Midlane Bros (Aust) Ltd v Reid [1930] HCA 31; (1930) 44 CLR 281 (22 September 1930)

HIGH COURT OF AUSTRALIA

Midlane Bros. (Aust.) Limited Appellant; and Reid and Others Respondents.

H C of A

On appeal from the Court of Bankruptcy, District of South Australia.

22 September 1930

Gavan Duffy, Rich and Dixon JJ.

Travers, for the appellant.

Ligertwood K.C. (with him S. H. Lewis), for the respondents.

The Court delivered the following written judgment:—

Sept. 22

Gavan Duffy, Rich and Dixon JJ.

This is an appeal from an order of Judge Paine, sitting in Bankruptcy, by which it was determined and ordered that a proof of debt of the respondent Clara Louise Reid should be admitted against the joint estate which a firm, styled Tom Reid & Sons, had assigned to trustees for the benefit of its creditors by a deed of assignment pursuant to Part XI. of the Bankruptcy Act 1924-1928. The order appears to have been made as under sec. 206 of the Act.

The firm of Tom Reid & Sons, which was formed as from 1st January 1922, consisted of the husband and three sons of the respondent Clara Louise Reid. The claim which she sought to prove was for money lent and for interest thereon at six per cent. But originally the principal had been lent to the husband by the wife before the husband took their sons into partnership and while he carried on business alone. The first question upon which the wife's claim depended therefore was whether the partnership had become indebted to her at all, or whether the debt remained that of the husband alone.

"An agreement by an incoming partner to make himself liable to creditors for debts owing to them before he joined the firm may be, and in practice generally is, established by indirect evidence. The Courts, it has been said, lean in favour of such an agreement, and are ready to infer it from slight circumstances (Ex parte Jackson1(1790) [1790] EngR 2326; 1 Ves. Jun. 131; 1 R.R. 91; [1790] EngR 2326; 30 E.R. 265.; Ex parte Peele2(1802) [1802] EngR 53; 6 Ves. 602; 31 E.R. 1216.. See, also, Rolfe v. Flower, Salting & Co.3(1865) [1866] EngR 75; L.R. 1 P.C. 27.); and they seem formerly to have inferred it whenever the incoming partner agreed with the other partners to treat such debts as those of the new firm (see Cooke's Bankruptcy Law, (8th ed.), p. 534, citing Ex parte Bingham and Re Staples, Ex parte Clowes4(1789) [1789] EngR 681; 2 Bro. C.C. 595; 29 E.R. 327.). But this certainly is not enough, for the agreement to be proved is an agreement with the creditor; and of such an agreement an arrangement between the partners is of itself no evidence (Ex parte Peele; Ex parte Parker5(1842) 2 M. D. & DeG. 511.. See, also, Ex parte Freeman6(1819) Buck 471.; Ex parte Fry7(1817) 1 G. & J. 96.; Ex parte Williams8(1817) Buck 13.)" (Lindley on Partnership (9th ed.), p. 276). In Rolfe v. Flower, Salting & Co.[9] Lord Chelmsford, in delivering the judgment of the Privy Council, after saying that there seemed no reasonable doubt that the insolvent partnership in that case, at the time of its formation, assumed the debts and liabilities of the former firm from which it took over the business, including a debt due to the proving creditor, went on to say:—"The only remaining question to be considered is whether" the proving creditor, "being aware of this arrangement, consented to accept the liability of the new firm, and to discharge their original debtors. Upon this question, as upon that of the agreement of the partners inter se, it was said by Lord Eldon, in Ex parte Williams1(1817) Buck, at p. 16., A very little will do to make out an assent by the creditors to the agreement." (See, too, Hart v. Alexander[11].)

In this case there are many circumstances to show that when the partnership was formed, and throughout its duration, the father and his sons intended that they should all be responsible to his wife for the amount in which the husband was indebted at the time the partnership was formed together with interest at six per cent, the rate which had been agreed upon between husband and wife. The articles of partnership were not very full, but they imply that the sons were to take over the liabilities of the business theretofore conducted by the father, and clause 6 contained the following stipulations:—"The net profits of the said business shall be divided as follows:—The said Thomas Burns Reid shall receive eight-fifteenths Clara Louise Reid the wife of the said Thomas Burns Reid shall receive four-fifteenths the said Walter Gliddon Reid shall receive one-fifteenth the said George Robbins Reid shall receive one-fifteenth and the said Clarence Cecil Reid shall receive one-fifteenth Provided however that the said Clara Louise Reid shall receive her share of net profits as aforesaid only during the time of and in consideration of her leaving her fixed deposit in the said business. But the receipt by the said Clara Louise Reid of a share of the profits shall not be deemed to constitute her a partner of the said firm. And in the event of the said Clara Louise Reid (or her executors administrators or assigns) withdrawing her fixed deposit the net profits of the said business shall be divided" in another manner therein set out. The wife is not a party to these articles, and, according to the evidence and the findings of the learned Judge, she did not know and never learnt that she was to be credited with a share of the profits. In the firm's books of account a deposit account was opened in which the wife was credited with the balance of her husband's indebtedness to her as at 1st January 1922, and to this account interest was regularly credited throughout the partnership, as also was a share of the profits. In July 1925 one of the members of the firm, a son, in negotiating with a bank for an overdraft for the firm, produced to the chief clerk of the bank a balance-sheet which upon the liability side showed an item described as "family interests." In answer to the chief clerk's question what this item represented, he said it was a debt to his mother. The chief clerk in his presence noted opposite the item "Mrs. C. L. Reid deposit at 6 per cent." The bank asked for a guarantee from the wife, and this she gave. This evidence can leave no doubt of the intention of the members of the firm to assume a liability to the wife, and of their belief that such a liability to her had been incurred by them as partners. But the question whether this intention was communicated to the wife and assented to by her is by no means so clear. She was not a business woman, and plainly she dealt with her husband and sons more on a footing of relationship than of ordinary business. She had inherited the money which she lent to her husband. When she lent it she appears to have understood clearly enough that it was a loan to him for the purpose of his business, bearing six per cent interest. Actual payments of interest were not made to her, but her husband told her that it was accumulating. Later she was told that her sons had been taken into partnership in the business, and for five years afterwards the business was conducted without any material incident. No accounts were furnished to her. One of the sons made up her income tax returns and usually signed it on her behalf. On one occasion she signed it herself, but on no occasion did she read or understand the contents of the return. In July 1925 she signed a guarantee of the firm's account with its bank. In December 1927 the bank requested the firm to obtain from her a letter to it undertaking not to withdraw or accept payment of the firm's debt to her. A letter was typed, the material part of which expressed an undertaking by her not "to withdraw or accept payment of any debt or portion of any debt due or becoming due to her by the firm without" the bank's consent.

None of the debtors was called as a witness. The wife herself, however, gave evidence and was cross-examined. In evidence-in-chief she was allowed to say:—"I knew afterwards that my husband did take two or three of his sons into partnership. I agreed to allow my money to remain in the business on the same terms." In cross-examination she assented to questions directed to show that she was passive and left the whole matter in her husband's hands. The learned Judge thought she was willing and endeavoured to give the Court all the information she possibly could, but that her mind at the time she gave her evidence was not by any means clear, and he did not accept in their entirety the literal answers she gave to counsel's questions, and he concluded that "she realized and consented to the fact that the firm had taken over the responsibility for the loan." In our opinion, this inference was open to the learned Judge upon the circumstances proved, and we ought not to disturb it. In substance it means that she understood that her husband and her sons intended to become her debtors in substitution for the husband alone, and that she intended to accept them. This amounts to a novation by which she became a creditor of the firm.

Sec. 85 of the Bankruptcy Act does not operate to postpone the proof of debt of the wife against the joint estate of a partnership of which her husband is a member (In re Tuff; Ex parte Nottingham[12]). But the question remains whether the proof of the wife is to be postponed to the unsecured creditors by reason of the provisions of sec. 86 of the Bankruptcy Act. If the contract of loan with her husband and sons resulting from the novation contained a term by which she became entitled to a share of the profits, her proof must be so postponed. But on her side, she did not know of the provisions of the partnership deed and, on the side of the firm, no intention appears from those provisions to contract with her to give her such a share. The provisions are expressed in a form which suggests rather that the partners, father and sons, agreed between themselves that they should allocate to her a share of profit with a proviso that they should cease to do so, when, and if, she withdrew her deposit. In any case, on the facts found by the learned Judge, they did not communicate to her any intention of conferring upon her a right to the profits, nor of admitting her to participate in profits in consideration of the loan. There was no suggestion that the deposit should not remain payable on demand and, if for any reason it became desirable for her to call it up, it would have been immediately payable. In these circumstances, we think the learned Judge was entitled to infer, as he did, that she did not contract for a share in the profits.

The appeal must be dismissed with costs.

Appeal dismissed with costs.

Solicitors for the appellant, Villeneuve Smith, Kelly, Hague & Travers.

Solicitors for the respondents, Joyner, Phillips & Joyner; Varley, Evan & Thomson; Baker, McEwin, Ligertwood & Millhouse.

[1] [1790] EngR 2326; (1790) 1 Ves. Jun. 131; 1 R.R. 91; [1790] EngR 2326; 30 E.R. 265.

[2] [1802] EngR 53; (1802) 6 Ves. 602; 31 E.R. 1216.

[3] [1866] EngR 75; (1865) L.R. 1 P.C. 27.

[4] [1789] EngR 681; (1789) 2 Bro. C.C. 595; 29 E.R. 327.

[5] (1842) 2 M. D. & DeG. 511.

[6] (1819) Buck 471.

[7] (1817) 1 G. & J. 96.

[8] (1817) Buck 13.

[9] (1865) L.R. 1 P.C., at p. 44.

[10] (1817) Buck, at p. 16.

[11] [1837] EngR 119; (1837) 2 M. & W. 484; 150 E.R. 848.

[12] (1887) 19 Q.B.D. 88.