E T Fisher and Company Pty Ltd v English Scottish and Australian Bank Limited [1940] HCA 42

E T Fisher and Company Pty Ltd v English Scottish and Australian Bank Limited [1940] HCA 42 - HCA 1940 case summary — Zoe

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the principal each year by the sum of £500. The company paid £2,141 10s. pursuant to this arrangement, and Koch as guarantor made payments aggregating £575 in reduction of principal and interest. The arrangement made between the bank and the company in April 1936 was not known to the remainder of the creditors except one, Kemsley & Co. Pty. Ltd., which was the largest creditor after the bank. The company continued to do business with the bank, and on 18th July 1939 the bank made demands on the com- pany and Koch for payment of £7,065 1s, 7d., the company's balance then due to the bank on its two accounts, including the " No. 2 account." The amount was not paid, and the bank instituted proceedings in the Supreme Court of South Australia against the company and Koch to enforce payment. Among the defences taken (and being the only one relevant to this report) was a contention by the company and Koch that the arrangement made between the parties in 1936 was a fraud on the other creditors and therefore void and released them from any liability to the bank for the advances made by it. Koch also instituted proceedings in the Supreme Court against the bank, relying substantially on the contention set out in his defence in the former action and also the last portion of the letter set out above and claiming a declaration that he was under no liability to the bank under the guarantee mortgage and orders that the bank deliver up the instrument and repay the sum of £575 paid by him to the bank after April 1936 on the company's " No. 2 account." 'The company also instituted proceedings against the bank, relying substantially on the same contention and claiming similar relief as Koch against the bank. It was ordered that the three actions should be consolidated and heard together. The actions were heard _ by Angas Parsons J., who gave judgment for the bank against Koch and the company for the sum claimed in the first action, declared that Koch was entitled to a declaration that the guarantee mortgage _ was duly discharged and should be delivered up to him as claimed inthe second action and ordered that the third action by the company against the bank be dismissed. He ordered Koch and the company _ to pay the costs of the bank in the three actions. Koch and the company appealed to the High Court, and the bank

eross-appealed in respect of the declaration made in favour of Koch. Further facts appear in the judgments hereunder.

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H.C. or A. over other creditors is against public policy and is deemed to h 1940. fraudulent and void. The effect of such an arrangement is to E. 7. Fisunr destroy the debt altogether so that the creditor cannot sue for it, & Co. and, if the debt is guaranteed, then the guarantee is also discharge amy Ir. by the fraudulent act. Another consequence is that, if any moni Exousx are paid under such an arrangement by either the debtor or th peer eeD guarantor, then such moneys can be recovered from the creditor Bank Lrv. and any securities taken in the course of the fraudulent arrangemen must be delivered up and cancelled. The arrangement m between the bank and the company is void on the ground of illegality (Britten v. Hughes (1); Mayhew v. Boyes (2) ) e analysis of the latter case shows that emphasis is placed on the word "'fraudulent."" The law is that, if the creditor makes the arrangement behind the backs of other creditors as the bank did this case, then the transaction is illegal and void (Hx parte Barrow; In re Andrews (3); Ex parte Burrell; In re Robinson (4) ). a follows irrespective of the intentions of debtor or creditor. e must be full disclosure among all the creditors, and, if one seeks to obtain an advantage over the other creditors, then any transaction giving such an advantage is fraudulent and void. The consequen of such a transaction are that the debt is destroyed by illega (Mallaliew v. Hodgson (5); Ex parte Phillips ; In re Harvey (6) ), and the bank must deliver up the debenture to the company (Jackman v. Mitchell (7); Middleton v. Lord Onslow (8); Jackson y. Lomas (9); Fawcett v. Gee (10) ). It would not be a security even for the fresh advance. In American Annotated Cases (1914), p. tl, a résumé of the law on this point is set out. In Zz parte Phillips In re Harvey (6) and Mayhew v. Boyes (11) the creditor does not lose ; only the difference between the debt and composition but loses the composition as well, as the consideration is illegal. The bank cannot get the composition. The next consequence is that the company can recover from the bank all moneys subsequently paid by it to the bank. That is an independent cause of action for money paid pursuant to an illegal arrangement (Smith v. Bromley (12); Smith

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the arrangement had been contemporaneous with the composition different considerations would have applied. But the essential element that makes an arrangement illegal in such circumstances is that it is made at a time when all creditors are entering into a composition which is based on mutual forbearance. Cases cited are all to the same effect. They show that the secret arrangement was. contemporaneous with the composition (Cockshott v. Bennett (1) ). There it is shown that the basis of the rule is a fraud on the creditors at a time when they are considering entering into an arrangement with one another. But it is equally clear that after the composition is completed the debtor can revive the original debt for a go consideration. It is a distinct transaction from the compositi and it does not render the other creditors more remote from getti their money. In fact, in this case, as a result of the transacti they got their money. Leicester v. Rose (2) lays down the same principle (Knight v. Hunt (3) ; Wood v. Barker (4) ). " [Srarke J. referred to Mahalm v. M'Cullagh (5).] In those cases the arrangement which was made endangered the assets. A debtor under a composition is left with his assets, and a creditor must do nothing whereby those assets may be diminished and other creditors be left without sufficient assets. If the assets. for the payment of the composition are not affected by a genuine - subsequent arrangement, then the debtor can for a good considera- tion agree to pay his debt to any creditor in full. In this case the company could have borrowed the money from anyone, including the bank, to pay off the trustee to enable him to pay the creditors _ the amount agreed on and the next day agree with the bank to pay its debts in full. The bank was paying the money to complete the composition and in fact did not diminish the company's assets. so that other creditors would have less to have recourse to. This. agreement being after the composition, it is unimpeachable (Zook v. Tuck (6); Carey v. Barrett (7); Wood v. Barker (4) ; Wilson v. Ray (8)). Ex parte Barrow; In re Andrews (9) is distinguishable in that the composition was endangered and the Bankruptey 4d 1869 forbade any variations in the composition. In Ha parle Burrell ; In re Robinson (10) the agreement was before the composi- tion, but here the payment was made by the bank to complete the

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some observations in the judgment of Lord Selborne (2), in which Brett and Cotton L.JJ. concurred, which are pertinent to the present case. The facts were : - In April of 1879 Andrews, a debtor, filed a liquidation petition, and the creditors resolved by proper statutory majority to accept a composition of 5s. in the pound in satisfaction of their debts, to be paid by instalments. The resolution was regis- tered. In August of 1879 Barrow, one of the creditors bound by 'the resolution, entered into an agreement with the debtor, before the first instalment of the composition became due, that his debt should be paid in full and that he should continue to supply the debtor with goods on credit. The pertinent observations of Lord Selborne are : - 1 must add that there have been many decisions both in courts of law and in courts of equity against the validity of underhand dealings in favour of a particular creditor contem- poraneously with a composition for the benefit of the general body of the creditors, and it appears to me that the principles of those decisions are fully and entirely applicable to the present case. But it is said that fresh credit was given by the appellant to the debtor, and that in this way there was a consideration for the agreement to pay the old debt in full. That might well be so in a case like Jakeman vy. Cook (3), where there was no question of good faith with the other creditors, and no question of compliance or non-compliance with the terms of composition resolutions. But no consideration can oe an agreement which is inconsistent with good faith to the creditors, and with the spirit of sec. 126." The judgment 'tecognizes that a private dealing in favour of a particular creditor contemporaneously with a composition for the general body of creditors is inconsistent with good faith, but it goes further. The bag was also expressed that the private agreement in that case for the benefit of a particular creditor, though not made contem- poraneously with the composition agreement, could not stand together with the composition for the benefit of all the creditors for 'it was inconsistent with good faith. The result of the private agreement might be the sweeping away by the particular creditor

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company to carry on its business and pay its debts, and eventually 4. ©. oF 4. the creditors assented to a composition scheme which is embodied rat in the indenture of charge dated 3rd August 1934. Ferres' manage- p 7, Fisuer 'ment of the company had not been a success ; he had only succeeded _ & Co. in paying the creditors 1s. in the £1, and on 18th April 1934 Koch at a 'and Lower had resumed the management of the company so that _ Exouisn at the date of the indenture of charge they were in charge of the omen of the company. The provisions of the indenture of charge Baxk Lrv. were assented to by all the creditors of the company. The indenture wijtiams 3. 'contained a recital of the company's debts, which were shown at a total of £11,951 7s. 10d. The debts were itemized and were 'stated at the original amounts shown to the meeting of creditors "held on 16th December 1931, less the dividend of Is. in the £1, so it no creditor was allowed any interest after 31st May 1931. The sum of £11,951 7s. 10d. was described as the sum " hereby secured." ere Was a covenant that the company would pay the sum thereby "secured at the times, in the instalments and in the manner set forth in the conditions annexed to the indenture. Then followed a proviso that "if the company shall pay to the trustee the sum of seven thousand five hundred pounds (£7,500) (together with the sum of four hundred and fifty pounds (£450) heretofore advanced to the company by the trustee out of the trust account hereinafter men- tioned and any further sum so advanced) on or before the 18th day: of August, 1936, and shall duly and punctually observe and perform all the covenants conditions agreements and stipulations 'herein contained and on the part of the company to be observed formed and kept the said sum of seven thousand five hundred ot (£7,500) (and such further sums) shall and will be accepted taken by the said several creditors or by the trustee on their in full satisfaction and discharge of the sum hereby secured." The creditors had therefore agreed that, subject to fulfilment by the iy of the conditions specified, they would accept a sum of ,500, or, in other words, 12s. 6d. in the £1, in full payment of their debts, _ During the negotiations which resulted in the execution of the inka of charge Koch had signed and delivered to the bank on 'lth July 1934 a letter in the following terms : - ' The debts due 'its creditors by E. T. Fisher & Co. Ltd., including the E. 8. & A. Ltd., will be secured as you know by the charge to be executed by that company in favour of Mr. L. W. Ferres as trustee for the "said creditors. Thave already guaranteed payment by the company tothe B.S, & A. Bank. This letter is to inform you that the charge to be given by the company to Mr. Ferres will not prejudice

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or adversely affect in any way the guarantee given by me to th bank as mentioned above. This guarantee will remain in full fore and virtue according to the tenor thereof notwithstanding the fa that there are further operations upon the account at the bank by the company and further moneys lent and notwithstanding the bank shares the benefit of the charge upon the prope E. T. Fisher & Co. Ltd. in favour of Mr. Ferres and in due co may receive satisfaction pro tanto and participate in the accrue under the charge. Provided always that discharge in by payment under the said charge shall release me from th guarantee." After the execution of the indenture of charge company continued to carry on its business under the manag of Lower and from time to time made payments of the ins to Ferres as trustee for the creditors. But in 1935 it fell into am and thereafter remained in arrears with the instalments. In 1936 the arrears were £575. On 24th March 1936 Robertson, branch manager of the bank in Adelaide, wrote a letter for th information of the joint general managers of the bank in Melbourn Its effect was that the bank should provide the company immediat with a sum of £1,833 to pay to Ferres. This with the moneys a paid by the company to Ferris would make up £7,500. Ferres to give a full discharge on behalf of the creditors. As a condition of making the advance, the bank was to obtain from the company a debenture to cover, not only the £1,833, but the whole balance o the company's overdraft with full compound interest charged fi December 1931. In other words, while the other creditors were get a composition the bank was to get its debt in full. The joim general managers gave their approval to this scheme on 2nd Apr 1936. Robertson approached Lower and got his approval to the scheme, and correspondence then took place between Roberts Lower and Koch, during the course of which Koch also appro A new debenture was prepared by the bank's solicitors and executed by the company on 27th April 1936. This debenture gave the bank an equitable charge over the whole of the com assets to secure all moneys in or for which the company was the or should for the time being be indebted or liable to the bank. provided that it should not affect any guarantee held by the b i" as security for the debt, and that it should be a collateral securit) with the guarantee mortgage.

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H.C. or A. the two guarantees was determined when the bank was paid th 1940. dividend. There does not appear to be any substance in the second E. T. Fisner Contention, which is based on the construction of the proviso to the & Co. - letter of 11th July 1934. This proviso must be construed in the Pry. Lt. Jioht of the whole context of the document ; if it is ambiguous, itis permissible to have regard to the subsequent acts of the parties to ScomisH 4S ascertain the meaning which they themselves attributed to j Bank Lrv. (Watcham vy. East Africa Protectorate (1) ). The evidence shows Williams s, that the parties subsequently acted consistently on the basi that Koch remained liable under his guarantees for the full amount of the bank's debt. The proviso appears to me to re either to payment of the full amount of the bank's debt for principal and interest or to payment in full of the bank's debt mentioned in the recitals to the indenture of charge, viz., £8,998 15s. 8d. I not think it can mean, as suggested by the learned trial jud payment of the composition of 12s. 6d. in the £1. Such a construe tion does not give effect to the earlier part of the document which refers to the whole debt or to the words "in full" or " payment." I am strongly inclined to think that the true meaning is payment to the bank of the whole debt, because the proviso contemplai the bank making further advances to the company, and these wot not be included in the sum of £8,998 15s. 8d., but it is unneces: to decide between the two alternative constructions, because company never paid the bank either sum, so that on either construc- tion the proviso never operated. If it had done so, it would ha ' caused a release of both guarantees, as it is difficult to believe parties could have intended Koch to be released from the guarantee of 1930 and still remain liable on that of 1929. The proviso really refers in a compendious way to Koch's liability under the guaran and not to one or other of the documents themselves. The agreement for the composition made in August 1934 was one in which no creditor obtained any advantage over the others. There could be no objection to the bank having the additional rights i respect of the balance of its debt against Koch under the guaran
The original debt of the company to the bank had been discharg by the new agreement contained in the indenture of charge, but this original debt remained in force between the bank and Ko because the guarantees had each provided that the rights of bank against the guarantor should not be affected by the bat making such a composition. If, therefore, no further agreement been made between the company and the bank subsequently to he indenture of charge, there would have been nothing to prevent

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bank from receiving its composition of 12s 6d. in the £1 from the trustee for the creditors and recovering the balance of its whole debt from Koch. _ It is necessary to consider what effect the events which occurred 'in 1936 had on these rights. Mr. Ligertwood, for the appellants, 'the company and Koch, has contended that in a composition with creditors any arrangement made with the debtor by one creditor nd which he gains or seeks to gain a preference over other creditors against public policy and is fraudulent and void ; that the effect of such an arrangement is to destroy the debt so that the creditor 'cannot sue for it; that when any such debt is guaranteed the guarantee is discharged by the fraudulent agreement; that any 'moneys paid under such arrangement whether by the debtor or by the guarantor can be recovered from the creditor ; and that securities taken in the course of the fraudulent arrangement must be delivered up to be cancelled. Summarized, his contention is that the contract "made between the bank and the company in 1936 was in breach of 'the agreement made between the creditors in 1934 to discharge their debts on receipt of a composition of 12s. 6d. in the £1 and was a secret benefit to the bank at the expense of the other creditors which vitiated and destroyed the rights of the bank to recover any moneys from the company or Koch under the guarantees or to recover the sum of £1,825 10s. advanced by the bank to the company to pay the final dividend on the composition from the company and entitled the company and Koch to recover from the bank the amounts of £2,141 10s. and £575 already mentioned and to have the debenture and guarantees delivered up discharged by the bank. It is clear that the contract by which the creditors mutually agree to forbear to sue for the full amount of their debts and to accept composition is a contract uberrimae fidei, and that, if any creditor makes a secret stipulation with the debtor for some additional benefit for himself, as, for instance, the payment of the balance of his debt, contemporancously with the contract for the composition, the law considers such a stipulation to be fraudulent and opposed to public policy and therefore void, and not only will not allow him to recover or retain any such secret benefit but also regards it as itiating and destroying his rights to recover his share of the com- ... At the same time the law considers the original debt to have been discharged by the composition, and the result is that the creditor cannot recover either the original or the compounded debt (Mallaliew v. Hodgson (1); Mayhew v. Boyes (2); Leake on Contracts, 8th ed. (1931), p. 595). None of the authorities, however, suggests (1) (1851) 16 Q.B. 689 (117 E.R. 1045). (2) (1910) 103 L.-T. 1.

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tainting ca occur. In the present case the debt of the company to the bank existing % in August 1934 had been lawfully incurred for advances made by Eycusn the bank to the company from time to time, and the bank could Spores have sued the company to recover this debt if it had not been Baxk Liv. discharged by the composition. This debt was guaranteed by Koch, Williams s. and his liability by express agreement with the bank was not rele by the composition (Perry v. National Provincial Bank of Englay (1) ), so that any fraudulent conduct of the bank in relation there would not invalidate its rights against Koch. The agreement between the company and the bank in 1936 was not contemporaneous with the composition deed. It was made ty years subsequently thereto and was an entirely distinct and separate agreement. It was entered into while payments had still to made under the indenture of charge, so that the composition was still executory, but it did not hinder the creditors being paid. fact it facilitated payment because the bank provided the nec: moneys to pay the final dividend. A creditor who enters into ; composition acts properly so long as he makes full disclosure at tl time to all the other creditors of any agreements he may have with the debtor for a preference. After the deed has been executed debtor is freed from the balance of the debts beyond the divid he has agreed to pay. Each creditor has forborne to sue for th balance of his debt in consideration of the other creditors forbearing to sue for the balance of their debts, and the debtor has been rele from the original debts and therefore from all these balances. debtor is left the master of his assets so far as they are not char or otherwise dealt with by the composition. It is to his interest | pay the creditors the amount of the composition and discharge h obligations to them. It is to their interest to be paid. To rai the necessary funds to pay the creditors the debtor can make new bargain he likes, and if he makes a bargain with one of th creditors he can agree to pay the balance of that creditor's old debt. The creditor who executes a composition deed only agrees to forl to sue for the balance of his debt under a then existing right. does not agree not to acquire a new right to recover the balance for some new consideration such as a further advance. In Ea parle Barrow ; In re Andrews (2) Lord Selborne pointed out that there have been many decisions against the validity of underhand dealings

At a glance

Court

Decision date

Before

Source

Judgment (156 paragraphs)

Cited By (1)