Gye v McIntyre

Gye v McIntyre - [1991] HCA 60 - HCA 1991 case summary — Zoe

[50]

Section 86 is primarily concerned with the quantification or satisfaction (by set-off) of provable debts. The section is, as has been seen, in a Division concerned with "Proof of Debts". It operates in a context where there is a debt of "a person who has become a bankrupt" which would, apart from set-off, be provable in the bankruptcy (see above). As a matter of language, the words of s. 86(1)(a) and (b) allow a set-off, against such a debt, of the amount due in respect of a mutual credit, a mutual debt or other mutual dealings regardless of whether the claim in respect of that amount vested in the trustee in bankruptcy. On the other hand, general considerations of true mutuality and the context provided by s. 86(1)(c), with its assumption that any surplus or "balance" will be either provable in the bankruptcy or recoverable by the trustee, support the view that, upon the preferable construction of s. 86, set-off between claims by and claims against a person who has become bankrupt is allowed only if the bankrupt estate is entitled to the benefit as well as being subjected to the burden of the respective claims. That construction is also supported by general considerations of bankruptcy law since, if the trustee is entitled to the benefit of a set-off of claims which do not vest in him, the result could be that set-off under s. 86 would defeat the policy of the Act that bankruptcy should not denude the bankrupt of certain beneficial rights. On the other hand, s. 86 speaks as at the time of the making of the sequestration order and operates by reference to the dealings and entitlement of "a person who has become a bankrupt" as distinct from the entitlement of the trustee in bankruptcy which is only ascertained, when the section is applicable, after the account required by s. 86(1)(a) has been taken and after a set-off under s. 86(1)(b) has taken effect. On balance, it appears to us that s. 86 should be construed as allowing a set-off in favour of the trustee in bankruptcy only in respect of a claim which vests in him under the bankruptcy. It is, however, strictly unnecessary to express a concluded view on this aspect of the matter since, as has been seen, the claims for fraudulent misrepresentation against Mrs. McIntyre would, if a sequestration order had been made at the time of the relevant special resolution, have vested in the trustee in bankruptcy. That being so, the real question raised by this submission is, upon analysis, a somewhat different one to that which was directly addressed in argument. It is whether, in the case of a composition under Pt X, there can be no set-off between a claim provable in the composition and a claim by the debtor which is not assigned to the trustee under the composition notwithstanding that there would have been a set-off in bankruptcy between those claims as claims in respect of mutual dealings if, in the words of s. 243, "a sequestration order had been made against the debtor on the day on which the special resolution was passed". As a matter of the ordinary meaning of the words of s. 243, the answer to that question is in the negative, that is to say, to the effect that a set-off is not precluded in those circumstances. A negative answer to the question is also supported by considerations of "substantial justice" and policy.

[54]

The main rationale of the exclusion, by s. 82(2), of most noncontractual unliquidated claims, including unliquidated claims in tort, from debts provable in bankruptcy, would seem to lie in the desirability of avoiding uncertainty and delay in bankruptcy administration. Whatever view be taken of the validity of that rationale (cf., e.g., In re Berkeley Securities (Property) Ltd. [40] ; and In re Islington Metal & Plating Works Ltd. [41] ), there is no convincing reason why a liquidated claim of a creditor of the bankrupt should not be set off against an unliquidated claim in tort of the bankrupt which vests in the trustee in circumstances where the three criteria of mutuality are present. In such a case, any uncertainty or delay in the bankruptcy administration flows from the vesting of the unliquidated claim in the trustee and not from a set-off of the creditor's liquidated claim. Moreover, the considerations of justice and fair dealing which underlie s. 86 require that a set-off be allowed in such circumstances. For example, it would be quite unfair if the Act authorized a trustee to pursue and require payment in full of a claim for unliquidated damages in tort without allowing credit in respect of a provable liquidated debt in circumstances where the two countervailing claims arose out of the same transaction. As has been seen, s. 86 is not applicable unless the claim of the bankrupt vests in the trustee and the countervailing claim against the bankrupt would, but for the set-off, have been provable in the bankruptcy. If both those requirements are satisfied, there is no reason why the words of the section should be further confined by the introduction of an additional requirement to the effect that the countervailing claim of the trustee in bankruptcy must be of a kind which would be provable in the bankruptcy of the person who has had mutual dealings with the bankrupt if that person were to become a bankrupt. The only further control of the type of claim which can be set off under s. 86 is that specified by the section itself, namely, that the countervailing claims be in respect of mutual credits, mutual debts or other mutual dealings which existed or had occurred at the time of the sequestration order.

[56]

The appellants' final submission was to the effect that there can be no set-off under s. 86 where the claim by the trustee against the third party arises after the date of the sequestration order and is not a claim in contract. The "whole policy" of s. 86 is, it was said, to rule off the ledger at the date of the composition or bankruptcy. The answer to that submission is to be found in the words of the section and in what has been written above. A claim arising after the date of the sequestration order can be set off under s. 86 only if it is in respect of a credit, debt or other dealings which existed or had occurred at that date. In the case of a claim against the bankrupt, the requirement that it be provable in the bankruptcy means that, if it be a demand "in the nature of unliquidated damages", it must be a demand "arising by reason of a contract, promise or breach of trust". In the case of a claim by the bankrupt, the requirement that it vest in the trustee will mean that, if it be a demand for unliquidated damages, it must not be a claim for personal injury or personal wrong (s. 116(2)(g)(i)). Once it is accepted that the word "dealings" in s. 86 should not be construed as a synonym of "contract" and that a set-off of (or against) an unliquidated claim vested in the trustee in bankruptcy is not limited by an implied additional requirement that the claim would have been provable in a hypothetical bankruptcy of the other party, there is no convincing reason for further confining set-off under s. 86 by an implied restriction to the effect that no subsequently arising claim in respect of a credit, debt or other dealings which existed or had occurred at the time of the sequestration order can be set off unless it is a claim in contract. To allow set-off in respect of such subsequently arising claims is neither to prevent a drawing of the line as at the time of the sequestration order nor "to alter the rights of the parties by reference to subsequent transactions" (per Rich J., Hiley [42] ). It is merely "to ascertain [those rights] by reference to the natural outcome of previous transactions" (ibid.).

[60]

What is more important for present purposes is the reason given by Cave J., in Jack v. Kipping, for rejecting an argument that set-off should not be allowed because "a fraudulent misrepresentation is a tort". That reason [46] was that the fraudulent misrepresentation involved in the case was "not a personal tort, but a breach of the obligation arising out of the contract of sale". Analysis of the case discloses, however, that Cave J. was not necessarily suggesting that only claims arising out of contract could be set off under a provision such as s. 86. It had been argued on behalf of the trustee [46] that the claim for fraud against the bankrupt could not be set off under the statutory provision for the reason that it could not be proved in the bankruptcy under the statutory equivalent of s. 82 of the Act (i.e. s. 31 of the Bankruptcy Act 1869 U.K.). As a demand "in the nature of unliquidated damages", it was only so provable under that provision if it was not a demand "arising otherwise than by reason of a contract or promise". It was in that context that the fraudulent misrepresentation was said by Cave J. to be "not a personal tort, but a breach of the obligation arising out of the contract of sale". The point of the statement was to answer the trustee's argument that the claim of the defendant purchaser was not provable in the bankruptcy. In that regard it is relevant to note that the following sentences of the judgment [46] were concerned to reject a further argument that the fact that s. 49 of the 1869 Act provided that an order of discharge did not release the bankrupt from any debt or liability incurred by means of any fraud meant that a liability arising out of fraud "is not provable in the bankruptcy, and consequently cannot be set off". It follows that Jack v. Kipping, properly understood, recognizes that a claim against the bankrupt can be set off under s. 86 only if it would, but for the set-off, be provable in the bankruptcy. The case is not authority for a more general proposition that claims (or unliquidated claims) cannot be set off under the section unless they arise from contract.

At a glance

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Before

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Judgment (70 paragraphs)

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