Bank of Adelaide v Lorden

" all such advances including all debts now owing or hereafter to accrue due from the customer" (the company) "to the Bank" (the appellant) "and interest on the same respectively until payment at the rate or respective rates (not exceeding £10 for every £100 by the year) which the General Manager or Assistant General Manager or Manager or Acting Manager for the time being of the Bank shall from time to time fix and compute in the manner usual in the Bank making half-yearly rests." The instrument of guarantee provided that the amount ultimately payable by the guarantors thereunder should: not exceed the sum of £4,000 and interest on the said sum or so much thereof as shall be owing or unpaid from time to time at the rate aforesaid and computed as aforesaid with half-yearly rests from the date hereof until payment and whether such interest shall have been charged to the account of the customer and converted into principal or otherwise.

including in its meaning all general balances and the ultimate balance arising from time to time of the customer's entire account with the Bank and all other balances of the customer's accounts with the Bank and all the customer's present and future indebtedness (such indebtedness shall in case the customer has or at any time hereafter shall have more than one account include at the option of the Bank and as the Bank may from time to time determine the indebtedness of the customer on all or some two or more of the customer's accounts whether the same be held at the head office and/or at all or any of the Bank's branches and/or agencies) and all other liabilities to the Bank and all charges for keeping the customer's accounts with the Bank and for commission interest and other expenses charged by the Bank in the course of its business as banker in respect of any advances or discounts made or to be made by the Bank to or on account of or for the credit of the customer.

that the Bank may from time to time and without affecting impairing or releasing this guarantee or the guarantor's liability under it execute or bindingly assent to any deed of assignment or arrangement (and all preliminaries thereto) of the customer's estates and effects to Trustees for the benefit of the customer's creditors or compound with the customer and also with any party or parties to any Bill of Exchange and that any dividend which the Bank may receive from the assets estate or estates whether in liquidation or in bankruptcy or under any statutory deed of assignment or arrangement of the customer or of any such party or parties may be first applied in reducing the indebtedness and other liabilities above the sum beforementioned of the customer to the Bank.

By cl. 8 of the instrument of guarantee it was further agreed:

this guarantee shall at all times be valid and enforceable against the guarantor even though the advances (include-the principal debt) payment whereof is guaranteed hereby cannot be legally enforced against the customer.

The company met its creditors informally on 19th January 1959 when the creditors present decided to recommend to the managing director of the company that the company should go into voluntary liquidation unless it could arrange to dispose of its assets within one month at a figure satisfactory to the creditors. At a further informal meeting of creditors held on 10th March 1959 an offer to purchase the company's assets including its book debts was found acceptable to the creditors present at the meeting. The majority of those creditors carried a motion that the offer be accepted by the meeting subject to its acceptance by all the company's creditors. On 20th March the chairman of the meeting of creditors sent a circular letter to all creditors informing them of the meeting, of the resolution there carried and of the amount which would be available for distribution to creditors on the basis of the sale of the company's assets as proposed, namely, a minimum sum of 2s. 9d. in the pound. The letter concluded:

to enable the distribution to be made, you are asked to kindly sign and return the attached form of letter at once. When all such letters are to hand, a cheque for amount due to you will be forwarded. On 5th May 1959, a cheque for £889 10s. 5d., being 2s. 9d. in the pound on the total amount of the debt due by the company to the appellant, was sent to the appellant by the chairman of the meeting of creditors. In that letter the writer said that the appellant had signed a form of agreement to accept not less than 2s. 9d. in the pound in full settlement of the appellant's debt. The officer of the appellant who gave evidence in the proceedings out of which this appeal arises said that he had agreed on behalf of the appellant to accept the sum, and that the appellant did in fact receive the sum, of £889 10s. 5d.

Although the appellant received the sum of £889 10s. 5d. in full satisfaction of the total indebtedness of the company, the appellant did not close the company's account but continued it under the name of Godfrey Lorden Motors Pty. Ltd. (liquidated). Interest was debited to that account from time to time on the amount from time to time standing to the debit of the account.

No point was raised in the case based on the terms of cl. 3 of the instrument of guarantee as to the use which the appellant could make of the amount received as a dividend in the composition. From figures supplied by counsel it would appear that the total indebtedness of the company at that time was $12,938.25 reduced to $11,159.20 by crediting the amount received against the total indebtedness.

On 10th May 1959 the respondents executed a memorandum of mortgage over certain land in Western Australia to secure the company's debt to the appellant up to a limit of £4,000 and interest.

The respondent, Stephen Godfrey Lorden, at that time gave the appellant a charge over his interest in the estate of A. H. Lorden (deceased) also to secure the sum of £4,000 of the company's debt to the appellant and interest thereon. In 1960 the representative of the deceased estate of A. H. Lorden paid to the appellant a total of £1,773 10s. 5d. which was credited to the account of Godfrey Lorden Motors Pty. Ltd. (liquidated). No payments were made by the respondents or either of them to the appellant thereafter. On 11th April 1968 the appellant by a writing of that date demanded of the respondents the payment of the amount due by them under the guarantee, the total sum claimed being $8,298.94 of which $3,853.89 was interest on a principal sum of $4,445.05.

On 1st October the respondents issued a writ out of the Supreme Court of Western Australia seeking a declaration that the memorandum of mortgage which they had executed on 10th May 1959 was unenforceable and void and that there were not at that time nor ever had been any moneys owing under or secured by the mortgage. Their statement of claim as amended at the hearing of the action alleged that the memorandum had been executed under protest on the demand of the appellant and that at the date of the giving of the mortgage the company was not indebted to the appellant so that the mortgage was given without consideration. In its defence the appellant set up the guarantee in writing signed by the respondents, and submitted that at the time of its execution the company was indebted to the appellant in a sum in excess of $8,000 and that the memorandum of mortgage was executed freely and voluntarily by the respondents. The appellant counterclaimed the payment of $8,206.51 together with interest thereon until payment at the rate of five and three-quarter per cent as money due under the instrument of guarantee. The amount of $8,206.51 was made up by the appellant of -

(1) interest from 17th February 1958 until 16th May 1960 on $8,000;

then having received the payment of $3,400 on 16th May 1960:

(2) interest on a balance of $4,600 from 16th May 1960 to 12th August 1960;

then having received the payment of $147.04 on 12th August 1960:

(3) interest on a balance of $4,452.96 from 12th August 1960 to 24th March 1969;

interest in each case being at five and three-quarter per cent compound, with half-yearly rests.

The primary judge held that the memorandum of mortgage was not executed for any consideration for the reason that prior thereto the appellant had compounded with the company so that at the date of the execution of the mortgage there was no sum of money due and payable by the company to the appellant. His Honour made the declaration sought by the respondents as to the unenforceability of the memorandum of mortgage and made the necessary ancillary orders.

The primary judge also held that the guarantee was no longer enforceable because the debt which it guaranteed had been wholly discharged by the composition effected by the appellant with the company. Consequently he dismissed the appellant's counter-claim.

The appellant appealed to this Court against the whole of the judgment of the primary judge. However, upon the appeal being opened counsel for the appellant informed the Court that the appellant abandoned the appeal so far as it sought to set aside the declaration made by the primary judge as to the unenforceability of the memorandum of mortgage and the orders made ancillary thereto. The appellant confined its appeal to so much of the judgment and order as dismissed the counterclaim. The question therefore is whether the appellant can recover from the respondents the amount guaranteed, notwithstanding that the appellant had compounded with the company. We are not called upon to express any opinion as to the correctness of the declaration and order which are not now challenged by the appellant.

In general, a composition with the principal debtor by which a sum is accepted in full satisfaction of the obligation to the creditor will discharge the surety unless the surety be a party to the transaction or there is an express reservation at the time of the making of the composition of the creditor's rights against the surety. Where such rights are reserved at the time the creditor makes the composition with the principal debtor the surety's rights against the principal debtor on payment of the amount guaranteed remain so that notwithstanding the composition the principal debtor can be called upon to pay to the surety the whole amount paid by the surety to the creditor. Where there is such a reservation, what apparently was a discharge of the principal debtor's debt to the creditor may be construed as merely a covenant not to sue.

But the surety may agree in advance to remain liable though the debt of the principal debtor be discharged by other means than payment as, for example, by composition. Clause 3 of the instrument of guarantee in this case is clearly an endeavour to provide that the surety shall remain liable though the debt of the principal debtor should be discharged by composition. The particular question in the case therefore, in my opinion, is whether cl. 3 of the instrument of guarantee is effective to continue the liability of the respondents though the appellant has effectively discharged the debt of the company to it by accepting, as part of the general composition with creditors, a lesser sum than the full amount in satisfaction of the debt due. It is quite clear, in my opinion, that the Bank did compound with the company, and did so as part of a general composition of the company with its creditors. Upon its acceptance of the sum of 2s. 9d. in the pound on the full amount of the debt then due by the company to the appellant it effectively discharged the company from any further liability to pay any sum on account of that debt.

Clause 3 expressly gives to the Bank the right to compound with the company without affecting, impairing or releasing the guarantee or the guarantor's liability thereunder. In Perry v. National Provincial Bank of England [1] a surety had executed mortgages over his own property to secure the bank overdraft of a firm of which he was not a partner. The mortgage instrument provided that the Bank:

shall be at liberty without thereby affecting their rights herein at any time to compound with give time for payment of and accept compositions from and make any other arrangements with the debtors or any of them The firm came into serious financial difficulty as a result of which a company was formed to purchase the property of the firm in exchange for shares to be allotted to the members of the firm as and when debentures then issued to the creditors in satisfaction of the debts due to them at the rate of 25s. 0d. for every one pound of debt due should be paid off. The Bank was owed £3,530 0s. 0d. It valued the securities it held at £1,630 so that its unsecured debt was £1,900. It took debenture stock to the value of £2,375 in full discharge of all its claims against the firm. It was held that the acceptance of the debentures in satisfaction of the unsecured sum of £1,900 effectively extinguished any liability of the surety in respect of that sum for the reason that the sum of £1,900 was paid, or should be regarded as having been paid, in full. However, it was also held that the surety remained liable in respect of the sum of £1,630 which had not been paid though the firm had been released in respect of it by the composition. The Court of Appeal, calling attention to and relying upon the decisions in Cowper v. Smith [2] ; Union Bank of Manchester (Ltd.) v. Beech [3] , held that there was no obligation upon the Bank in that case when accepting the composition to reserve any rights against the surety. "The surety had himself contracted that the rights under the deed should not be affected by any such arrangement." The Master of the Rolls said "that being so, it seems to me that though there is no personal liability on the part of" (the firm) "to the bank, yet as regards" (the amount unpaid) "the surety is still liable to the bank notwithstanding the release of the debtor" [1] . Here the parties have used language of the same order as that employed in the mortgages upon which the Court of Appeal passed in Perry v. National Provincial Bank of England [2] . It seems to me that the primary judge ought to have given effect to cl. 3 of the instrument of guarantee and held that the liability of the surety remained though the debt of the principal debtor had been discharged otherwise than by payment in full. Consequently, in my opinion, the appeal should be allowed so far as the judgment below dismissed the counterclaim and judgment should be entered for the appellant against the respondents for the amount due under the instrument of guarantee. 1. [1910] 1 Ch. 464. 2. (1838) 4 M. & W. 519 [150 E.R. 1534]. 3. (1865) 3 H. & C. 672 [159 E.R. 695]. 4. [1910] 1 Ch. 464, at p. 475. 5. [1910] 1 Ch. 464.

Two matters remain for decision. First, an argument was advanced that the debt under the instrument of guarantee was statute barred in that the appellant had made a demand for payment in 1959. This submission was founded upon some answers given in cross examination by the officer of the appellant who gave evidence before the primary judge, answers in which he acknowledged that pressure had been brought to bear upon the male respondent to pay over or cause to be paid over an amount out of the estate of A. H. Lorden (deceased) over his interest over which he had given a charge to secure the same sum as was secured by the instrument of guarantee. However, it suffices, in my opinion, to say that there was quite clearly no demand for payment of the amount secured by the instrument of guarantee before the written demand was made in April 1968. Accordingly, no question of the debt having been barred by limitation of time arises.

The other question is more difficult. It is the question of the amount for which judgment should be entered for the appellant. The respondents by the instrument of guarantee promised to pay on demand all advances to the company and interest thereon until payment at a rate to be specified with the reservation that the amount ultimately payable should not exceed £4,000 and interest thereon. I have earlier quoted in full the terms of the respondents' promise.

Though interest may accrue on daily balances of the overdrawn account, the company's indebtedness to the Bank at any particular time was of a single sum made up of the debit to the account at the last half-yearly day and interest from that date to the date in question. As each half-yearly day arrived, interest was added to the sum otherwise due so that on that day a single sum only was due. If occasion arose to ascertain the company's indebtedness at a date between the half-yearly days, interest accrued since the last of such days to the date in question was added to the then debit to form one sum.

Thus, whenever it was calculated, the amount due to the Bank, subject to the exercise of any of the privileges accorded to the Bank by the instrument of guarantee in respect of the debt or debts of the customer, none of which are relevant in this case, was a single undifferentiated debt.

The obligation of the respondents under the instrument of guarantee is to pay on demand the amount then due to the appellant by the company with a stated upward limit of liability. In the case of a principal debtor there is in general an amount always due to the creditor and in the case of an interest-bearing debt, interest thereon accruing due, though for want of a demand or the effluxion of an agreed period of time, nothing may be payable. But the position is otherwise, in my opinion, in the case of a surety who promises to pay on demand, who does not owe any debt to the creditor until demand. Whether a debt then becomes due and payable by the surety depends on the terms of the instrument of guarantee and the relevant circumstances which then obtain or have theretofor occurred affecting the liability of the surety. If the guarantee is to pay on demand up to a limited sum, the time at which to determine whether that limited sum is due and payable to the creditor by the surety is the date of the demand by the creditor on the surety. At that time a comparison between the sum then due by the debtor to the creditor will establish whether or not that limited sum or some lesser sum is due and payable by the surety.

In the case of an overdrawn account with a bank secured by personal guarantee, as was the instant case, the bank may close the account in the sense that no further drawing will be met and may in addition demand payment of the account by the customer. In either case interest will continue to run on the balance of the account and, if that be the arrangement as in the present case, it will continue to be compounded on half-yearly rests. If an interval of time elapses between the closure of the account and the demand upon a surety who has executed an instrument of guarantee in the terms of the instrument here in question, the interest accruing in the interval will be added to the last half-yearly balance and the surety will be liable to pay so much of that total debt as falls within the limit of the guarantee. In my opinion, the surety's liability will not be to pay so much of the sum due to the Bank at the time of the closure of the account as fell within the limit of the guarantee. For example, if the amount due at the date of the closure of the account is less than the agreed limit of the guarantee, the surety will not be liable to pay only that amount and interest thereon. In such a case the Bank would be entitled to demand the full limit of the guarantee if at the date of the demand, due to interest having meantime accrued, that amount or more was due by the customer. Though the limit of the guarantee of an overdrawn account is expressed to be an amount and interest thereon as in the terms of the instrument of guarantee in this case there is, in my opinion, no principal sum the repayment of which the surety guarantees together with interest thereon as agreed. It is the amount due by the customer to the Bank at the date of the demand upon the surety which becomes due and payable by the surety subject to any limit of liability fixed by the instrument of guarantee. Here the limit is expressed to be £4,000 and interest on the said sum or so much as shall be owing or unpaid from time to time at the rate aforesaid and computed as aforesaid with half-yearly rests from the date hereof until payment. If the "said sum" is £4,000, as I think quite clearly it is, that sum cannot be regarded, in my opinion, as a principal sum due either by the company or the surety throughout so much of the period of the company's account with the appellant as was covered by the guarantee so that the limit of the surety's liability is £4,000 plus interest on £4,000 at a stated rate compounded on half-yearly rests for the whole period of the overdrawn account since the date of the guarantee. Such sum in truth may never have been due by the company for its balance as I have said from time to time included all interest at least to the last half-yearly day. The reference to the payment of interest in the portion of the guarantee which I have lastly quoted is, in my opinion, a reference to the payment of interest upon the sum due and owing by the surety. It is not intended, in my opinion, to effect and it is not apt to effect an extension of the limit of the surety's liability at the time of the demand for payment under the instrument of guarantee. If the words "the date hereof" in the portion of the guarantee quoted cannot be given literal effect, as I think in the circumstances they cannot, they may not, in my opinion, be treated as if they provided for the running of interest from the date of the composition. Accordingly, in my opinion, the respondents' liability which accrued at the date of the demand for payment must be determined by a comparison between the amount then due by the company including interest to the appellant and the sum of £4,000. That sum, in my opinion, is the full upward limit of the respondents' debt to the appellant though of course it will bear interest from the date of demand until payment by the respondents.

The position may perhaps appear to be complicated in the instant case by the composition which put an end to the company's debt and to any liability on its part to pay interest on any sum. There was, in my opinion, no warrant for the appellant to continue to debit interest to the company's account after the date of the composition. In principle, however, though no further interest could accrue due by the company, in a case where, as here, the surety's liability persists, the position must, in my opinion, be the same as in the instance of a closure of an overdrawn account. There will be no sum due or payable by the respondents until a demand for payment has been made. The total indebtedness of the company to the appellant of which the respondents have promised to pay not more than £4,000 on demand will be the amount unrecovered at the date of the demand which if no sum is recovered in the meantime will be the same sum as was unrecovered by the appellant by the composition. Although the limit of the guarantee is expressed to be £4,000 and "interest on the said sum", all interest on the company's debt to which the appellant was entitled prior to the demand on the respondents was included in the total amount remaining outstanding at the date of the composition. No further interest was payable by the company. The respondents are not liable, in my opinion, for any interest on the amount unrecovered by the composition or upon the amount of the limit of the guarantee because of any supposed release of them by the composition but because at the date of the demand upon them no sum could properly be included in the total debt of the company unrecovered by the appellant for interest after the date of the composition.

But of course the respondents will be liable for interest on the sum of £4,000 or a lesser balance then due by the company, as from the date of demand until payment to the appellant. The words of the respondents' promise to pay "whether such interest shall have been charged to the account of the customer and converted into capital" appear to me to be appropriate to a case where after the demand on the surety, interest continues to accrue due by the customer and at the appointed time becomes part of the principal debt of the customer whilst the amount properly demanded of the surety still remains unpaid. The words quoted are inappropriate, in my opinion, to increase the limit of the guarantee to include interest on the amount of that limit from some date prior to the date of the demand of payment made upon the surety. In my opinion, "that sum" in the respondents' promise is the sum of £4,000 due and payable by the respondents when demanded that being the largest amount which the appellant could properly demand of the respondents. The reference in that promise to "so much thereof as shall be owing or unpaid from time to time" is a reference, in my opinion, to a part of an amount owing by the respondents, i.e. upon and after demand of payment by them.

There remains the question of the proper application of the money received by the appellant from the estate of A.H. Lorden (deceased) as the proceeds or part of the proceeds of the security given by the respondent S. G. Lorden to secure the payment of the company's account up to the same amount as is expressed in the instrument of guarantee. The respondent, S. G. Lorden, was thus a co-surety with the respondents and the charge given by him to the appellant was a security for the guaranteed debt. The respondents, upon payment of the amount properly demanded of them under the instrument of guarantee, would be entitled to the benefit of the security: and being co-sureties, rights as between themselves would arise. It seems to me therefore that the appellant having received a sum of money as proceeds of the security must apply the amount received to the credit of the respondents as sureties and not to the company's account. This will be so, in my opinion, whether or not what occurred between S. G. Lorden and the appellant prior to the payment of the sums totalling £1,773 10s. 5d. amounted to a demand upon him as a surety of the company's debt. Also, there is nothing in the terms of the instrument of guarantee which gives the appellant any special rights in respect of the application of money received from a co-surety.

The amount unrecovered from the company by the appellant in respect of the debt due to it by the company thus exceeded the limit of the respondents' liability under the instrument of guarantee, namely $8,000. Therefore, upon demand of payment made upon the surety on 11th April 1968 the sum of $4,452.95 became payable, that sum being $8,000, the limit of the guarantee, less the amount received from the estate of A. H. Lorden (deceased) namely $3,547.05. The sum of $4,452.95 will bear interest at five and three-quarter per cent on half-yearly rests from the date of demand until judgment. The total amount therefore for which judgment should be entered for the appellant is, in my opinion, the sum of $4,921.29 being the amount due on demand plus interest thereon until 6th December 1969 being the date when judgment ought to have been entered for the appellant.

The appeal should be allowed. Judgment should be entered for the appellant for $4,921.29. In my opinion, each party should bear its own costs of this appeal and of the proceedings in the Supreme Court.

The plaintiffs, who are the present respondents, brought an action against the Bank, which is the present appellant, seeking, in substance, a declaration to the effect that, upon a discharge of the principal debtor by virtue of a composition, they, as sureties, were no longer liable to the bank upon a guarantee given by them on 17th February 1958 in respect of advances by the Bank to the principal debtor. The Bank counterclaimed for $8,206.51 under the guarantee and for interest since that date. The action succeeded and the counterclaim failed. It is the Bank which appeals.

The Bank's principal creditor was Godfrey Lorden Motors Pty. Ltd., which, at the date of the guarantee, owed the bank something in excess of £4,000. On 10th March 1959, at a meeting of the creditors of the company, it was agreed by a majority of those creditors that an offer made by Stirling Investments Ltd. to purchase the undertaking of the company for £4,200 "be accepted by the meeting subject to its acceptance by all the creditors". Subsequently the creditors, including the Bank, signed letters to the effect that they would accept not less than 2s. 9d. in the pound in full settlement of the debts owing to them. The letter signed by the bank is not before us. On 5th May 1959 the Bank received from the accountants looking after the company's affairs a cheque for £889 10s. 5d., being 2s. 9d. in the pound on the amount then owing by the company to the Bank, viz. £6,469 2s. 6d.

It seems that, on receipt of the £889 10s. 5d. in full settlement of the debt owing to it by the company, the Bank did not close the company's account. It credited the account with the sum received and continued the account under the name "Godfrey Lorden Motors Pty. Ltd. Liquidated". Subsequently the Bank received, on behalf of the plaintiffs, £1,700 on 16th May 1960, and £73 10s. 5d. on 12th August 1960, which it credited to the account aforesaid. These payments came from the trustee of the estate of A. H. Lorden deceased, the mother of the surety S. G. Lorden, who had assigned his interest in the estate to the Bank. From time to time it debited the account with interest, as appears later. It was not until 11th April 1968 that the Bank made a demand upon the sureties for payment under the guarantee. Its demand was for principal outstanding $4,445.05 and interest to date $3,853.89, making a total of $8,298.94. Interest was, therefore, being charged from a date about eight years before the payment by the sureties of advances was demanded.

It was decided in the Supreme Court that the liability of the sureties under the guarantee came to an end when the indebtedness of the principal debtor was extinguished upon the acceptance by the Bank of £889 10s. 5d. in full settlement of the company's debt. This decision was based upon what I think was a misunderstanding of the decision of the Court of Appeal in Perry v. National Provincial Bank of England [1] . What was there decided was that, as to £1,900 of the debt of a principal debtor covered by a guarantee to a bank, the bank had accepted certain debentures in accord and satisfaction so that it could not claim against the surety for any part of that £1,900 which had, in effect, been paid. As to £1,630, however, although the bank had released the principal debtor from liability, it was decided that the surety remained liable under the guarantee because the contract between the surety and the bank provided that the surety should remain liable notwithstanding that the liability of the principal debtor should come to an end. In so deciding the Court of Appeal followed Cowper v. Smith [2] and Union Bank of Manchester v. Beech [3] . It is the second part of this decision, not the first, that is in point here, for the guarantee provides expressly for the continued liability of the surety notwithstanding a composition with the principal debtor. I turn to its relevant terms.

1. [1910] 1 Ch. 464. 2. (1838) 4 M. & W. 519 [150 E.R. 1534]. 3. (1865) 3 H. & C. 672 [159 E.R. 695].

all general balances and the ultimate balance arising from time to time of the Customer's entire account with the Bank and all other balances of the Customer's accounts with the Bank and all the Customer's present and future indebtedness and all other liabilities to the Bank and all charges for keeping the Customer's accounts with the Bank and for commission interest and other expenses charged by the Bank in the course of its business as banker in respect of any advances or discounts made or to be made by the Bank to or on account of or for the credit of the Customer. The liability of the sureties is expressed as follows. An undertaking: to pay the Bank on demand all such advances including all debts now owing or hereafter to accrue due from the Customer to the Bank and interest on the same respectively until payment at the rate or respective rates (not exceeding ten pounds for every one hundred pounds by the year) which the General Manager or Assistant General Manager or Manager or Acting-Manager for the time being of the Bank shall from time to time fix and computed in the manner usual in the Bank making half-yearly rests. Provided that the amount ultimately payable by the Guarantor hereunder shall not exceed the sum of four thousand pounds and interest on the said sum or so much thereof as shall be owing or unpaid from time to time at the rate aforesaid and computed as aforesaid with half-yearly rests from the date hereof until payment and whether such interest shall have been charged to the account of the Customer and converted into principal or otherwise.

3. It is further agreed that the Bank may from time to time and without affecting impairing or releasing this Guarantee or the Guarantor's liability under it execute or bindingly assent to any deed of assignment or arrangement (and all preliminaries thereto) of the Customer's estates and effects to Trustees for the benefit of the Customer's creditors or compound with the Customer and also with any party or parties to any Bill of Exchange Promissory Note Draft Cheque or other negotiable instrument paper or security whatever that may be received by the Bank from or on account of the Customer or of the liability of any such party or parties to the Bank and that any dividend which the Bank may receive from the assets estate or estates whether in liquidation or in Bankruptcy or under any statutory Deed of Assignment or arrangement of the Customer or of any such party or parties may be first applied in reducing the indebtedness and other liabilities above the sum before mentioned of the Customer to the Bank.

4. It is further agreed that in case the Customer executes any such deed of assignment or arrangement or becomes bankrupt or as the case may be goes into liquidation or is ordered to be wound up or is wound up or is dissolved by any other means the Bank shall be entitled to prove on the Customer's estate or assets for the total amount of the Customer's indebtedness and other liabilities to the Bank and if the Bank shall think fit the Bank may refuse to accept from the Guarantor the amount guaranteed until after the Bank has received all or some one or more of the dividends payable out of the Customer's estate or assets.

The decision under appeal failed to give effect to cl. 3, which clearly enough renders inapplicable the ordinary rule relating to guarantees that to release the principal debtor, by a composition, is to release the surety too.

At the hearing, however, there was difficulty in determining the amount which the Bank was entitled to recover from the sureties. This was in part because the way in which the Bank had made up its claim for interest did not appear. It was, however, in part due to a more fundamental difficulty, viz. the proper construction of the provisions of the guarantee relating to the payment of interest by the sureties themselves.

Upon consideration, it seems to me that no interest could accrue due to the Bank from the principal debtor after the Bank's compounding of the principal debtor on 5th May 1959. It was on that date that the amount of the "advances" guaranteed, including interest which had become payable by the principal debtor, was fixed. There could be no further payment by or on behalf of the principal debtor to reduce the amount of the advances. The amount of the advances was £6,469 2s. 6d., less £889 10s. 5d. then paid, so that the advances guaranteed would have been £5,579 12s. 1d. had it not been that the amount of advances to the principal debtor payable by the sureties under the guarantee was limited to £4,000. That sum was, therefore, payable upon demand by the sureties. The liability of the sureties is, however, not limited to £4,000. The limit is the amount of advances up to £4,000 and interest as provided on what is owing or unpaid from time to time. The obligation to pay the amount of advances arises on demand. The question is whether interest upon the amount of the advances up to £4,000 does not start to run until payment of the advances is demanded from the sureties.

It seems to me that, upon the composition with the principal debtor, when advances could no longer be reduced, its bank account should have been closed and a record then kept of the sureties' indebtedness starting with the sum of £4,000 which the sureties owed and were bound to pay upon demand. When the Bank received the sums of £1,700 and £73 10s. 5d., as already stated, these should have been credited to the sureties, notwithstanding that payment had not been demanded from them. This was, in effect, done.

What the Bank did about interest after the composition, so we have been informed, was to charge the sureties interest at the rate of five and three-quarter per cent with half-yearly rests as follows:

interest from 17th February 1958 until 16th May 1960 on $8,000;

interest on a balance of $4,600 from 16th May 1960 to 12th August 1960;

interest on a balance of $4,452.96 from 12th August 1960 to 24th March 1969 (the date of the counterclaim).

In doing as it did, I think the Bank did not overcharge the sureties unless the guarantee means that interest upon £4,000, being part of the £5,579 12s. 1d., which was the amount of advances unpaid by the principal debtor at the time of its release, did not run until demand by the Bank upon the sureties for payment of the unpaid advances up to £4,000. However, as I read the guarantee, interest is to be paid by the guarantors upon the sum of £4,000 owing under the guarantee without there having been any demand by the Bank for payment of that sum. It is a possible construction of the guarantee that interest should not run without demand for the guaranteed amount, but I prefer the construction which I have already stated. It is, of course, quite clear that the sureties may have to pay the Bank more than £4,000 because it is expressly provided that interest thereon is payable. I have not found myself able to read the guarantee as providing anywhere that interest should not be payable without a demand for the sum that is to carry interest. Interest is normally chargeable upon what is owed, i.e. the amount by which the Bank is from time to time out of pocket, rather than merely upon what has become due and payable, and I find nothing in the guarantee to warrant departing from this general rule, but I do find indications to support its application. The only reference in the guarantee to a demand is in relation to "advances", not to interest.

From the date of the composition £4,000 was owing by the sureties to the Bank and there is a promise by the sureties to pay interest on that sum, or so much thereof as shall be owing or unpaid from time to time computed from the date of the guarantee. The words "owing or unpaid" recognize, I think, that, although a payment will reduce what is owing, such a reduction may occur otherwise than by payment. The Bank was not, I think, in error in treating £4,000 as the principal becoming owing by the sureties at the date of the composition with the principal debtor. It, or so much thereof as was owing from time to time, was to carry interest. I have been puzzled by the choice of the date of the guarantee as the date from which interest payable by the sureties upon the amount payable by them in respect of advances to the principal debtor should be computed with half-yearly rests. It seems, however, to be fatal to the contention that interest did not become payable until the date upon which payment of the guaranteed advances was demanded. The computation has no regard to the date of this demand, which, upon the construction which I reject, would be the date for computing interest with half-yearly rests. It could hardly have been intended that interest should be computed from the date of the guarantee if, under the guarantee, interest did not become payable by the guarantor until a demand was made. A possible construction is, perhaps, that interest runs from the date of the guarantee but that the sureties are not required to pay interest when it has been paid by the principal debtor. Interest is not to be paid twice. This may be the significance of the final words of the undertaking set out earlier.

Accordingly, I consider that the appeal should be allowed, the declaration in favour of the plaintiffs set aside, and an order made against the plaintiffs for payment of the amount claimed in the counterclaim.

I entirely concur in the judgment of the Chief Justice.

At the hearing of this appeal counsel for the appellant abandoned so much of it as challenged a declaration made by the Supreme Court of Western Australia, that no moneys were owing on a mortgage given by the respondents to the appellant, and certain consequential orders. Therefore the Court is concerned only with an appeal against that part of the judgment and order of the Supreme Court by which a counterclaim of the appellant, for moneys claimed to be due under a guarantee given by the respondents, was dismissed.

I agree with the reasons given by the Chief Justice for holding that the fact that the appellant had made a composition with the principal debtor by which an amount then received was accepted in full satisfaction of that debtor's obligation did not have the consequence that the counterclaim (so far as it was based upon the guarantee) ought to have been dismissed. I agree also with his conclusion that the debt under the instrument of guarantee was not statute-barred and with his reasons for that conclusion.

There remains the question whether the appellant was entitled to recover the amount claimed by it or a smaller amount. This depends upon the construction of the instrument of guarantee. In particular, I think it depends mainly upon the construction of that part of the guarantee which imposes an upper limit upon "the amount ultimately payable" by the guarantors. The relevant provisions of the agreement have been stated in other judgments and I need not repeat them. The opposing contentions of the parties as to the question under consideration do not depend, except in relation to one matter to be mentioned later, upon factual details as to the amount owed to the appellant at any material time by the company known as Godfrey Lorden Motors Pty. Ltd., whose debt the respondents guaranteed, or upon the details of the proper calculation of the amount of interest payable by the respondents, assuming that they are liable to pay anything. What the appellant claims and what the respondents, in part, deny, is that where a demand upon them had been made the respondents became liable to pay:

(1) the sum of $8,000 less the amounts totalling about $3,547 received in 1960 by the appellant and

(2) interest at the rate specified in the guarantee calculated -

(a) from its date (17th February 1958) on the sum of $8,000 up to the date of the first of the payments in 1960,

(b) from that date to the date of the second of the payments in 1960 upon $8,000 less the amount of the first payment, and

(c) from the date of the second of those payments upon $8,000 less the total of both those payments.

It appears to me that it has been assumed, in working out the claim of the appellant in that way, that at the date of the guarantee and thereafter up to the date of the composition with the company the amount owing to the appellant by the company did not fall below the sum of $8,000. That has not been proved but it is probably correct. It is established that when the dividend was received in May 1959 in the composition by the appellant with the company, the total debt of the company stood at over $12,000 and it was then reduced by about $1,778, being the dividend which the appellant received.

After the composition the appellant could recover from the company no further part of the amount which was then unpaid nor could it claim against the company any interest in respect of any subsequent period. If the guarantee had been merely a promise to pay upon demand whatever amount should be at the time of the demand due and payable by the company to the appellant nothing could have been recovered from the respondents, because nothing would have been due and payable by the company. But that was not the promise contained in the guarantee. That promise extended (subject to the proviso) to all the customer's debts and to interest on them until payment and cl. 3 had the effect in my opinion that as between them and the appellant, the respondents continued to have the same liability to it as they would have had if the composition had not been made. This would mean that they would be liable not only in respect of what was due by the company when the composition was made, but also in respect of what would have become due by the company for interest after that date if the composition had not been made.

The liability to which I have just referred was, however, subject to an upper limit defined by the proviso. This was not expressed by reference to an amount answering the description, at a given point of time, that it was then due by the company or was then recoverable from it. The limit was fixed by reference to two components. The first component was stated simply as a sum of money. The second was stated to be "interest on the said sum or so much thereof as shall be owing or unpaid from time to time at the rate aforesaid and computed as aforesaid with half-yearly rests from the date hereof until payment and whether such interest shall have been charged to the account of the Customer and converted into principal or otherwise". I have italicized the words in this provision which appear to me to be a major importance in resolving the question which is now to be decided.

In my opinion the proviso means that the limit would not have been exceeded if interest had been debited from the date of the guarantee on the full sum of £4,000, provided that that amount had been at all material times "owing or unpaid". It would be proper to describe that sum, for the purposes of the proviso, as "owing or unpaid" if the appellant had advanced it and had not received repayment of it. That expression cannot refer only to a sum which has become "owing or unpaid" because a demand made upon the respondents to pay has not been met. The interest of which the proviso speaks is to be computed "from the date hereof". If an account had been opened at the date of the guarantee, for the purpose of recording the amount of the maximum contingent liability of the guarantors, and if at that time the amount outstanding in the company's account was not less than £4,000, it would have accorded with the agreement to open the account with that sum and thereafter to debit interest on it or on such smaller sum as was at the time of the debit outstanding, if the sum outstanding had become less because the appellant had received payments which brought the sum "owing or unpaid" down below £4,000.

For the purposes of the proviso, the right of the appellant to debit an account showing the maximum liability of the respondents with interest did not depend in my opinion upon whether or not interest payments were kept up by the company on a balance outstanding at the date of the guarantee. Nor did it depend upon the continued existence of a liability in the company for the payment of interest. Payments of interest, if made by the company, could have affected the liability which the guarantors might be called upon to meet, not by affecting the computation required for the application of the proviso, but by affecting the calculation of the amount of the "advances" which the respondents undertook to pay. For example, if it be supposed that a year after the guarantee had been given the company had reduced by payment its total debt to the appellant to the sum of £3,000 and then a demand had been made on the respondents they would have been required to pay only £3,000. If the demand had been made another year later and in the meantime no further payment had been made, their liability would have been £3,000 plus interest on that sum for that period. They would not have been required also to pay, in respect of the first year after the guarantee, interest which had already been paid by the company. But they would not have been preserved from that further obligation for the reason that the proviso operated to reduce an amount which but for it would have been payable by them. The reason why they would not have been liable to pay the additional sum would have been that they had never undertaken to pay more than what was due to the appellant from the company.

It does not appear that any such account as I have supposed was kept to record the contingent liability under the guarantee. But when the composition took place and the account of the company was in effect "closed" at that point, a situation was created which in my opinion made it necessary that whenever a demand should thereafter be made upon the respondents an account of their liability should be constructed which would accord with the hypothetical account to which I have referred. The amount remaining unpaid after the composition was £5,579 12s. 1d. This exceeded the sum which was stipulated in the proviso as the first component in the maximum amount which the respondents could be ultimately liable to pay. If the amount of the contingent liability of the respondents had then been calculated, a reduction would have been necessary from the amount then remaining unpaid by the company. But in my opinion the correct reduction would not have been to bring the amount down to £4,000. It would have been to bring it down to that sum plus interest on it (or on so much of it as had been owing or unpaid in the interval, which I am here assuming would have been the full £4,000) at the specified rate, from the date of the guarantee up to the date of the calculation. Likewise, if at some subsequent time, a calculation had to be made of the amount which could be demanded from the respondents the same method would have been used. But it would have been necessary to take into account any payments which the appellant received, such as the payments which it did receive in 1960. This is the method by which the amount claimed in the counterclaim has been computed. In my opinion it accords with the agreement, subject to the assumption earlier mentioned as to the state of the company's account between the date of the guarantee and the date of the composition. To meet the possibility that this assumption does not accord with the fact, liberty should be reserved to have that matter determined if necessary by the Supreme Court.

For the respondents it has been contended that their liability was limited to the sum of £4,000 and interest thereon computed only from the date when demand was made on them. By the time that the demand was made the appellant had received the payments in 1960 and this reduced the amount which could be demanded from the respondents, according to their contention, to about $4,453. The respondents say that if they are held liable the amount of the judgment against them should be that sum (or the slightly smaller sum of $4,445.05 which was claimed in the notice of demand to be owing as "principal" at the date of demand) and interest calculated from the date of the demand to the date of judgment. These contentions depend upon the view that no interest could be included in the sum for which the respondents could be held liable, as at the date of the demand. But in my opinion that construction ought not to be accepted because in the first place what the respondents promised to pay (subject to the proviso) included interest on any amounts advanced to the company as well as the amounts so advanced and the liability to pay both the interest and the amounts advanced was not to be affected or impaired by the composition made by the appellant with the company and, in the second place, in the proviso by which a limit was put upon the amount ultimately payable by the respondents, that amount was expressed to include interest at the specified rate on the sum £4,000 (of part thereof) computed, not from the date of demand or from a date when the company's account might be closed by reason of a composition or a liquidation or otherwise (see cll. 3, 4 and 8), but from "the date hereof until payment".

In my opinion the appeal should be allowed but only to the extent of setting aside orders and substituting other orders so as to give effect to the conclusion that the appellant is entitled to payment of the amount as claimed in par. 12 (1) of its defence and counterclaim and of substituting for the learned trial judge's order as to costs such order for costs as seems appropriate to the judgment on the action and on the counterclaim resulting from the varying of the learned judge's orders to that extent. The order for the recovery of the amount claimed should be made subject to such variation, if any, of that amount, as may be determined by the Supreme Court to be proper if application should be made to it on behalf of the respondents to determine what amounts were from time to time owing to the appellant by the company in the period from 17th February 1958 to 5th May 1959. The respondents should be given liberty to apply if so advised for the consideration of this question by the Supreme Court.

I have had the advantage of reading the reasons prepared by the Chief Justice and agree with them.

I would add only a few remarks in relation to the question whether under the guarantee the Bank's entitlement is limited to the sum of £4,000 and interest on that sum or so much thereof as is owing or unpaid computed from the date of demand. The question is one of construction. There is no doubt that the words of the guarantee are not free from difficulty and that two constructions are possible. However the guarantee was on a printed form obviously prepared to meet the needs of the Bank. It seems to me that the principle which is expressed in the maxim verba fortius accipiuntur contra proferentem, although a rule of last resort, justifies the Court in adopting the possible construction which is least favourable to the Bank and thus supports the conclusion which the Chief Justice has reached.

I agree with the order proposed by the Chief Justice.