O'Day v Commercial Bank of Australia Ltd [1933] HCA 37; (1933) 50 CLR 200 (21 August 1933)

O'Day Plaintiff, Appellant; and The Commercial Bank of Australia Limited Defendant, Respondent.

This appeal was an experiment by a guarantor who not unnaturally regretted having involved himself in such a liability. It was supported by an able and ingenious argument by Mr. Walker on behalf of the appellant, but the resources of his ingenuity were too heavily taxed by the carefully prepared banking documents which contained provisions designed to guard the Bank against the application of the doctrines of equity which might otherwise apply to the facts of the case. Mr. Walker's attempt to find a navigable course through these charted rocks appeared to me to be foredoomed to failure. My brother Dixon has prepared a judgment which deals with the arguments on precise technical grounds and the reasons which he has given appear to me completely to answer these arguments. Other answers might, perhaps, also be given but I prefer to content myself with expressing my concurrence with those which he has assigned. The appeal should be dismissed.

A Company styled P. O'Day Pty. Ltd. was a customer of the Commercial Bank of Australia Ltd., and on 22nd June 1931 was indebted to the Bank in a sum approaching £150,000. It had given the Bank a debenture charging all its property and assets with the principal interest moneys and other liabilities mentioned therein, but so that the charge constituted a floating security only. The debenture stipulated that the Company would on demand in writing ... pay to the Bank all moneys for the time being owing on or secured by the debenture. By a condition of the debenture it was also provided that at any time after the principal moneys became payable the Bank might appoint a receiver or a receiver and manager of the Company's business, and such receiver or receiver and manager should have power to sell the Company's business as a going concern and all or any of the property and assets comprised in the security on such terms and for such consideration as he might think proper ... provided that no such power of sale should be exercised unless and until notice in writing requiring payment of the principal moneys and interest (if any) had been served on the Company by the Bank in conformity with the provisions of the said debenture and the Company had made default in payment of such principal moneys and interest or part thereof for a period of two weeks after such service. The receiver or receiver and manager, it was stipulated, should be deemed the agent of the Company, which should be solely responsible for his acts.

Richard Bernard O'Day became a surety for the Company. In October of 1926, he gave a general lien over his assets in favour of the Bank, securing the indebtedness of the Company, and agreed, in the event of the moneys secured or any part thereof not being paid at maturity or on demand to pay the same. Further he declared that the security constituted by the general lien should be considered in addition to any other security which the Bank had or might thereafter take, and that he would not in any way claim the benefit or seek the transfer of any such other security or any part thereof. O'Day further supported the Company's account with the Bank by a guarantee dated 16th May 1930 and a mortgage dated 11th June 1930. The guarantor promised to pay to the Bank on demand in writing all moneys then payable or thereafter becoming payable by the Company to the Bank. It is declared, however, that the guarantee shall be considered in addition to any other guarantee or security either from the guarantor or any other person or company which the Bank has or may thereafter take for the debts of the Company, and that the guarantor will not in any way claim the benefit or seek the transfer of any such other security or any part thereof. The mortgage contains a similar provision.

The Company's account with the Bank fell into an unsatisfactory condition, and on 22nd June 1931 the Bank made demand in writing upon the Company. It simply stated that the Bank "demands payment of all principal interest and other moneys owing" by the Company to the Bank "the payment of which is secured by the debenture dated 14th January 1930" created by the Company in favour of the Bank. The moneys were not paid. On 23rd June 1931, the Bank appointed a receiver and manager of the business of the Company and authorized him to enter and take possession of the property and assets charged by the debenture. The receiver and manager accordingly entered, and took possession of the property and assets of the Company, and proceeded to sell and realize and has in fact sold and realized a considerable proportion of those assets.

Richard Bernard O'Day in 1932 commenced an action in the Supreme Court of Victoria against the Bank, claiming a declaration that he was discharged from all liability under the general lien, the guarantee, and the mortgage, given by him, and ancillary relief. Mann J., who tried the action dismissed it. Hence this appeal.

"A mortgagee may pursue all his remedies at the same time." But he is "bound, on payment, to restore the property to the mortgagor, and if it appear from the state of the transaction that by the act of the mortgagee, unauthorized by the mortgagor, it has become impossible to restore the estate on payment of all that is due," equity "... will interfere and prevent the mortgagee suing the mortgagor at law" (Lockhart v. Hardy[1]; Schoole v. Sall[2]; Palmer v. Hendrie[3]; Palmer v. Hendrie [No. 2][4]; Kinnaird v. Trollope[5]; Ellis & Co.'s Trustee v. Dixon-Johnson[6]). Authority may be derived however from the mortgage deed (as from an express power of sale), or from the direct concurrence of the mortgagor, or, possibly, otherwise (Rudge v. Richens[7]; Kinnaird v. Trollope[8]). The argument addressed to us in the present case is that the Bank disposed of the assets of the Company—the security given by the debenture already mentioned—without lawful authority from the Company, and is unable to restore them on payment of the moneys due to it by the Company and secured by the debenture. Consequently, it is contended, the Bank would not in equity be permitted to enforce the debt against the principal debtor, the Company, nor, therefore, against the surety, the appellant. In order to justify the appointment of a receiver and manager, the bank must no doubt have complied with the conditions precedent contained in the debenture, and it is claimed that it did not do so. The debenture provided that the Company should pay on demand in writing, and that at any time after the principal moneys became payable the Bank might appoint a receiver and manager, who should have a power of sale. The demand, it is said, however, was bad, because the precise amount due and demanded was not specified, and because a reasonable time after demand was not allowed the debtor to enable him to find the money (Comyns's Digest, 5th ed. (1822), "Condition" G5; Massey v. Sladen[9]; Brighty v. Norton[10]; Toms v. Wilson[11]; Moore v. Shelley[12]). Therefore, the argument concludes, the Company was not in default under the debenture, and the appointment of the receiver and manager, and the subsequent sale of the assets were unauthorized. But there is nothing in the debenture, or in the nature of the case, which suggests that the demand in writing should specifically set forth the sum demanded. The demand is for the purpose of bringing home to the Company that the Bank is demanding its money, and that is sufficiently indicated by claiming all principal interest and other moneys owing to it. Again, it must not be overlooked that the security is but a floating charge: it is dormant until the Bank, in whose favour the charge was created, intervenes. One method of intervention is by the appointment of a receiver, and that is often a most urgent act to protect the charge. The appointment of a receiver and manager does not in itself effect a sale or forfeiture of the property charged. But in any event, the question whether a reasonable time was allowed to elapse after the demand and before the appointment of the receiver and manager must depend upon the circumstances of the case (Wharlton v. Kirkwood[13]). And I should have thought it not unreasonable in the present case, having regard to the nature of the security, the character of the debt, and the conduct of the principal debtor. Further, it appears to me that if the appointment of the receiver and manager were authorized, then the Bank is not required to justify his acts in the sale, for the debenture itself provides that he shall be deemed the agent of the Company and that the Company should be solely responsible for his acts and defaults. The same result would follow if the Company had acquiesced in the appointment of the receiver and manager and waived a demand in writing or the lapse of time between the demand and the appointment of a receiver. Assume, however, that the appointment of the receiver and manager was unauthorized, the surety must still, I think, fail in his action. "A floating security is an equitable charge on the assets for the time being of a going concern. ... It is of the essence of such a charge that it remains dormant until the undertaking charged ceases to be a going concern, or until the person in whose favour the charge is created intervenes" (Governments Stock and Other Securities Investment Co. v. Manila Railway Co.[14]). The Bank, under the debenture, obtained neither the possession nor the property in the undertaking and assets charged. A charge, and not a mortgage or an agreement to give a mortgage, was created by the debenture, and the party entitled to that charge would be entitled to the assistance of the Court in effecting a sale, but not to foreclosure (Sampson v. Pattison[15]; Tennant v. Trenchard[16]; Shea v. Moore[17]). The right to foreclose and the right to redeem are correlative rights, and can only arise in cases in which there is "either a legal mortgage or an agreement for a legal mortgage" (Ashburner on Mortgages, 2nd ed. (1911), p. 411). Consequently, in my opinion, the rule of equity illustrated in the case of Lockhart v. Hardy[18] and the other cases cited has and can have no application to the floating charge created by the debenture in the present case; there is not and never was any property vested in the Bank which it could restore to the Company.

It is true, no doubt, that the Bank is liable in trespass and in conversion if it entered the Company's premises and seized and sold the latter's assets before its right to the appointment of a receiver and manager attached (Brierly v. Kendall[19]). But the debt to the Bank subsisted, though subject to the question whether it must not be reduced by the amount of the assets realized or the damages sustained by the Company. (See Walker v. Jones[20]).

One or two minor arguments were also made for the appellant, but they are untenable and do not require specific mention.

The question upon this appeal is whether a surety has been discharged from the obligations of suretyship by the conduct of the creditor. The creditor is a Bank and the principal debtor, a proprietary Company, is its customer. The instruments of guarantee are three in number. The first is a general lien given by the surety charging his property with payment of loans, advances, discounts, interest, commission, banking charges, costs, charges, expenses or other moneys for which the customer might be or become liable to the Bank and guaranteeing to pay such moneys if the customer should fail to do so on demand. The second is a joint and several guarantee given by the surety with two co-sureties to pay on demand all sums of money which were or should become payable to the Bank by the customer. The third is a mortgage of real property given by the surety to the Bank containing a covenant on demand to pay (inter alia) the balance owing to the Bank by the customer on current account or otherwise. After the first and before the second instrument was given by the surety, the principal debtor, the customer, gave to the Bank a security creating a floating charge over all its assets. This security contained a covenant by the principal debtor that it would on demand in writing pay the balance which should for the time being be owing by it to the Bank on its account current and on any other account. It conferred upon the Bank a power "at any time after the principal moneys have become payable" to appoint a receiver and manager. It authorized the receiver to sell after the principal debtor had been in default for fourteen days from the service of notice in writing requiring it to pay principal and interest. At a time when the principal debtor was indebted to the Bank in a sum of the order of £150,000, the Bank served upon it a notice demanding payment of all principal, interest and other moneys owing by it to the Bank, and on the following day appointed a receiver and manager who went into possession. Subsequently, but after an interval of at least fourteen days, he sold a great part of the principal debtor's assets. The surety complains that the power to appoint the receiver and manager had not arisen because the principal moneys had not become payable and that his proceedings were therefore unauthorized. It is said that, for three reasons, the demand was ineffectual to make the principal moneys payable.

The first reason relied upon fails upon the evidence. A case was made that when the notice of demand was served upon the principal debtor the representative of the Bank made oral statements which had the effect of nullifying or suspending the operation of the demand. I think that no such construction should be placed upon the expressions ascribed to him.

The two remaining grounds have more substance. The notice of demand did not specify the amount demanded. It is said that a notice of demand is bad unless it names the sum payable. In support of this interpretation of the principal debtor's covenant to pay upon demand reliance is placed upon the observations of Cleasby B. in Massey v. Sladen[21]; cf. Wharlton v. Kirkwood[22]. Finally, it is contended that the power to appoint a receiver and manager did not arise until a reasonable time elapsed after service of the notice of demand and that one day was insufficient. According to this contention the power to appoint a receiver is not exercisable unless the principal debtor has made default under its covenant to pay on demand and there is no default until a reasonable time has expired for payment in compliance with the notice of demand. Such an interpretation is often adopted of powers to seize or sell conferred by securities requiring a demand upon the debtor (see Brighty v. Norton[23]; Toms v. Wilson[24]; Moore v. Shelley[25]; Fitzgerald's Trustee v. Mellersh[26]. Compare Bradford Old Bank v. Sutcliffe[27]).

I find it unnecessary to consider the correctness of either of these grounds for denying validity to the appointment of the receiver and manager and to the exercise of his powers. Assuming that the conditions precedent to the power to appoint him did not occur and the power had, therefore, not arisen, it does not, in my opinion, follow that the surety was discharged by the course taken in appointing a receiver and causing him to enter into possession and to sell assets. The ordinary rights of a surety in respect of securities given by the principal debtor do not exist in the present case. Each of the instruments of suretyship contains elaborate provisions which effectually disentitle the surety to any interest in, and to any rights in respect of, the security, whether by way of subrogation or otherwise. It follows that no reliance could be placed upon a contention that the acts of the Bank amounted to a wrongful dealing with securities discharging the surety. But to surmount this difficulty two arguments were advanced on behalf of the surety. These arguments did not deny, but proceeded upon the assumption that he could not complain of the creditor's dealings with securities as such. The first of these arguments was that the creditor, the Bank, had placed it beyond its power to restore the security given for the principal debt, and that, as redemption had become impracticable, no part of the principal debt so secured could be recovered. Accordingly it was argued that, as the principal debt was irrecoverable, the surety must be released (cf. McDonald v. Dennys Lascelles Ltd.[28]). It may be that some of the instruments of guarantee sufficiently negative the principle by which failure of the liability guaranteed releases the accessory obligation of the surety. But there is at least one other valid answer to the contention. The very assumption upon which the argument proceeds is that the floating charge did not become a specific security; it was never crystallized. A floating charge operates to secure moneys over an undertaking without giving to the creditor any legal or equitable interest in any specific piece of property comprised in the undertaking until the event occurs upon which it becomes a fixed security. The creditor obtains neither the possession nor property in any part of the assets. He has nothing to retransfer or to redeliver to the debtor upon payment of the debt. The debtor retains control of the assets and the power to dispose of them in the course of business. The rule of equity invoked is that "if a creditor holding security sues for his debt, he is under an obligation on payment of the debt to hand over the security; and if, having improperly made away with the security, he is unable to return it to his debtor, he cannot have judgment for the debt" (per Viscount Cave L.C., Ellis & Co.'s Trustee v. Dixon-Johnson[29]). This doctrine is entirely inapplicable to a charge which remains floating where nothing is vested in or handed over to the creditor. If the Bank failed to give the required notice, the seizure and sale may have involved it in trespass and conversion, but certainly did not expose it to a suit for redemption. On the other hand, if the appointment of the receiver was regular, or, although irregular, was not void ab initio, or was validated by waiver on the part of the principal debtor, then the sale of assets was open to no further objection. In that case, even if the receiver in selling acted as agent of the Bank and not of the principal debtor, the Company, no doubt could exist as to the continuance of its liability for the balance of the debt (Gordon Grant & Co. v. Boos[30]). It is, therefore, unnecessary to inquire whether the irregular or premature exercise of a power of sale affecting marketable chattels would preclude a mortgagee from recovering the balance of the mortgage debt. (Cf. Ellis & Co.'s Trustee v. Dixon-Johnson[31].)

The surety then fell back upon the contention that the appointment and entry of a receiver and manager necessarily destroyed or impaired, or was calculated to destroy or impair, the principal debtor's ability to pay and, if it was unauthorized, the Bank thereby had committed a wrongful act likely to impede or actually impeding performance of the principal obligation and so had discharged the surety. In my opinion this contention cannot be sustained. The Bank acted in the purported exercise of a remedy given to it to secure satisfaction of the principal liability. The surety had no interest in the security or in the remedy, or in the conditions precedent which are said not to have been observed. The fact that, in a bonâ fide endeavour to obtain payment of some part of the principal debt, the creditor does something which happens to impair the principal debtor's credit or earning capacity, and also happens to be a legal wrong, cannot, unless the surety has some further or other equitable or legal interest which is also affected, operate as a discharge of his obligations.

I think that the judgment of the Supreme Court was right, and that the appeal should be dismissed. The documents of guarantee signed by the appellant are themselves sufficient to defeat the arguments so vigorously contended for by Mr. Walker. Although a surety is a debtor most favoured by the law, he cannot escape his contractual obligations where they provide, as they do here, for their own survival in the very contingency which the surety relies upon in order to work a discharge.

I agree that the appeal should be dismissed. It was contended for the appellant, the surety, that the appointment of the receiver, under the debenture given by the principal debtor to the respondent, was unlawful in its inception, because the moneys due thereunder were not payable at the time of such appointment, as the same had not been lawfully demanded under the debenture, and also because, if the demand was valid, the time allowed by the debenture for payment, a reasonable time, so it was contended, had not elapsed after the demand when the receiver was appointed and took possession of the principal debtor's assets. For these reasons it was contended that the sale of the principal debtor's assets was a tortious act. Mr. Walker submitted that if these contentions are correct the appellant is entitled to be discharged from the suretyship on the following grounds:—1. The creditor's unlawful action caused the loss of the security held by it for the payment of the debt for which the security was secondarily liable. 2. The same unlawful action destroyed or was calculated to destroy the principal debtor's credit and ability to pay. 3. As this unlawful action had rendered it impossible for the creditor to restore the security to the principal debtor should the money secured by the debenture become legally payable and the principal debtor pay the same, the principal debt was thereby extinguished.

In my opinion the surety in the present case is not entitled to be discharged from the suretyship on any of these grounds, even if the appellant's submissions as to the illegality of the appointment of the receiver and the sale of the assets were conceded. In this view it is immaterial to inquire whether the acts complained of were lawfully done under the debenture. It will be sufficient to deal with the question of the validity of the above-mentioned grounds upon which it is submitted the surety should be held to be discharged, assuming the appellant's preliminary contentions to be correct.

As to the first ground. It is true that the surety is entitled to the benefit of all securities held by the creditor and if such securities are by the creditor's act rendered unavailable to the surety he will be entitled to be discharged from the suretyship. This right "is not necessarily dependent upon contract, but is the result of the equity of indemnification attendant on the suretyship" (De Colyar on Guarantees, 3rd ed. (1897), p. 322; Duncan, Fox, & Co. v. North and South Wales Bank[32]). But the surety may by his contract give up this right (Perry v. National Provincial Bank of England[33]). In my opinion Mr. Russell Martin rightly contended that the right which the appellant might otherwise have had in the security was deliberately excluded by the conditions of the contract whereby he assumed the obligations of a surety. These contracts contain elaborate provisions which were manifestly inserted with that object and they effectually achieve it. The respondent's dealing with the security, assuming that it was unlawful did not therefore violate any right of the appellant as surety in the security for the principal debt.

As to the second ground. It is not alleged that the action taken by the creditor to realize the assets of the principal debtor was taken with the intention of injuring it and amounted to a fraud on the surety. Although such action was injurious in a sense to the principal debtor, it did not partake of any other character than a bonâ fide exercise of a power, even if it were also, as alleged, in excess of the creditor's rights under the debenture. In Black v. Ottoman Bank[34] Lord Kingsdown dealing with the converse case of conduct on the part of a creditor which would appear to have been beneficial to a debtor but disadvantageous to a surety said "From these cases it is clear that ... the mere passive inactivity of the person to whom the guarantee is given, his neglect to call the principal debtor to account ... does not discharge the surety; that there must be some positive act done by him to the prejudice of the surety, or such degree of negligence as, in the language of Vice-Chancellor Wood in Dawson v. Lawes4(1854) Kay 280; [1854] EngR 167; 69 E.R. 119., to imply connivance and amount to fraud"[36]. Wood V.C., after referring to decisions with respect to the right to be discharged of a surety who had guaranteed the conduct of a person in an office, there said "All those remarks point to active connivance, amounting, in fact, as it would do in such a case, almost, if not entirely, to a fraud on the part of the person, and particular officers who were so conducting themselves" (Dawson v. Lawes[37]). As the mere inactivity of a creditor which has no other colour than failure to enforce his rights against a debtor will not discharge a surety so also I think that action by a creditor against a debtor which has no other colour or character than action bonâ fide taken in pursuit of his remedies will not discharge a surety though such action may be taken under a mistake of law as to the creditor's rights. Assuming the creditor's action in the present case to have been tortious it lacked the additional character and colour necessary to render it an equitable cause for the discharge of the surety on the ground that it injured him.

As to the third ground upon which the appellant submits that he is entitled to be discharged. If the assets were tortiously made away with there is no question of redemption at the suit of the debtor and there is no basis for the contention that the principal debt was extinguished because they could not be restored to the principal debtor. On the other hand if the action taken was a due exercise of the creditor's powers under the debenture there is again no basis for the contention that the surety was discharged by the realization of the principal debtor's assets.

[1] [1846] EngR 552; (1846) 9 Beav. 349, at p. 357; [1846] EngR 552; 50 E.R. 378, at p. 381.

[2] (1803) 1 Sch. and Lef. 176.

[3] [1859] EngR 902; (1859) 27 Beav. 349; 54 E.R. 136.

[4] [1860] EngR 712; (1860) 28 Beav. 341; 54 E.R. 397.

[5] (1888) 39 Ch. D. 636.

[6] (1925) A.C., at p. 491.

[7] (1873) L.R. 8 C.P. 358.

[8] (1888) 39 Ch. D., at p. 646.

[9] (1868) L.R. 4 Ex. 13.

[10] [1862] EngR 1114; (1862) 3 B. & S. 305; 122 E.R. 116.

[11] [1863] EngR 702; (1862) 4 B. & S. 442, 455; [1863] EngR 702; 122 E.R. 524, 529.

[12] (1883) 8 App. Cas., at p. 293.

[13] (1873) 29 L.T. 644.

[14] (1897) A.C. 81, at p. 86.

[15] [1842] EngR 760; (1842) 1 Hare 533; 66 E.R. 1143.

[16] (1869) L.R. 4 Ch. 537.

[17] (1894) 1 I.R. 158.

[18] [1846] EngR 552; (1846) 9 Beav. 349; 50 E.R. 378.

[19] [1852] EngR 166; (1852) 17 Q.B. 937; 117 E.R. 1540.

[20] [1865] EngR 790; (1866) L.R. 1 P.C. 50, at pp. 62, 63; [1865] EngR 790; 16 E.R. 151, at pp. 156, 157.

[21] (1868) L.R. 4 Ex. 13.

[22] (1873) 29 L.T. 644.

[23] [1862] EngR 1114; (1862) 3 B. & S. 305; 122 E.R. 116.

[24] [1863] EngR 702; (1862) 4 B. & S. 442, 455; [1863] EngR 702; 122 E.R. 524, 529.

[25] (1883) 8 App. Cas. 285.

[26] (1892) 1 Ch. 385, at p. 390.

[27] (1918) 2 K.B., at pp. 844, 845 and 848, 849.

[28] [1933] HCA 25; (1933) 48 C.L.R. 457.

[29] (1925) A.C., at p. 491.

[30] (1926) A.C. 781, at p. 786.

[31] (1924) 1 Ch., at p. 353; (1924) 2 Ch., at pp. 467, 470, 471, 473; (1925) A.C., at pp. 491, 494.

[32] (1880) 6 App. Cas. 1.

[33] (1910) 1 Ch., at pp. 471, 476.

[34] [1862] EngR 883; (1862) 15 Moo. P.C.C. 472; 15 E.R. 573.

[35] [1854] EngR 167; (1854) Kay 280; 69 E.R. 119.

[36] (1862) 15 Moo. P.C.C., at p. 483; 15 E.R., at p. 577.

[37] (1854) Kay, at p. 301; 69 E.R., at p. 128.

High Court of Australia

O'Day v Commercial Bank of Australia Ltd [1933] HCA 37; (1933) 50 CLR 200 (21 August 1933)

HIGH COURT OF AUSTRALIA