the question now at issue, whether a surety who has paid the debt which he has guaranteed can relate that payment back to a date before the liquidation or bankruptcy in question, was not decided. It is true that the members of the court emphasised that Fenton had paid nothing under his guarantee, but they must have had in mind payment or non-payment before the date of the liquidation."
The decision records that the receiving order the date of which was conceded to be relevant for the application was that against the estate of W (guarantor). Since the action by W's trustee to recover on the guarantee was against C (principal debtor) and C was contending that he had the right to set off what was owed to him by W already, namely some 101 pounds, to the end that thereby the sum which W's trustee might have recovered against him would be insufficient to support a bankruptcy petition, one wonders what the position may have been if no such concession was made. Had it not one might argue the debt to W's trustee preceding the order against C appointing a receiver could have been reduced by off setting against it the amount owed C by W earlier - i.e. that the "relevant date" more appropriately should have been treated as the date of the receiving order against C.
Except for the expressions in Re a Debtor (e.g. per Hodson L.J. p. 234 H) it did not appear that members of the Court in Fenton did have in mind payment or non payment before the date of liquidation. It is of importance to note what Lord Evershed said of Fenton at p. 229 -
"It will be observed that the case is in certain respects analogous to that now before us, where the parts of Fenton and the association are, as it were, taken by Mr. Waite and the appellant respectively. It is, however, to be noted that in Re Fenton, Ex p. Fenton Textile Assocn., Ltd. (1) (unlike in the present case) the relevant date was treated as that of the association's liquidation. Moreover, as already noticed, nothing had been paid to the bankers by Fenton or his trustee. The question with which we are now concerned, the question what the situation would have been had Fenton's trustee paid off the sums due to the association's bankers which Fenton had guaranteed, did not therefore directly arise for the determination of the court. The decision turned primarily on the court's view that to allow the set-off would, in effect, be to allow a double proof in respect of the same debt in the association's winding up. The reasoning of the judgments, however, is clear authority for the proposition which I have earlier invoked - that, if at the relevant date a guarantor has not paid the principal creditor (and has not taken any other step to enforce his rights against the principal debtor), and so long at least, thereafter as that situation continues, there is no "debt due" to the guarantor from the principal debtor capable of forming the subject of a set-off, under s.31 of the Bankruptcy Act, 1914, against a debt due from the guarantor to the principal debtor."
(Emphasis is mine)
He considered, therefore, that he was "thrown back" on the terms of s.31 of the Bankruptcy Act 1914 for the right of set off claimed as a special right defined and ordained as he said by the Statute. He said (231) -
"I have already expressed my view that, as I read the language of the section, and on the footing, which Counsel for the appellant has conceded, that the relevant date for the application of the section . . . . . . . is the date of Mr. Waite's receiving order, there was then nothing "due" from the appellant to the bankrupt; and that the sum paid nearly ten months later by the respondent trustee to discharge the sum then due to the appellant's bankers which may well have been quite different from the sum due on October 1954 cannot be treated as a mere quantification of an obligation in the nature of a debt already existing on the last mentioned date."
Reference must also be made to Hiley v. The Peoples Prudential Assurance
Company Limited (In Liquidation) and Others [1938] HCA 40; (1938) 60 C.L.R. 468 (Hiley)
The facts in that case I proceed shortly to summarise.
A policy holder (Hiley) borrowed money from an Assurance Company. As security he gave a mortgage over land and deposited the policy as collateral security. The mortgage was transferred by the Assurance Company by way of security to another company. That company later transferred it by way of security to a bank. Subsequently the Assurance Company was wound up. The liquidator notified Hiley that the Assurance Company would not carry out its obligations under the policy. Hiley had made all payments of interest and premiums under the mortgage though not always punctually. The Assurance Company accepted the payment; the mortgage was never called up; at the date of liquidation no interest or premium was overdue. After the liquidation, litigation was commenced by the company raising an issue, inter alia, whether the transferring of mortgages by the company had been ultra vires. This was settled by compromise; the Bank retransferred to the Assurance Company, amongst others, the Hiley mortgage. The suit was continued by the Company against Hiley for the recovery of the moneys secured by the mortgage. He claimed to be entitled to set-off against the amount secured by the mortgage, the damages suffered by him by the repudiation of the policy.
It was held (Latham CJ dissenting) that the entire amount of the mortgage became subject to the Bankruptcy Act 1924 s.82 right of set-off (equivalent to s.86) i.e. Hiley was entitled to set-off against any amount claimed by the plaintiff under the mortgage, the damage suffered by the repudiation by Assurance Company of its obligations under the policy.
The words of Latham C.J. although a dissentient in the result, at page 483 are I consider in point -
". . . . . . . that is sufficient to justify a set off if at the date of the winding up there existed contractual obligations the enforcement of which might give rise to a claim provable in the winding up."
See also Starke J. at p. 490, 491 where he said -
"There are cases in the books in which sureties who have been compelled to pay a principal debt after bankruptcy have been allowed to set off the sum so paid against debts due to the bankrupt (cf. Rowlatt on Principal and Surety 2nd Edit. (1926) page 307) but the obligation of the surety in those cases arose before bankruptcy and was an obligation which might and did in fact end in a money claim."
Having read the page 307, it may be that page 319 was intended where his Honour mentioned 307. There the passage reads -
"A surety becoming bound at the request of the principal before the bankruptcy of the latter, but compelled to pay by the creditor after the bankruptcy, is entitled to set off the sum paid against debts due by him to the bankrupt."
Authority cited was Jones v. Mossop [1844] EngR 803; (1844) 3 Hare 568. But, note the admission set out (ibid) p.571; i.e. it is a right based on equitable principles rather than bankruptcy legislation with which the jdugment is concerned. But see "Williams and Muir Hunter on Bankruptcy" 19th Edit. p.201.
A similar statement occurs in the 3rd edition of Rowlatt though by this time incorporating a reference to Fenton; so suggesting the author accepted that the Fenton decision made no difference to the statement set out in the earlier edition. Also, with respect, very much in point is the statement of Dixon J. (as he then was) ibid p.496.
"If the liquidator in the present case be regarded as having acquired on behalf of the respondent company a new right to Hiley's mortgage not subsisting in the company at the commencement of the winding up, then it is easy to understand why the company's liability on Hiley's life policy should not be set off against Hiley's liability for the mortgage moneys which the company would thus have acquired after the commencement and in the course of the liquidation. As against the bank, assuming it to have been a bona fide transferee of the mortgage for value, Hiley could claim no such set off. If the liquidator on behalf of the company simply obtains the bank's rights in the course of liquidation and stands in the bank's shoes, no right of set off arises, because the credits are not mutual at the commencement of the winding up. But, in my opinion, the foundation of this reasoning is incomplete and the conclusion is unsound. It leaves out of account more than one consideration. In the first place, the general rule does not require that at the moment when the winding up commences there shall be two enforceable debts, a debt provable in the liquidation and a debt enforceable by the liquidator against the creditor claiming to prove. It is enought that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set off. If the end contemplated by the transaction is a claim sounding in money so that, in the phrase employed in the cases, it is commensurable with the cross demand, no more is required than that at the commencement of the winding up liabilities shall have been contracted by the company and the other party respectively from which cross money claims accrue during the course of the winding up (Naoroji v. Chartered Bank of India (1); Astley v. Gurney (2); Palmer v. Day & Sons (3); In re Daintrey; Ex parte Mant (4))."
Later he said (499)
In my opinion the answer is that the entire amount of the mortgage becomes subject to the statutory right of set off. All the respondent company's rights in relation to the mortgage arise out of and are referable to rights subsisting at the time when the winding up began. It pursued or prosecuted whatever rights then belonged to it with the result that it obtained a right to call for an unencumbered legal title to the mortgage to which, unless the transfers or one of them were in truth invalid, it was entitled, on liquidation, only in equity subject to encumbrances. But this was the consequence of pursuing rights subsisting at that time and involved no new and independent transaction."
The dicta from the various cases, e.g. Barrett, Daintrey, Fenton (Lord
Hanworth M.R.), Hiley and In re a Debtor, passage at p.28
hereof, support the
respondent's contentions. In particular, I note that Dixon J. at p.496, in the
passage quoted did not insist
that at the commencement of the winding up the
then state of the dealings was that they must "mature or develop" into
pecuniary demands
capable of set off. To the same effect were the words of
Lord Hanworth in the passage at p.107 in Fenton cited earlier at p. 19 hereof.
On the other hand Re Bruce David Realty Pty. Ltd. 1969 V.R. 240; 14 F.L.R. 56
might be said to support the appellant's arguments. There the facts were -
February 1960 Bankrupt opens account with
Bank; overdraft limit $10,000.31 May 1961 Order for winding up of Bruce
Account guaranteed by company.
David Realty Pty. Ltd. (the company)22 February 1962 Sequestration Order against Griffiths
on petition of the National Bank of
Australasia Ltd. (the Bank).
(bankrupt). Bank lodges proof27 May 1964 Bankrupt's trustee lodges a proof
against liquidator (on guarantee)
and Trustee.
of debt for $27,741 with thePortion of the proof of debt was in respect of an amount for which the company had (prior to liquidation) guaranteed the bankrupt's account with the Bank. The Liquidator rejected the proof (sic)(241) (per Adam J.)
liquidator.
"this amount (representing the liability of the company by way of guarantee in respect of the bankrupt to the (Bank) . . . . . that the said Bank has lodged a proof of debt against the Company in respect of the liability and by this election and admission of the said debt the rejection is correct."
The parties in the report were Principal Creditor (Bank), Principal Debtor (Bankrupt), Surety (the Company), and the company had already accepted (perforce) its liability on the guarantee. It was the principal debtor via his trustee who sought to prove in the liquidation of the company, and the liquidator rejected the proof (242).
There is little reference to authority; but the Fenton judgment was summarised thus -
"This decision of the Court of Appeal established that the undoubted right of a surety in general to be indemnified by the principal debtor against his liability to the principal creditor does not, save to the extent that such liability to the principal creditor has been discharged by payment made by the surety, give rise to any debt which can be set off as against the principal debtor."
After discussing the reason for this he continued - (243)
"for some purposes, no doubt, the contingent liability of a surety before payment constitutes him a creditor, if the principal debtor becomes bankrupt, but until the surety had discharged his liability, wholly or in part, to the principal creditor, the bankrupt is not indebted to him."
Then comes what does not appear to me to emerge from Fenton - (243)
"The principle of mutual dealings does not permit of a surety setting off his claim to be indemnified by the bankrupt principal debtor, save to the extent that at the commencement of the bankruptcy the surety has paid the guaranteed debt to the principal creditor."
(Though some support might be found in In re a Debtor I observe that it seems the commencement of liquidation and not bankruptcy was the significant date.) He continued -
"Clearly neither the suffering of a judgment for the amount of its liability under the guarantee nor the subsequent lodging of a proof of debt by the bank for the amount thereof, even though admitted, can be regarded as equivalent to payment by the guarantor company for purposes of the mutual dealings principle, for neither discharges the principal debtor from his primary liability to the bank. Only payment in fact by the surety to the principal creditor would achieve this and only then would the principal debtor become indebted to the company."
This statement seems to move away from insistence of payment before bankruptcy (or liquidation). The headnote as to what was held (as reported in 1969 V.R.) does not refer to the commencement (of bankruptcy) as crucial and except for in re a Debtor does not emerge clearly from other authorities. And his Honour was at pains to avoid a double proof.
In this welter of dicta I feel I am, as the saying goes, thrown back on the terms of s.86. The weight of authorities I suggest supports the decision I reach.
My conclusions then are based on what appears to me to be the meaning of s.86 assisted by the decisions to which reference had been made. I consider that on the facts there had been mutual dealings; an inspection of the record of repayments of the loan show there had been a failure of the appellant to repay instalments monthly on the dates required and a subsequent failure to pay the total sum at the end of the term. The "customer" (appellant) had therefore become liable to Esanda under the terms of the Memorandum of Contract for Loan for the whole amount outstanding; that there had been a loan to appellant having been found by the learned trial Judge so the surety respondent was, in terms of the guarantee(s) "liable" to Esanda. All of these events preceded the date of the order for winding up of the appellant. So far as is necessary to note, the guarantee explicitly provided that the making of a demand "shall not be a condition precedent to any liability of the guarantor thereunder".
The meaning of "due" in s.86 is of first importance. The word is referred to thus in "Black's Law Dictionary" - 5th Edit. p. 448 -
"The word "due" always imports a fixed and settled obligation or liability, but with reference to the time for its payment there is considerable ambiguity in the use of the term, the precise signification being determined in each case from the context. It may mean that the debt or claim in question is now (presently or immediately) matured and enforceable, or that it matured at some time in the past and yet remains unsatisfied, or that it is fixed and certain but the day appointed for its payment has not yet arrived. But commonly, and in the absence of any qualifying expressions, the word "due" is restricted to the first of these meanings, the second being expressed by the term "overdue", and the third by the word "payable."
In my opinion, on the facts of this case, the amount of the oustanding loan made to appellant was "due" from the respondent to Esanda and before the date of the liquidation; that it was later paid removed any doubt as to respondent's entitlement to rely on the payment defensively in these proceedings. If it could be said that there was only a contingent liability earlier, then the respondent's defence was complete and that liability quantifies into a precise sum before the hearing concluded. In my opinion there was, before the order for winding up of the appellant, an amount outstanding under the Memorandum of Contract for Loan and due to Esanda exceeding $100,000. The admitted fact was that there had not been any repayment to Esanda Ltd. in reduction of the loan. The respondent became liable on its guarantee and mortgage to Esanda, also before the order for winding up of the appellant; thus the appellant at that time was liable to indemnify the respondent for amounts it must pay to Esanda. The precise amount was in due course quantified by respondent's repayment of at least the amount of the loan to Esanda.
There was, in my view, on the proper construction of s.86 and before the order for winding up of the appellant, a debt due from the respondent to the appellant - as the learned trial judge correctly found - and there was also before order for winding up a sum in excess thereof "due" by appellant to the respondent which the respondent was entitled to set off against the debt it owed the appellant; or, at least, as Dixon J. said in Hiley -
". . . . at the commencement of the winding up mutual dealings exist which involve rights and obligations. . . . absolute or contingent of such a nature that afterwards they mature or develop into pecuniary demands capable of set off."
There were at the commencement of appellant's winding up such "dealings", involving such "rights and obligations"; and they were of such a nature that they did "mature or develop into pecuniary demands" capable in the hands of the respondent of set off. So I would find that respondent has made good its claim.
Respondent also relies upon an entitlement of the defendant to an equitable set-off. Presumably this right will always be as wide as that entitling one to a legal set-off. See High v. Bengal Brass Co. & Bank of N.S.W. (1921) 21 S.R. 232 at 238 referred to in "Equity Doctrines & Remedies" supra at p.669 et seq. As to the requirement, for the establishment of an equitable set-off, that the plaintiff's title be "impeached" see (much quoted) Rawson v. Samuel (1839) Cr. & Ph. 161 at 179 referred to in Morgan & Son Ltd. v. S. Martin Johnson & Co. Ltd. (1949) 1 K.B. 107; the last named case was cited with approval in Hale v. Victoria Plumbing Co. Ltd. (1966) 2 Q.B. 746 at 749. On the facts as found here, the defence is intimately connected with and would "impeach" the title of the appellant to recover the $100,000 rather than operate in diminution of the claim. See "Equity Doctrines & Remedies" p.672. Mutuality may not always be necessary for such a defence. (see e.g. Clark v. Cort [1840] EngR 1030; (1840) Cr. & Ph 154; 41 ER 449. cf. Re Whitehouse & Co. (1878) 9 Ch.D. 595 at 597. In some circumstances, therefore, one could argue that an equitable set-off may have a wider operation than does s.86. Nevertheless the wording of the section and its history seem to me to be intended to and, in fact, provide a code; the word "due" has a certain quality of adaptability which ought allow scope for an argument which would afford the same result as would an equitable remedy. In Mathieson's Trustee v. Burrup, Mathieson & Co. 1927 1 Ch. 562 at p.569 Clauson J. said -
"On principle, it appears to me that the mere fact that the debt is an equitable debt, and not a legal debt, has no bearing at all on the question whether it is available for the purpose of set-off under s.31. The Bankruptcy Act, as I understand it, is an Act regulating the proceedings of a Court which has always been a Court of equity, proceeding on equitable principles, recognizing equitable debts, subject of course to such infirmities as are sometimes present, but drawing no distinction between equitable and legal rights for purposes of administering the estate of the bankrupt. I think, at this time of day, it would be very unfortunate, if it were held that a Court of Bankruptcy is in any way fettered by any such distinctions, except so far as any Court of equity is fettered by the fact that certain infirmities may in certain circumstances attach to equitable rights as compared with corresponding legal rights. Accordingly I decide that this set-off claimed by the defendants is a good set-off and is operative to overtop the claim which has been made by the plaintiff in his action."
A comprehensive statement of principles and reference to authorities on equitable set off is to be found in Re Galambos & Son Pty. Ltd. v. McIntyre 5 A.C.T.R. p.10 per Woodward J.
Having regard to my finding as to the operation of s.86 it is not necessary finally to deal with this argument. My view, however, is that there is no separately available defence of equitable set-off. Were it available, my view is that it would operate here to defeat appellant's claim.
If the payment by respondent, out of the proceeds of Esanda's sale of Portion 1218, could be said to be a payment by one of joint obligors (i.e. since both executed the mortgage pursuant to which the mortgagee's (Esanda's) rights were implemented) a passage from "Corbin on Contracts" Volume 4 Ch. 52 para. 763 is in point -
"When two or more obligors are bound for the same performance, whether jointly or severally, full payment by one discharges the obligee's rights against them all; and yet if the one making such payment is in the position of a surety for another obligator, with respect to some or all of the debt, he is in equity subrogated to the obligee's former rights and remedies to compel the others to pay their just proportion."
But no argument was offered by the parties as to payment of portion of any sum. Accordingly, I do not deal further with this matter.
No evidence discussed the amount owing if any to appellant's creditors; their position might be worsened by appellant's loss here; yet they have been advantaged in that Esanda will not seek any payment from appellant.
I would reject this appeal. The appellant should pay respondent's costs.
The essential facts of this matter are as follows:1. On 18 October, 1976, the respondent (the defendant in the action) gave to Esanda Limited a mortgage over its leasehold estate in the whole of the land comprised in Portion 1218 Hundred of Bagot in the Northern Territory. The mortgage was given in consideration of any loans, advances, credits or accommodation, whether made or given upon the signing of the mortgage or which might thereafter be made or given by Esanda to the respondent or to the appellant (the plaintiff in the action) (in the mortgage referred to as "the borrower").
The mortgage concluded with the following provision:
"AND the mortgagor (the respondent) and the borrower (the appellant) undertake personal liability to pay the principal and interest payable hereunder and any mortgagor not being a borrower guarantees payment thereof and the mortgagor and the borrower agree that personal liability shall be additional to any liability under this security".
The mortgage was executed by the appellant as well as by the respondent and
Esanda.
2. Also on 18 October, 1976, the appellant made application to Esanda for a
loan. The application was made in writing on a form which,
if accepted by
Esanda, would become a contract for loan. The form is headed, "Memorandum of
Contract for Loan". The application was
accepted by Esanda on 29 November,
1976. The amount of the loan was $100,000. It was to bear interest of 17.5 per
cent per annum.
The period of the loan was one year. It and the interest were
to be paid by 11 consecutive monthly instalments of $1,458.34 and final
instalment of $101,458.26. The date of the making of the loan, that is the
actual provision of the money, was 26 November, 1976.
By paragraph 5 of the
document the appellant requested Esanda to disburse the amount of the loan by
payments made to two persons,
Jape and Greenleaf, of $99,750, and to Messrs.
Ward Keller, a firm of solicitors, of $250. Clause 2 of the document provided
for
default. In the event of a default in payment on the due date of any
instalment or part thereof "the whole of the balance of principal
remaining
unpaid together with the due proportion of interest calculated up to the date
of the demand hereinafter referred to shall
at the option of Esanda become due
and payable on the day following demand. Such demand shall be deemed made when
the same is delivered
to the borrower or one of them personally . . . . . ".
Clause 6 of the document provided that principal and interest payable under
the contract of loan should be secured by "the attached Memorandum of
Mortgage. . . . . the terms of which shall be deemed to form
part of this
contract but notwithstanding the granting of the said Memorandum of Mortgage
the borrower undertakes personal liability
to pay the principal and interest
payable hereunder and agrees that such personal liability shall be additional
to any liability
under the said Memorandum of Mortgage". The mortgage is the
mortgage referred to in paragraph 1 hereof. The application was executed
by
the appellant under its common seal.
3. The sum of $100,000 advanced by Esanda was applied in the way that the
appellant had requested. But it was agreed that the payments
made were made
for the use and benefit of the respondent. The payments were made on 29
November, 1976, in order to discharge an existing
mortgage in favour of Jape
and Greenleaf over Portion 1218 Hundred of Bagot. The discharge of mortgage
was notwithstanding the date
of the payment, registered on 26 November, 1976.
On the same date the mortgage over the property given by the respondent to
Esanda
referred to in paragraph 1 hereof was registered.
4. On 18 October, 1976, the respondent and certain individuals executed a
guarantee in favour of Esanda whereby they guaranteed the
payment "of each and
all sums of money interest and damages in which the Customer described in the
Schedule hereto now or hereafter
be indebted or liable or contingently
indebted or liable to you (Esanda) on any account whatever including (without
limiting the
generality of the foregoing) any account relating to leasing or
hire purchase or loan". The customer described in the schedule to
the
guarantee was the appellant.
5. On 3 June, 1977, the respondent executed a further guarantee in terms
similar to that executed on 18 October, 1976.
6. On 18 May, 1978, the appellant was wound up.
7. The appellant was then in default under the contract of loan which it had
executed on 18 October, 1976. I do not say that because
some of the monthly
instalments (they appear to have been paid by the respondent) were paid late,
but because the entirety of the
principal sum of $100,000 was not paid at the
end of November 1977 when it was due. It was still outstanding at the date of
the winding-up
of the appellant on 18 May, 1978. It should be observed that
the provisions of the default clause (clause 2) of the loan agreement
which
require service of a demand are not in point. Clause 2 was designed to enable
Esanda to require the immediate repayment of
the principal if one of the
instalments was not paid in time. It did not deal with the position which
would arise if the whole or
part of the final instalment was not paid. Plainly
the appellant was under a liability to pay that amount at the end of November
1977 irrespective of the service of any demand.
8. On 6 June, 1978, the appellant demanded the repayment by the respondent of
the sum of $100,000. The sum demanded was found by his
Honour to be owing by
the respondent to the appellant. It was the sum borrowed by the appellant from
Esanda and paid at its request
to Jape and Greenleaf in discharge of the
mortgage to them. His Honour's finding resulted from the agreement of the
parties that
the payment to Jape and Greenleaf was made for the use and
benefit of the respondent. By reason of that agreement his Honour could
have
come to no other conclusion than that the money was owed by the respondent to
the appellant. There was no challenge by the respondent
to his Honour's
finding, but counsel said, somewhat strangely, that he did not concede the
correctness of it. It was plainly correct.
9. On 2 August, 1979, Esanda demanded the payment by the respondent of loans,
advances and credits made or afforded by it pursuant
to and secured by the
mortgage of 18 October, 1976, referred to in paragraph 1 hereof. Both before
and after 2 August, 1979, payments
were made to Esanda in discharge of the
respondents's indebtedness to it. These, for the most part, were made from the
proceeds of
sale received by Esanda as the result of the exercise by it of
powers of sale in mortgages or charges over assets of the respondent.
Before
the hearing at first instance commenced, there had been paid to Esanda the sum
of $127,556.74. But that was not the entirety
of the respondent's indebtedness
to Esanda pursuant to the securities which Esanda held. On 16 October, 1979,
Esanda, exercising
its power of sale as mortgagee, sold Portion 1218 Hundred
of Bagot. The sale was completed on 16 November, 1979. Esanda retained
out of
the purchase moneys the sum of $84,475.82 being the balance of the moneys
owing to it by the respondent. Thus the total of
the sums paid by or on behalf
of the respondent in discharge of indebtedness owing by the respondent to
Esanda was $212,032.56. Esanda
is owed no further sum. Included in the sum of
$212,032.56 paid to Esanda by or on behalf of the respondent was the sum of
$100,000
borrowed for the respondent by the appellant from Esanda. The
respondent was obliged to make good the appellant's default by reason
of the
provisions of the mortgage of 18 October, 1976, referred to in paragraph 1 and
the two guarantees of 18 October, 1976 and
7 June, 1977, referred to in
paragraphs 4 and 5.
10. The trial of the action commenced on 15 October, 1979. On 17 October, 1979, the learned trial judge reserved his decision. On 7 December, 1979, the respondent applied for leave to re-open its case. The purpose of its application was to enable evidence to be led of the sale of the mortgaged property and the payment of the sum of $84,475.82 referred to above. The application was opposed but allowed by his Honour. A ground of appeal against his Honour's decision to allow the re-opening was abandoned during the hearing before us.
The essence of the defence to the proceedings was that the respondent was entitled to set off against the amount of $100,000 owed by it to the appellant the amounts paid by it or on its behalf for the appellant's indebtedness to Esanda. Those amounts included, as I have said, the very amount which the appellant had, upon the respondent's behalf, borrowed from Esanda and for which the appellant sues in these proceedings.
The respondent claimed to be entitled to set off the amounts which it had paid, or which had been paid on its behalf, by reason of the operation of s.86 of the Bankruptcy Act 1966 as applied by s.291(2) of the Companies Ordinance of the Northern Territory. Alternatively the respondent submitted that it was entitled to the set-off by reason of the equitable principles relating thereto. His Honour upheld the respondent's submission that it was entitled to the set-off it claimed by reason of the operation of s.86 of the Bankruptcy Act.
The appellant submitted that the case was outside s.86 of the Bankruptcy Act because, at the date of the winding-up of the appellant, no payment had been made in discharge of its liability to Esanda for the indebtedness of the appellant, whether as principal debtor under the mortgage of 18 October, 1976, or as surety under the guarantees. Until such a payment were made, the appellant was not obliged to indemnify it. The respondent's right to set-off depended upon payment. Since payment was made after the winding-up there was, at the date thereof, no amount owing by the appellant to the respondent and thus nothing to set off against the liability of the respondent to the appellant. The appellant further submitted that, by reason of the winding-up of the appellant, the equitable principles relating to set-off did not apply. Section 86 was an exhaustive statement of the circumstances in which set-off would be permitted where one of the parties was bankrupt or in liquidation.
An initial question discussed during argument was whether the provisions of s.86 of the Bankruptcy Act could be relied upon by the respondent in proceedings of this kind. The proceedings were ordinary civil proceedings for the recovery of a debt. No proof of debt was in question. However, a number of authorities establish that a person in the position of the respondent here may rely upon the provision, if he can show that he is otherwise within it. So much was decided in Peat v. Jones & Co. (1881) L.R. 8 Q.B.D. 147; re Daintrey, ex p. Mant (1900) 1 Q.B. 546 and Mitchell v. Purnell Motors Pty. Limited (1964) 20 A.B.C. 200 at p.204.
As I have said, the reason why the appellant submits that the respondent is unable to rely upon the section is that at the date of the winding-up of the appellant, 18 May, 1978, the respondent had not been called upon, pursuant to the mortgage of 18 October, 1976, and the guarantees of that date and of 3 June, 1977, to pay any money. Its liability to the respondent was thus said to be contingent only. It may never have been called upon to pay anything.
Unquestionably the general rule is that the date of the bankruptcy - the winding-up in the case of a company - is the date at which the account is to be taken for the purposes of the section; see, inter alia, re Daintrey, ex p. Mant (supra) at p.555; In re Fenton, ex p. Fenton Textile Association (No.1) (1931) Ch.85 and Hiley v. Peoples Prudential Assurance Co. Limited [1938] HCA 40; (1938) 60 C.L.R. 468. But in the words of Dixon J. (as he was) in Hiley's case (60 C.L.R. at p.497):
"It is enough that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set off. If the end contemplated by the transaction is a claim sounding in money so that, in the phrase employed in the cases, it is commensurable with the cross-demand, no more is required than that at the commencement of the winding up liabilities shall have been contracted by the company and the other party respectively from which cross money claims accrue during the course of the winding up (Naoroji v. Chartered Bank of India ((1868)L.R. 3 C.P.444, at pp.451,452); Astley v. Gurney ((1869) L.R. 4 C.P. 714); Palmer v. Day & Sons ((1895) 2 Q.B. 618, at p.622); In re Daintrey; Ex parte Mant ((1900) 1 Q.B., at pp. 568, 574)"
Strong reliance was placed upon that passage by counsel for the respondent. To it and the cases cited by Dixon J. in support of the propositions it contains I shall return. But it should be noted at this point that the mortgage and the guarantees pursuant to which the respondent's liability to Esanda arose, were all entered into prior to the winding up and that the appellant, before the winding up, was in default under its loan agreement with Esanda. The mortgage and the guarantees obliged the respondent to make good that default. That obligation, subject to Esanda calling upon the respondent to pay, also existed prior to the date of the winding-up.
In support of his submissions counsel for the appellant relied upon a line of authority commencing with In re Fenton earlier cited. In that case one Henry Fenton, who was a woollen manufacturer, formed an association known as the Fenton Textile Association Limited in order to amalgamate a group of woollen mills in which he was interested. In 1921, by reason of a severe trade depression, Fenton executed a deed and a supplemental deed of arrangement in favour of his creditors. Before entering into the deeds of arrangement he had guaranteed a number of debts owing by the association to certain banks. The association went into liquidation and the liquidator lodged a proof against Fenton's estate in respect of sums due by him to the association. The trustee of Fenton's estate rejected the proof and claimed to set off the various sums which had been advanced by the banks to the association for which Fenton had given his personal guarantee. The banks had proved against Fenton's estate under the guarantees but nothing had been paid to them. His liability to them had arisen prior to the execution of the first deed of arrangement; see for example (1931) 1 Ch. at p.88. In that respect the case was similar to the present.
It was held by the Court of Appeal that as none of the sums due under the guarantees had in fact been paid by Fenton or his trustee to the banks, the trustee was not entitled under s.31 of the Bankruptcy Act 1914 (the equivalent of s.86 of the Bankruptcy Act 1966) to set off Fenton's contingent liability under the guarantees against the sums due by him to the association.
After referring to a number of authorities Lord Hanworth M.R. said (p.107):
"Thus, so far as the cases go, it had been decided that a surety is entitled to a right to prove if (a) his liability arose under a guarantee given before the date of the receiving order or winding-up order, and (b) he has in fact paid to the creditors the sum that he seeks to set off. No case has decided that he can set off his contingent liability before he has changed that, by payment to the creditor, into an actual debt due to himself. Several cases have indicated a doubt whether there could be a right to prove before such a payment."
His Lordship went on to refer to the various forms the section had taken down to the Act of 1914 and to some further authorities. He continued (p.109):
"In the present case, as I have pointed out, the liability of Fenton at the date of the receiving order was uncertain, though he might have made his position certain by payment. The words of the section seem clearly to connote an account capable of ascertainment on either side if not immediately, yet based upon authority or liability definitely undertaken. I find it difficult to construe those words or adapt that system to dealings in which there was a debt on one side due to the other, and per contra there was not a debt or a certain laibility, but one in respect of which there was a right of protection and no more; a liability which could not be turned into a direct contra money claim, unless and until the debt had been paid by the surety, who then, and "not till then, would become entitled to give a discharge for the sum paid to him. This he had not done at the date of the liquidation when his rights became determined."
His Lordship went on to refer to what he described as "another rule which is well founded in bankruptcy, the rule against a double proof." He referred to what had been said by Mellish L.J. in In re Oriental Commercial Bank L.R. 7 Ch.99 at p.103, namely, "the true principle is, that there is only to be one dividend in respect of what is in substance the same debt, although there may be two separate contracts." His Lordship continued (pp.109-110):
"Now the debt in respect of which the set-off is claimed is the debt in respect of which the banks have a right of proof against the Association. They have a right under s.65 and the rules to come in and tender a proof at any time before a dividend is declared and to be admitted to prove, subject to certain limits imposed by the rules. If two of the banks have not yet exercised their full rights of proof, that is because there appears to be nothing for the unsecured creditors to receive, but their right of proof exists. If the trustee of Fenton's estate were allowed to set off the debt due to the banks which Fenton guaranteed, he would exercise that right in respect of the same debt for which the largest creditor bank has already proved, and the other two can prove. It would in effect be a double proof. But it would be more; it would be an allowance to Fenton's estate in full of a debt due to another which Fenton has not paid himself; with the result that Fenton's general creditors would benefit to the extent of the debt which is primarily due from the Association to the banks. The rule, therefore, against double proof also prevents Fenton's trustee from setting off this liability of Fenton's to the banks which has not crystallized into a debt due to Fenton."
Lawrence L.J. also took the view that the right to set off should be denied. He said (p.114):
"The reason why, in my opinion, such a claim (although it apparently has the requisite attributes for a set-off under the section and although it is one from which the principal debtor would be released by the order of discharge) cannot be set off is because so long as the estate of the principal debtor remains liable to the principal creditor the surety will not be permitted to prove against the estate of the principal debtor, as such a proof would be a double proof for the same debt, and would therefore be inadmissible as being contrary to the established rule in bankruptcy."
He also said (p.115):
"Even where the principal creditor has been paid in full partly by a dividend from the estate of the insolvent surety and partly by a dividend from the estate of the insolvent principal debtor, the trustee of the insolvent surety will not be allowed to prove against the estate of the principal debtor for the amount which the estate of the surety has contributed towards the payment of the debt, as it is only when the surety has paid the full amount of the debt that he will be subrogated to the rights of the principal creditor: see In re Oriental Commercial Bank (L.R. 7 Ch.99 at p.102)."
It would not appear that Lawrence L.J. rested his decision on any ground other than the rule against double proof.
Romer L.J. said (p.117) that the first question to be determined was whether a claim by a surety, who has not paid off the principal creditor, in respect of the contingent liability to the surety of the principal debtor was one that could be proved by the surety in the principal debtor's bankruptcy. He went on to refer to some authorities which dealt with the meaning of the word "creditor" in another provision of the bankruptcy legislation. Having distinguished those authorities he continued (pp.118-9):
" . . . I cannot agree that a surety who has not paid off the principal creditor can prove in the bankruptcy of the principal debtor so as to share in the distribution of his assets unless the principal creditor has renounced in some way his right to lodge a proof himself while preserving, of course, his rights against the surety. To allow such a sharing in the assets would be to subject the assets to two claims in respect of the same debt, and this is contrary to the well established rule in bankruptcy against double proof."
Thus, Romer L.J., like Lawrence L.J., denied the claim to set off by reason only of the rule against double proof. It was only Lord Hanworth M.R. who advanced a ground for the rejection of the claim independent of that based on that rule.
It was because of that situation that the respondent here sought leave to re-open its case. The evidence it led established that Esanda had been paid out in full. After that occurred there was no basis upon which there could be a double proof.
I have found some of the dicta in the judgments in Fenton's case ambiguous. When it is said, as it was by Romer L.J. in the passage last cited, that a surety who has not paid off the principal creditor cannot prove in the bankruptcy of the principal debtor so as to share in the distribution of his assets, does it matter that the payment may not be made until after the bankruptcy or winding-up. The fact that Romer L.J. went on to except a case where the principal creditor had renounced in some way his right to lodge a proof himself while preserving his rights against the surety would lead me to think that his Lordship was saying that if the rule against double proof could be overcome by any means, e.g. payment or an agreement not to prove, proof by the surety and thus set off by him would be allowed. In the passage earlier cited from the judgment of Lawrence L.J. he seems to express the same view. He said that so long as the estate of the principal debtor remained liable to the principal creditor the surety would not be permitted to prove against the estate of the principal debtor because such a proof would be a double proof for the same debt. But the question remains, what is the position where, albeit after the winding up, the principal creditor is paid out. Having reflected on the matter I have reached the conclusion that Fenton's case itself does not answer that question. It may be that Lord Hanworth would have answered it against the surety, but I think the question is at least left open by the other members of the Court.
The next case relied upon by the appellant was Re a Debtor, ex p. the Debtor v. the Trustee of the Property of Waite (1956) 3 A.E.R. 225. In that case the point now under consideration did arise for decision. The principal creditor was paid out but after the bankruptcy. Lord Evershed, M.R. referred to the dicta in Fenton's case to which I have referred and to what had been said at first instance by Danckwerts, J., as he then was. Evershed M.R. said (p.231):
"Danckwerts, J., delivering the judgment of the Divisional Court of the Chancery Division in the present case, cited ((1956) 2 A11 E.R. at p.99) and applied to the analogous circumstances of the present case, the passage which I have quoted from the judgment of Romer, L.J.; and he treated the word 'was' in the second sentence of that passage from the judgment of Romer, L.J., as meaning 'was at the date of (Fenton's) receiving order'. I think that the learned judge was entitled so to do, for the date of that order was, on the hypothesis on which Romer, L.J., was proceeding, the relevant date just as, in the present case, Mr. Waite's receiving order is conceded to be the relevant date. I am, therefore, on the whole, of the opinion that the language and reasoning of the three judgments in this court in Re Fenton, Ex p. Fenton Textile Assocn. Ltd., are more consonant with the argument of counsel for the respondent trustee than with that of counsel for the appellant. None the less, the precise point with which we are concerned was not raised in Re Fenton, Ex p. Fenton Textile Assocn.,Ltd. and not determined in that case by this court. If that is so, then I am thrown back on the terms of s.31 of the Bankruptcy Act, 1914, for the right of set-off claimed is a special right, defined and ordained by the statute. I have already expressed my view that, as I read the language of the section, and on the footing, which counsel for the appellant has conceded, that the relevant date for the application of the section is Oct. 1, 1954, the date of Mr. Waite's receiving order, there was then nothing 'due' from the appellant to the bankrupt; and that the sum paid nearly ten months later by the respondent trustee to discharge the sum then due to the appellant's bankers (which may well have been quite different from the sum due on Oct. 1, 1954) cannot be treated as a mere quantification of an obligation in the nature of a debt already existing on the last-mentioned date."
His Lordship went on to say (p.232):
"Counsel for the appellant also contended, as I understand him, that there was some equity which was available to the appellant and which entitled him to require the respondent trustee to reduce his claim against the appellant by setting-off the sum due by the bankrupt to the appellant. I cannot agree. As I have observed, the set-off enjoined by s.31 of the Bankruptcy Act, 1914, "is a special statutory right or requirement. I do not think that there is any room for any such 'equity' as counsel for the appellant sought. If, however, there were, then it is, to my mind, clear that it is now too late for the appellant to invoke it; for in that respect the judgment of Oct. 6, 1955, is conclusive against him."
The judgment to which his Lordship referred was a judgment signed by Waite's trustee in bankruptcy against the debtor in respect of the amount to which the trustee was subrogated, after payment on 20 July, 1955, of the principal debt to the principal creditor.
Hodson L.J., as he was, reached the same conclusion. He said (p.234):
"Counsel for the appellant argued that if Fenton or his trustee had paid these sums to the banks the trustee would have been held by the Court of Appeal entitled, under s.31 of the Bankruptcy Act, 1914, to set off payments under the guarantee against the sums due by him to the association, and it was the fact that Fenton had paid nothing under his guarantee which led the Court of Appeal to take a different view from that of Luxmoore, J. Counsel claimed that Mr. Waite's liability under his guarantee, although not ascertained at the date of the receiving order, was capable of ascertainment at a later date and so was reducible to a certainty and within the principle established by Re Daintrey, so that s.31 applied and the appellant was entitled to a set-off. This is, in my opinion, inconsistent with the views expressed by the court in Re Fenton, Ex p. Fenton Textile Assocn.,Ltd. The decision there turned mainly on the point that to allow the set-off would be to allow a double proof in respect of the same debt in the winding-up of the association, and the question now at issue, whether a surety who has paid the debt which he has guaranteed can relate that payment back to a date before the liquidation or bankruptcy in question, was not decided. It is true that the members of the court emphasised that Fenton had paid nothing under his guarantee, but they must have had in mind payment or non-payment before the date of the liquidation."
The emphasis is mine.
His Lordship went on to refer to what had been said by Lord Hanworth in Fenton and concluded (p.235):
"In order to bring the case within s.31 the change must take place before the date of the receiving order, when the rights of the parties must be determined. In this case no change took place at that time. It was not until nearly ten months after the date of the receiving order that the respondent trustee changed the contingent liability originally incurred by Mr. Waite into a debt due to himself when he paid off the overdraft outstanding on the appellant's banking account which then stood at 133 pounds 14s. in order to redeem the title deeds of Mr. Waite's house pledged to the bank as security. In my opinion, the reasoning in Re Fenton, Ex p. Fenton Textile Assocn..Ltd. is against the contention that there can be a set-off within the meaning of s.31 of the Bankruptcy Act, 1914. I agree that the appeal should be dismissed."
Jenkins L.J. agreed in both the judgements of Lord Evershed M.R. and Hodson L.J. (p.232).
The final case in the line of authorities relied upon by counsel for the appellant is Re Bruce David Realty Pty. Limited (in liq.) (1968) 14 F.L.R. 56, a decision of the Supreme Court of Victoria (Adam J.). In that case the liquidator of a company disallowed a proof of debt by a trustee of a bankrupt estate to the extent of a set-off claimed on behalf of the company in respect of an unpaid debt of the bankrupt estate guaranteed by the company. It was held that the principle of mutual dealings between bankrupt and creditor expressed in s.82 of the Bankruptcy Act 1924 (the predecessor of s.86 of the present Act) does not permit of a surety setting off his claim to be indemnified by the bankrupt principal debtor, save to the extent that at the commencement of the bankruptcy the surety has paid the guaranteed debt to the principal creditor. Neither the suffering of a judgment by the guarantor for the amount of its liability under the guarantee nor the subsequent lodging of a proof of debt by the creditor in the liquidation of the guarantor company for the amount thereof could be regarded as equivalent payment for the purposes of the mutual dealings principle. His Honour referred to and relied upon Re Fenton. He did not mention Re a Debtor, which was apparently not cited to him. For the reasons I have mentioned the decision in Re Fenton does not, in my opinion, necessarily lead to the conclusion reached by him. But the decision in Re a Debtor plainly leads to the conclusion at which he arrived. His Honour also relied upon the rule against double proof but made it clear that that was an additional reason why, in his view, there could be no set off in the case with which he was dealing.
Although he contended that both Re a Debtor and Re Bruce David Realty Pty. Limited were distinguishable from the present case, counsel for the respondent saw the force of the consideration that they were authorities against him. Accordingly he made the alternative submission that they were wrongly decided and ought not to be followed by this Court. He claimed to be reinforced in that submission by what he submitted to be contra dicta in Hiley v. Peoples Prudential Assurance Co. Limited (supra). I shall come to that case in a moment, but before I do so there are two other authorities to which I wish to refer.
The first of these is Re The Moseley-Green Coal and Coke Company(Limited) ex p. Barrett (Barrett's case) (1865) 4 De G.J. & S.756; 12 L.T.193; 46 E.R.1116. The report I have used is that which appears in Volume 12 of the Law Times Reports. I have used it because it was the report of the case referred to both by Dixon J. in Hiley's case (60 C.L.R. at pp.500-501) and Lord Evershed M.R. in Re a Debtor ((1956) 2 A.E.R. at pp.228-229). The case was one in which a company entered into a contract for the purchase of mines which were subject to a mortgage for 7,000 pounds.Barrett, a shareholder in the company, was a surety to the mortgagee for the mortgagor-vendor. Part of the agreement was that the company should pay off the mortgage debt in May 1862, but the company, failing to do this, handed to the mortgagee a promissory note for 7,000 pounds at six months dated in September 1862. In October 1862 a winding up order was made, and in February 1863 the mortgagee pressing for his money, Barrett induced his sister to pay off the mortgage debt and take a transfer of the securities, including the promissory note, which shortly afterwards fell due and was dishonoured. Barrett having been settled on the list of contributories, obtained a transfer of the company's note from his sister, giving her his own promissory note instead, and then asserted his right to set off his claim against the company in respect of the promissory note pro tanto against the sum due from him for calls. It was held that the contract of suretyship, being incurred by Barrett anterior to the winding-up order, gave retroactive force to his possession and ownership of the note so as to enable him to refer it back to that contract or relation before the winding-up order was made. Barrett was accordingly entitled to a set-off.
The Lord Chancellor, Lord Westbury, said (p.194):
"Then the question comes to this: if an individual be surety for a creditor of a company anterior to a winding-up order, and afterwards, in respect of that suretyship, pays the debt, and becomes entitled to the benefit of the securities, among which is a promissory note, is he or is he not in respect of the ownership of that promissory note, entitled to set it off against any claim which the company may have against him? I think he must be held to be precisely in the same state in which the creditor stood at the time when the note was made; and if I remit him back to the right which his principal had, then I refer his right to set-off to the state of things which existed at the time of the winding-up order; and not to a state of things which has arisen in consequence of any contract or proceeding which has taken place subsequently to the winding-up order".
His Lordship's view was not a final one and the case was put back for further argument. He then said (pp.194-195):
"Mr. Willcock (counsel for the official liquidator) is not in a condition to contend that if Mr. Barrett had been a holder of the company's promissory note at the time of the winding-up order he would not have been entitled to a set-off. Then comes the mischievous thing, in winding-up as in bankruptcy, of permitting a debtor to purchase up counter claims subsequently to the winding-up order for the purpose of making a case of set-off; and then, whether there is not an exception in the case when there is an actual ownership of a counter claim, which, though arising subsequently to the winding-up "order or the bankruptcy, yet is a consequence of some anterior matter. Then comes the material question in the present case: Does the contract of suretyship, incurred as it was by Barrett anterior to the winding-up order, with its attendant rights, give such retroactive force to Barrett's possession and ownership of the note as to enable him to refer it back to that contract or relation, before the winding-up order was made? My present impression is that it will; that he is a bona fide possessor of the note, and, therefore, that he has a right to a set-off."
His Lordship's opinion was still tentative. But after further considering the matter he said that the opinion which he had before stated was that to which he wished to adhere.
As earlier mentioned, the case was referred to by Lord Evershed in Re a Debtor. It was also referred to by Lord Hanworth in Fenton ((1931) 1 Ch. at p.108) and said to be to the same effect as Daintrey's case (supra). Of Barrett's case Lord Evershed M.R., after referring to the second of the passages I have cited from Lord Westbury's judgment, said ((1956) 2 A.E.R. at p.229):
"On a later date another case of a claim to set-off by Barrett, in the
liquidation of the same company came before Lord Cranworth,
L.C. Counsel for
the appellant conceded that Lord Cranworth appeared to have entertained some
doubt of Lord Westbury's decision.
Whether that was so or not, Lord Cranworth
disallowed Barrett's claim in the case before him, stating ((1865), 34
L.J.Boy, at p.44)
that the matter seemed to him to stand on exactly the same
principles as in bankruptcy.
In my judgment, whatever be the view taken as to Lord Westbury's decision or the grounds on which it proceeded, Re Moseley Green Coal & Coke Co., Barrett's Case was a case, depending on its own special facts and on the conclusion that on those special facts Barrett's claim against the company on its promissory note could be related back to the date of the company's liquidation. Such claim, at all events, arose "exclusively out of the note itself which had been given for a sum certain and at a date prior to the liquidation; and Barrett, as surety for the mortgagor's obligation under the original mortgage, had been, as such, entitled to the benefit of the company's securities for payment of the principal debt. In other words, I think that Danckwerts, J., was entitled, as he did ((1956) 2 A11 E.R. at p.98), to treat the case as dependent on its own special circumstances and distinguishable, accordingly, from the present."
Both counsel relied upon Barrett's case in support of their submissions. It was the submission of counsel for the appellant that it was a decision in line with Fenton's case, Re a Debtor and Re Bruce David Realty Pty. Limited. That was because, if it had not been for the fact that Barrett was able to procure the note, he would have failed. That was the clear import of what Lord Westbury had said. On the other hand, Barrett became entitled to the set-off only because of his rights and obligations as a surety which pre-existed the winding-up. In the event that he were called upon to pay the principal creditor, the company would in turn be obliged to indemnify him. It was that potential liability of the company which was said to give retroactive force to the liability to him of the company on the note, which latter and actual liability had arisen after the winding-up. I confess to having had difficulty in understanding why, if that be so, there ought really be any difference in principle between Barrett's case and a case such as Re a Debtor. Why should it not be said, assuming there to be no problem of double proof, that the contingent liability of the debtor to pay the surety gives retroactive force to the actual liability of the debtor which arises when, after bankruptcy or winding-up, the surety pays out the principal creditor. Indeed, it would seem easier to take that course in a situation where, as in Re a Debtor, it was the very contingent liability which existed prior to the bankruptcy which became an actual liability thereafter when payment out to the principal creditor was made. In such a case the connection between the pre-existing contingent liability and the actual liability would appear to be much closer than the connection in Barrett's case between the pre-existing contingent liability of the company to Barrett, as surety, and the actual liability arising under the promissory note which was, comparatively speaking, a far more independent and separate transaction.
In Re Daintrey, ex p. Mant (supra) is a different type of case to any so far cited. Daintry was a solicitor who was indebted to Mant, another solicitor, in the sum of 86 pounds. On 24 December, 1892, Daintrey committed an act of bankruptcy of which Mant had no notice. On 31 December, 1892, Daintrey sold his business to Mant under an agreement which fixed as the price a portion of the profits expected to be earned for three years from the business sold. Thereupon Mant took possession of and carried on the business. On 17 January, 1893, a receiving order was made against Daintrey but no profits had then been earned from the business. At the end of the three years a sum of 300 pounds was found to be due from Mant to Daintrey under the agreement as the price of the business. Mant paid this sum to Daintrey's trustee but deducted the sum of 86 pounds due by Daintrey to Mant. It was claimed by the trustee that no right of set-off existed but it was held that Mant was entitled to set off the 86 pounds due to him from Daintrey. His right to do so was the then provision in the English bankruptcy legislation of which s.86 of the Bankruptcy Act is the counterpart.
In the course of his judgment Romer L.J. said ((1900) 1 Q.B. at pp.573-574):
"There was a certain sum due from Daintrey to Messrs. Mant. On the other hand, Messrs. Mant were under a liability to Daintrey by virtue of the agreement of December 31, 1892. I agree that the amount which ultimately became payable by them could not be ascertained until some time later than the date of the receiving order, and it was possible that the amount might be very small, but, whatever sum eventually became payable, became payable to Daintrey by virtue of this agreement of December 31, 1892, and of nothing else. For Messrs. Mant to obtain the advantage of the mutual credit clause, it was not necessary that the money payable under the agreement should be immediately payable to the bankrupt at the date of the receiving order; nor were the circumstances such that the account could be taken as between Messrs. Mant and the bankrupt at that date. It is quite sufficient if the account can be taken when the set-off arises."
The important thing to notice about Daintrey's case, which in my opinion distinguishes it from the other cases, is that there was an actual, not a contingent, liability by the bankrupt to the creditor pursuant, to the agreement under which the practice was sold. It is true that the liability was not quantifiable nor crystallised at the date of the bankruptcy, but it was not contingent. There was an obligation in existence at that date binding the creditor to pay the bankrupt whatever sum should prove to be due as the price for the sale of the practice. In the guarantee cases earlier cited, whilst it is true that there was a binding obligation upon the surety in each of the cases to pay if called upon by the creditor and a consequent contingent liability in the debtor to reimburse the surety if he paid the creditor, none of the sureties had paid him prior to the dates of the winding-up orders or bankruptcies in those cases. Thus, unlike the position in Daintrey's case there was, at the date of the windings up or bankruptcies, no obligation upon the various sureties in the guarantee cases to pay any sum of money and, consequently no obligation upon any of the debtors to reimburse the sureties. The contingent liability which each of the debtors had to the surety was, in each case, held not to be a sufficient warrant for allowing the surety to set off that liability against the amount owed by him to the debtor.
It is now convenient to go to Hiley's case. In my opinion that case, like Daintrey's case, is distinguishable from the guarantee cases. The point of difference between the majority and Latham C.J., who dissented, was whether the insurance company, not being entitled to the benefit of the mortgage at the date of its winding-up, was nevertheless to be regarded as being entitled to that benefit by reason of the fact that it had the benefit of it when the proceedings were heard as the result of the compromise of a claim made by it that the transfer of it was void and of no effect. The majority thought that the mortgage was to be treated as having been the company's property at the date of the winding-up. Latham C.J. disagreed. But once the conclusion of the majority was reached, the case became an ordinary case of the application of the section. Hiley had an unliquidated claim for damages, in existence at the date of the winding-up of the company (that is the assumption upon which all the judgments proceeded), for anticipatory breach by the company (accepted by Hiley as a repudiation of his contract of insurance) of its obligation to honour the insurance policy he had with it. He was indebted to the company under the mortgage. That indebtedness, in the view of the majority, also existed at the date of the winding-up. The fact that Hiley's claim against the company was not quantified at the date of the winding-up was irrelevant. The company was under an obligation to pay whatever was due when it was quantified. There were thus existing obligations on both sides at the date of the winding-up order. In that respect Hiley's case may be likened to Daintrey's case and distinguished from the guarantee cases where the liability to the sureties, at the date of the bankruptcies or windings-up, was contingent only. Until payment by the sureties they had no claim against the principal debtors.
Notwithstanding this point of distinction counsel for the respondent sought to rely on a number of dicta in the judgments in Hiley's case. But these must be read in the light of the facts of that case and the point of distinction which exists between the facts of it and those of the other cases to which I have referred. In my opinion there is only one passage in the judgments which might be thought to lend support to the respondent's argument. It is a dictum of Starke J. His Honour said (60 C.L.R. at p.491):
"The result (that is the outcome if no set off were allowed), if established, is hard upon the appellant and strikes me, in the circumstances of this case, as unjust. There are cases in the books in which sureties who have been compelled to pay a principal debt after bankruptcy have been allowed to set off the sum so paid against debts due to the bankrupt (Cf. Rowlatt on Principal and Surety, 2nd ed. (1926),p.307). But the obligation of the surety in those cases arose before bankruptcy and was an obligation which might and did in fact end in a money claim."
There is no relevant passage in the second edition of Rowlatt at p.307. There is, however, a relevant passage at p.319. It says:
"A surety becoming bound at the request of the principal before the bankruptcy of the latter, but compelled to pay by the creditor after the bankruptcy, is entitled to set off the sum paid against debts due by him to the bankrupt."
The authority cited for this proposition is Jones v. Mossop, [1844] EngR 803; 3 Hare, 568 at p.571. But at that page the Vice-Chancellor makes clear that the case was one involving an insolvent debtor, not a bankrupt. In those circumstances he applied equitable principles and not the provisions of the English equivalent of the section of the Bankruptcy Act now under consideration. It is true, however, that his Lordship did indicate in what he said that if there had been a bankruptcy he would have had no difficulty in reaching a conclusion. It is that statement upon which Rowlatt relies. But the statement is obiter and must be weighed against the later decisions, particularly Re a Debtor and Re Bruce David Realty Pty. Limited. Furthermore the passage in the judgment of Starke J. is also obiter.
The same statement is made in the third edition of Rowlatt (1936) in a paragraph in which reference is also made to Fenton which had been decided five years previously. It is not suggested by the learned author that there is any conflict between the two cases (pp.325-326).
In the same paragraph there is a further statement to the following effect which appears in both editions:
"Thus, under the mutual credit clause . . . . . . an accommodation indorser or acceptor compelled to pay after the bankruptcy of the party accommodated was entitled to set off".
The authorities cited for this proposition are Hulme v. Mugglestone, [1837] EngR 133; 3 M. & W. 30: 150 E.R. 1043 and Russell v. Bell [1841] EngR 136; 8 M. & W. 277; 151 E.R. 1042. In the former case the court said (3 M. & W. at p.40; 150 E.R. at p.1047):
"It is well established by many cases, that the credit given as there stated (that is in the plea) is a good subject of set off; and the cases which have decided that only such transactions may be set off as would necessarily end in debts, are quite reconcileable with those cases where it has been held that accommodation - acceptances may be set-off".
The cases are thus distinguishable because, by reason of the acceptance or endorsement of the bills, the liability, although not accrued, was certain rather than contingent. It is to be noted, however, that the plea which was held good (the case was a demurrer) said in part (p.30; E.R.p.1043):
". . . . the defendant gave credit to the bankrupt to the amount of 50 pounds by indorsing for his accommodation . . . . . and that such credit was of a nature extremely likely to end in a debt".
Subject to that matter, the two cases (the same words were used in the plea in Russell v. Bell) are in line with all other authorities to which I have referred except, perhaps, Barrett's case.
As previously mentioned counsel for the respondent relied strongly upon what had been said by Dixon J. in the passage earlier cited from his judgment in Hiley's case - see p.10 hereof. Particular reliance was placed upon the words, "It is enough that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set off". The emphasis is mine. It is important, however, to bear in mind the context of the case in which the words were spoken and also to have regard to the authorities cited in support of the propositions formulated by his Honour. Naoroji v. Chartered Bank of India was a case in which the plaintiffs were in the habit of drawing bills upon merchants in Bombay and handing them to the defendants who were bankers in London for collection by the defendants' Bombay branch. The proceeds when received were remitted by the branch to the plaintiffs through the defendants' house in London. The plaintiffs executed a deed of inspectorship under the Bankruptcy Act, they then having a sum of money, the proceeds of bills collected for the plaintiffs in Bombay. At the same date the plaintiffs were indebted to the defendants on certain other bills of exchange. It was held a case of mutual credit within the bankruptcy legislation. At the pages referred to by Dixon J., Byles J. said (3 C.P.451):
"Mutual credits I conceive to mean simply reciptrocal demands which must naturally terminate in a debt".
Keating J. said (p.452):
"The plaintiffs were indebted to the defendants on the one side, and the securities were entrusted to the defendants on the other for the purpose of being turned into money. This creates a liability which in the ordinary course must result in a debt".
The emphasis is again mine.
Astley v. Gurney was a similar type of case. The judges made it clear that there would be no set off unless each of the liabilities at the date of the bankruptcy was such that it must in due course end in an actual liability to pay a money sum.
I need not refer to the facts of Palmer v. Day & Sons. It is enough to note that the passage from the judgment of Lord Russell C.J. to which Dixon J. referred ((1895) 2 Q.B. at p.622) included the following:
"But whilst the right of set-off has been thus widely extended, it is still subject to the limitation that the 'dealings' must be such that in the result the account contemplated in the section can be taken in the way therein described. In other words the dealings must be such as will end on each side in a money claim".
I have already dealt in some detail with In Re Daintry; ex p. Mant.
It seems clear, therefore, that notwithstanding his reference to contingent rights and obligations, Dixon J. was not intending in what he said to depart from the general rule that for the section to operate the claims on each side must, at the date of bankruptcy or winding-up, be such that they must or will end in a debt. It should be observed that Hiley's case was decided some seven years after Fenton's case. It is true that that case is capable, as I have said, of being understood as a case decided entirely upon the basis of the rule against double proof, although that was not Lord Hanworth's view. But, not overlooking that circumstance, it seems to me unlikely that if it had been intended by the judges in Hiley's case to lay down a principle at all inconsistent with what Lord Hanworth had said, it would not have been referred to in the judgments, particularly that of Dixon J. I would regard it as unlikely that he would have been unaware of the decision. Furthermore, it seems strange, if the case had any relevance, that it was not at least cited in argument by the very experienced counsel who appeared in the case.
I should next refer to Dixon J's analysis of Barrett's case. He cited the passages which I have cited from Lord Westbury's judgment and continued (60 C.L.R. at p.501):
"The conclusion (Lord Westbury's final conclusion) is supported also by a line of authorities relating to bills of exchange, of which Collins v. Jones ((1830) [1830] EngR 45; 10 B. & C. 777; 109 E.R. 638) may be taken as an example. In these cases the indorser of a bill of exchange accepted by a person afterwards becoming bankrupt has been allowed to set off the bankrupt's liability on the bill against a debt owing by him to the bankrupt, although at the time of the bankruptcy the bill was in the hands of a subsequent indorsee as holder and was afterwards obtained by the indorser seeking to use it by way of set-off, only by paying off the holder (See, too, Bolland v. Nash ((1828) [1828] EngR 578; 8 B. & C. 105; 108 E.R. 982). Thus, in McKinnon v. Armstrong Brothers & Co. ((1877) 2 App.Cas.531, at p.539) Lord Blackburn says: 'It has for many years been decided, both in England and in Scotland, that if the indorser became a party to the bill before the bankruptcy in the one country or the sequestration in the other, he may set it off on becoming holder afterwards.'"
Unlike Lord Evershed M.R. in Re a Debtor, Dixon J. thus had no doubt as to the correctness of Barrett's case. But his Honour's view of it and the subsequent statement made by him in the passage from his judgment just cited show that Barrett's case can provide no direct assistance to the respondent here. Nevertheless, as I have earlier said, I find it difficult to understand why, in cases such as the present, the debtor being contingently liable to the surety at the date of bankruptcy or winding-up, that liability should not in principle be offset against a claim made by the trustee in bankruptcy or liquidator. This is always supposing that any problem of double proof has been overcome.
I have now made sufficient reference to the authorities. It seems to me that the appeal must succeed unless the facts of the case can be distinguished from those in question in Re a Debtor and Re Bruce David Realty Pty. Limited or unless those cases ought not to be followed.
Upon the analysis of the cases which I have undertaken, I am unable to regard the decision in Barrett's case or any of the dicta in Hiley's case as in any way running counter to what was decided in Re a Debtor and in Re Bruce David Realty Pty. Limited. With the possible exception of Starke J. no judge in Hiley's case adverted to this problem. What Starke J. said was obiter and the cases relied upon by Rowlatt do not bear out what is said by the learned authors of the second and third editions of his work. It is to be remembered that Lord Hanworth M.R. regarded Fenton as breaking new ground. Barrett's case is, and must have been regarded by Lord Hanworth, as a different type of case. As mentioned earlier, it was referred to by him.
On the other hand, if one takes the view, as I do, that a majority of the judges in Fenton decided the case only upon the ground that to allow the set-off would infringe the rule against double proof, the only authorities against the respondent are Re a Debtor and Re Bruce David Realty Pty. Limited. With respect to him there is a question as to whether Adam J's decision can be given substantial weight. He did not refer to Re a Debtor but relied on Fenton's case. That case would not necessarily support him, although Re a Debtor undoubtedly does so. And it must be said that the view of Fenton's case which Adam J. had was the same view of it as that taken by the Court of Appeal in Re a Debtor.
It seems to me that we should not depart from a decision of the English Court of Appeal unless we are convinced that it is wrong. In Public Transport Commission (N.S.W.) v. J. Murray-More (N.S.W.) Pty. Limited [1975] HCA 28; (1975) 132 C.L.R. 336, Barwick C.J. said (p.341) that the Supreme Court of a State (sitting as a court of appeal or as a full court) would be well advised as a general rule to follow the decisions of the English Court of Appeal. Gibbs J. went further and expressed the view (p.349) that the judges of the Court of Appeal of the Supreme Court of New South Wales should have treated a decision of the English Court of Appeal "as an authority binding upon them". With respect, it may be that the latter view goes too far, but certainly the full court of the Supreme Court of a State ought not lightly depart from a decision of the English Court of Appeal. It would seem to me that the Full Court of this Court stands in no different position, particularly when sitting as a court of appeal from decisions of the Supreme Courts of the Territories. Of course, a section of the Bankruptcy Act being involved, this Court has, perhaps, a special concern with the problem because it is the court to which bankruptcy matters come at least in New South Wales and Victoria. The Full Court of this Court is the court to which all appeals in bankruptcy come. But those considerations do not in my opinion warrant this court being enabled to depart the more readily from a considered decision of the English Court of Appeal given in relation to an aspect of bankruptcy law.
I confess to having misgivings about the decision in Re a Debtor and consequently in Re Bruce David Realty Pty. Limited. Those misgivings arise because of the view which the judges in Re a Debtor took of what was decided in Fenton's case. I do not believe that the case decided more than that where the rule against double proof was infringed no set-off would be allowed. But that was not the view of Lord Hanworth M.R. and it was not the considered view of the three distinguished judges who decided Re a Debtor. Whilst I have the misgivings of which I have spoken, I do not feel able to say that the decision in Re a Debtor is wrong. Indeed it seems to me to be consonant with principle when one bears in mind the earlier cases, some of which were cited by Dixon J. in Hiley's case, which stress that the liability must, as at the date of bankruptcy or winding-up, be such that it must eventually end in an indebtedness. Furthermore, Re a Debtor has stood for 24 years. The principle for which it is authority has been applied at least once in Australia in Re Bruce David Realty Pty. Limited. It is not unlikely that it has been followed and applied in other unreported cases as well, and also been acted upon by those whose task it has been to advise trustees in bankruptcy, liquidators and creditors in relation to the application of s.86 of the Bankruptcy Act. That provides another reason why we ought not lightly depart from the decision in Re a Debtor. Accordingly it is my opinion that it represents the law in Australia at the present time.
The final question is whether the facts of the present case can be
distinguished from those in Re a Debtor with the result that
a different
conclusion ought to be reached. The short facts of this case are:-
1. The appellant borrowed the sum of $100,000 from Esanda and disbursed it at
the direction of and for the benefit of the respondent.
2. The respondent thereby became indebted to the appellant in the sum of
$100,000.
3. The respondent by the mortgage and the guarantees obliged itself to repay
the amount borrowed by the appellant from Esanda to that
company.
4. Both the appellant and the respondent were then obliged to repay the money
to Esanda.
5. At the date of the appellant's winding-up the money had not been repaid to
Esanda.
6. After the winding-up, the respondent paid out Esanda.
The facts of this case differ from those of Re a Debtor because of the much closer connection which there is between the indebtedness of the respondent to the appellant and that of the appellant to the respondent. In Re a Debtor, although there were mutual dealings, they did not have the close relationship which these dealings have. But I cannot myself perceive any distinction of substance between this case and Re a Debtor unless, contrary to what I have said in paragraph 2 above, the appellant was not owed money by the respondent or unless the payment made to Esanda referred to in paragraph 6 had the effect of discharging not only the respondent's liability to Esanda but also its liability to the appellant as well. His Honour's finding that the appellant was owed the money by the respondent was, as earlier mentioned, not the subject of any challenge before us, nor, because of the respondent's admission, could it have been disturbed. Whether the discharge of the respondent's indebtedness to Esanda operated also as a discharge of its indebtedness to the appellant depends upon the contract between them. Of this there is little evidence. No submission to this effect was made to the learned trial judge or to us. It may depend upon whether there is in the contract between the appellant and the respondent any express or implied term dealing with the situation. In the absence of our attention being drawn to any relevant evidence and of any submission by either counsel on the point, it would be most dangerous for us to make some unaided assessment for ourselves. I am not prepared to take that course. It follows that, however closely connected the two debts are, there is no distinction of substance between the facts of this case and those of Re a Debtor.
Consequently I do not consider the case to be otherwise than one for the application of the principles propounded in Re a Debtor. In my opinion the respondent was not entitled, pursuant to the provisions of s.86 of the Bankruptcy Act, to the set-off it claims.
I turn to the question of equitable set-off. There is first a question as to whether there can be any equitable right to a set-off independent of that provided for in s.86 of the Bankruptcy Act. It would seem that Lord Evershed M.R. was of the view that no such right existed. I refer to the passage earlier cited (pp.17-18 hereof) from his judgment in Re a Debtor ((1956) 2 A.E.R. at p.232). That view would appear to have been agreed in by Jenkins L.J. Nevertheless what his Lordship said was obiter.
To the same effect are dicta of Turner L.J., with whom Knight Bruce L.J. concurred, in Smith, Fleming & Co's. case (1866) L.R. 1 Ch. App.538 at p.543 and of Willes J. in Watson v. Mid Wales Railway Co. (1867) L.R. 2 C.P. 593 at pp.599-600. Willes J. there said:
"When I speak of mutual credit, I do not refer to what are called mutual credits in bankruptcy, because these, existing by legislation, have their operation limited by the statute which creates them. And on this ground, in Re Commercial Bank Corporation, &c., Smith, Fleming, & Co.'s Case, in a case of winding up, the Lord Justices refused to apply by analogy to them the doctrine of equitable set-off, so as to restrain the liquidator of a company in process of being would up from negotiating acceptances of the applicants then running, although the company was at the same time liable to the applicants upon bills drawn by the company and dishonoured."
It is true that equity itself has for centuries in certain well recognised circumstances permitted a set-off. Its rules continued to be applied after the passing of the Statutes of Set-off (2 Geo.II c.22 and 8 Geo.II c.24) of 1728 and 1734 respectively. In ex parte Stephens [1805] EngR 113; (1805) 11 Ves. 24 at 27; [1805] EngR 113; 32 E.R. 996 at 997 Lord Eldon L.C. said:
"As to the doctrine of set-off, it is not necessary to say much. This Court was in possession of it, as grounded upon principles of equity, long before the law interfered. It is true, where a court does not find a natural equity, going beyond the statute, the construction of the law is the same in equity as at law. But that does not affect the general doctrine upon natural equity."
The question arises whether the same approach should not be taken in relation to the section here in question. The section has its origin in s.28 of the Statute 5 Geo.II c.30 passed in 1732. Its purpose and that of similar sections in later legislation was said by Parke B. in Forster v. Wilson [1843] EngR 1093; (1843) 12 M. & W. 191, to have been not to avoid cross-actions, for none would lie against the assignees, and one against the bankrupt would be unavailing, but to do substantial justice between the parties where a debt is really due from the bankrupt to the debtor to his estate. I refer also to Williams & Muir Hunter on Bankruptcy (19th edn., 1979, p.189)
The object of the bankruptcy legislation was thus to provide for what was fair and reasonable once bankruptcy had supervened. The Statutes of Set-off were much narrower in their application and were, as the passage above referred to indicates, enacted to avoid cross-actions. It was no doubt for that reason that the equitable doctrine remained largely unaffected by their enactment. I refer also to Meagher, Gummow, Lehane on Equity, paragraph 370B.
We were referred to no case in which equitable principles have been applied independently of the section. None is referred to in any of the bankruptcy or equity texts at which I have looked since we reserved our decision. All that I have found are the dicta earlier cited which would suggest that the position is governed entirely by the provisions of the bankruptcy legislation. Since the object of that legislation was to deal fairly with all, it is to be expected that the courts would not lightly engraft upon its terms additional circumstances or situations in which a set-off might be permitted. For those reasons I have reached the conclusion that it is not permissible for the respondent to rely independently on any rules of equity. It is accordingly unnecessary for me to reach a conclusion upon the question of whether, if this were not a case involving the winding-up of the appellant, equity would require the appellant to allow the set-off of the appellant's indebtedness to the respondent. Plainly the case, but for the winding-up of the appellant, would be one within the Statutes of Set-off, both claims being for liquidated amounts.
Before concluding there is another matter which I should mention. The relationship of the parties and Esanda was, by reason of what is provided in the contract of loan, the mortgage and the guarantees, one whereby the appellant was the principal debtor, Esanda was the principal creditor and the respondent was the surety. But that was not the only relationship. By reason of the words at the end of the mortgage of 18 October, 1976, referred to in paragraph 1, page 2 hereof, the appellant and the respondent were both liable as principals to Esanda; they were joint principal debtors or obligors. The fact that the appellant was independently and severally liable to Esanda under its contract of loan makes no difference to the fact that it was also liable for the same indebtedness jointly with the respondent. As mentioned in paragraph 7, pp.4-5 hereof, the amount borrowed from Esanda by the appellant was outstanding at the date of the winding-up. Both the appellant and respondent were then under a joint and several obligation to repay it.
But that circumstance of itself would not lead to the conclusion that there was at that time any indebtedness by the appellant to the respondent. Subject to what I am about to say, the respondent's right to compel its joint obligor, the appellant, to contribute would not arise until the respondent itself had paid Esanda. Since the indebtedness to Esanda was not discharged by the respondent until after the winding-up the principles which might be thought to be applicable would be the same as those propounded in Re a Debtor. The qualification which needs to be made to that statement is that equity would, in some circumstances, regard a right of contribution, as distinct from a right to be subrogated, as having arisen prior to payment by the person seeking contribution. If a plaintiff's loss were imminent and ascertainable, as where there was a judgment against the plaintiff for the entirety of the debt or liability in question, equity would give relief notwithstanding that there was no actual payment; see Meagher, Gummow, Lehane on Equity, paragraphs 1003 and 1020 and the cases there cited.
If this matter were to be approached as one whereby, at the date of winding up, the respondent had a subsisting right against the appellant for contribution apart from any right which it had to be subrogated to Esanda's remedies against the appellant upon payment out of Esanda, the amount which would be involved in any set-off would be half the amount of the indebtedness, namely, $50,000. No argument was put to us based upon a subsisting right, at the date of the winding up of the appellant, to contribution. Nor would it appear that such an argument was put to the learned trial judge. It is questionable whether it could have been raised without the filing of a notice of contention (Order 52 Rule 22(3)). Accordingly, it is not a matter upon which I have reached any final conclusion, nor considered further than is indicated by what I have said.
It follows that I would allow the appeal, set aside the judgment entered by the learned trial judge, enter judgment for the appellant in the sum of $100,000 and order the respondent to pay the appellant's costs of the appeal and of the hearing at first instance.
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