Gye v McIntyre

The appellants, Mr. Gye and Mr. Perkes, were members of a syndicate of five persons who, in October 1980, entered into a contract to purchase a hotel freehold at Wilberforce, New South Wales, together with an adjoining property which was the site of a tourist attraction known as the "Australiana Pioneer Village". The vendor under the contract was Mawsons Hotels Pty. Ltd. ("the Company"). At the same time, the five purchasers entered into a contract to purchase some other land from either the Company or a related company. The total purchase price under the contracts was $1.25 million. The respondent, Mrs. McIntyre, was associated with the Company: she was the licensee of the hotel business and the tenant of the hotel property. She and her husband were involved in the negotiations between the Company and the purchasers and induced Gye and Perkes to enter into the contracts by fraudulent misrepresentations about the profitability and takings of the hotel business. Completion of the contracts was financed, in part, by a loan of $600,000 from the Company to the five purchasers secured by first mortgages of the properties. Second mortgages of the properties were given by the purchasers in favour of Mrs. McIntyre to secure a loan to them from her of $200,000. The principal of the loan from Mrs. McIntyre was applied by the purchasers towards payment of the purchase price under the contracts.

The business operations of the syndicate failed. The Company, as first mortgagee, entered into possession of the mortgaged premises in October 1982. In the meantime, in proceedings instituted in the Supreme Court of New South Wales on 7 June 1982, Mrs. McIntyre had sued the five members of the syndicate to recover the principal and interest due under the securities held by her. On 24 June 1982, a default judgment was entered against the five members of the syndicate for $224,000 (being the $200,000 plus accrued interest) plus costs of $215. The actual judgment is not before the Court but it would seem to be common ground that each of the purchasers was severally liable for the whole of the judgment debt. Interest became payable upon the judgment debt from the time when the judgment took effect (Supreme Court Act 1970 N.S.W., ss. 95, 96). It is also common ground that the fact that the debt owed to Mrs. McIntyre was secured by a second mortgage may be ignored. Presumably, the security proved worthless.

Gye and Perkes each applied to the Supreme Court to have the default judgment against them set aside. Those applications were unsuccessful but, on 13 December 1982, a Master of the Supreme Court ordered that execution on the judgment against them be stayed pending determination of a cross-claim which was to be made by them against Mr. and Mrs. McIntyre. The cross-claim was filed in the Supreme Court proceedings on 7 January 1983 and was a claim in deceit for the damage caused by the fraudulent misrepresentations about the takings and profitability of the hotel business. After the cross-claim had been filed, bankruptcy notices which had been issued against Gye and Perkes on the application of Mrs. McIntyre were set aside by order of the Federal Court.

On 8 March 1985, Gye signed an instrument, pursuant to s. 188 of the Act, authorizing Mr. W. E. Andrew, a registered trustee, to call a meeting of his creditors for the purposes of Pt X of the Act and to take control of his property in accordance with that Part. The meeting of creditors was called by Mr. Andrew and was held on 3 April 1985. The meeting passed a special resolution accepting a composition with creditors which had been proposed by Gye. Mr. Andrew was appointed as trustee of the composition. On 12 June 1985, Perkes executed a similar authority under s. 188. A meeting of his creditors was held on 28 June 1985 and, by special resolution, accepted the composition proposed by him. Again, Mr. Andrew was appointed trustee. In the case of each composition, the creditors agreed to accept an assignment of designated property and an obligation to make specified payments of money to the trustee in full satisfaction of the relevant debtor's debts. The claim against Mrs. McIntyre and her husband in deceit, which was the subject of the pending cross-claim in the Supreme Court, was not included in the property assigned to the trustee by either Gye or Perkes. Mrs. McIntyre did not seek to prove as a creditor in either composition.

The cross-claim came to trial in the Commercial Division of the Supreme Court. One of the particulars of loss claimed was the liability of Gye and Perkes under the mortgage to Mrs. McIntyre. The relief sought included an order setting aside that security as against them. In the event, the learned trial judge (Brownie J.) made an award of damages only. His Honour found that Gye and Perkes were each entitled to judgment against Mrs. McIntyre and her husband in an amount equal to 16 per cent (that being the share of each in the syndicate) of $636,500 (representing the total damage sustained by the syndicate) together with interest on that amount to the date when the judgment took effect (24 June 1988) plus costs. Brownie J. refused an application made on behalf of Mrs. McIntyre for a direction (pursuant to s. 91(2) of the Supreme Court Act) that the entry of judgment in favour of Gye and Perkes be only for the total amount by which the amounts due to them on the judgment in their favour exceeded the amount due by them on Mrs. McIntyre's judgment. His Honour expressed the view that the question of set-off of the respective judgment debts must be resolved by reference to s. 86 of the Act and should be determined in the Federal Court. On 12 September 1988, judgment was entered on the cross-action in favour of each of Gye and Perkes in the amount of $214,600.89 plus costs. This Court was informed in the course of argument that that amount was assessed on the basis that the joint venture was liable to pay the whole of the mortgage debt to Mrs. McIntyre. Subject to the possible effect of a set-off under s. 86, interest became payable under the Supreme Court Act upon the amount of that judgment from the time it took effect. An appeal against the decision on the cross-claim was dismissed by the New South Wales Court of Appeal on 31 May 1989. Again, the precise terms of the Supreme Court orders are not before us.

There followed four applications to the Federal Court. One was by Gye. Another was by Perkes. In each of them, the relevant appellant sought, among other relief, a declaration that Mrs. McIntyre was not entitled to set off the amount payable to her under the 1982 judgment against the amount payable by her under the judgment on the cross-claim. The other two applications were by Mrs. McIntyre. One sought orders that the composition entered into by Gye be declared void pursuant to s. 222(4)(b) of the Act or that it be terminated pursuant to s. 242(1)(c). It also sought a sequestration order against Gye's estate on the basis that Mrs. McIntyre's judgment debt had not been provable in the composition for the reason that, at the date of the composition, its enforceability was contingent upon the lifting of the stay of execution imposed by order of the Master. Mrs. McIntyre's other application sought relief to similar effect against Perkes.

At first instance in the Federal Court, Hill J. ordered that the two applications brought by Mrs. McIntyre be dismissed with costs. In each of the applications brought by Gye and Perkes, his Honour made a declaration to the effect that Mrs. McIntyre was not entitled to set off the amount due to her under the judgment in her favour. His Honour held that Mrs. McIntyre had been entitled to prove as a creditor in the compositions notwithstanding that execution on the judgment in her favour against Gye and Perkes had been stayed. Mrs. McIntyre appealed from the judgment and orders to the Full Court of the Federal Court. That appeal was conducted on the basis that, if Mrs. McIntyre succeeded on the set-off issue, she had no interest in pursuing either the challenge to the compositions or the question whether she had been entitled to prove in the compositions. The Full Court (Pincus, Gummow and von Doussa JJ.) held that Mrs. McIntyre was entitled to succeed on the question of set-off [2] . Accordingly, their Honours did not enter upon the merits of the other grounds of appeal. Gye and Perkes now appeal to this Court against the decision of the Full Court.

In this Court, it has been common ground that the appeal should be disposed of on the basis that Hill J. was correct in concluding that the stay of execution of Mrs. McIntyre's judgment did not, while it subsisted, preclude proof of the judgment debt in either a bankruptcy or a composition. The appeals have also been argued on the basis that, for the purposes of s. 86 of the Act, nothing turns either upon any variations in the parties to the Supreme Court action and counterclaim or upon the precise terms of the various Supreme Court orders which, as has been said, have not been placed before us. The length and multiplicity of the past proceedings in the Supreme and Federal Courts plainly make it desirable that this Court dispose of the present appeals on the basis on which they have been argued and by reference to the particular questions which the parties have identified as being still in dispute. That being so, the issue of whether set-off is available or required can be determined on the footing that the situation does not significantly differ from that which would have existed if there had been, in each case, a judgment in Mrs. McIntyre's favour against the relevant appellant alone (presumably for half the total amount) and a judgment in favour of the relevant appellant against Mrs. McIntyre alone.

(1) Subject to this section, where there have been mutual credits, mutual debts or other mutual dealings between a person who has become a bankrupt and a person claiming to prove a debt in the bankruptcy -

(a) an account shall be taken of what is due from the one party to the other in respect of those mutual dealings;

(b) the sum due from the one party shall be set off against any sum due from the other party; and

(c) only the balance of the account may be claimed in the bankruptcy, or is payable to the trustee in the bankruptcy, as the case may be.

(2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the person who has become a bankrupt or at the time of receiving credit from that person, he had notice of an available act of bankruptcy committed by that person.

Section 86 is in Div. 1 of Pt VI of the Act. The heading of that Division is "Proof of Debts". Its opening section is s. 82 which relevantly reads:

(1) Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he may become subject before his discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his bankruptcy.

(2) Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy.

(4) The trustee shall make an estimate of the value of a debt or liability provable in the bankruptcy which, by reason of its being subject to a contingency, or for any other reason, does not bear a certain value.

Putting s. 86 to one side, the other sections in the Division deal with the quantification of provable debts, the procedure for their admission to proof and the special situation which arises when a provable debt is secured.

(1) Sections 82 to 107 (inclusive) and 140 to 148 (inclusive) apply, with the prescribed modifications (if any), in relation to a composition under this Part as if -

(a) a sequestration order had been made against the debtor on the day on which the special resolution accepting the composition was passed; and

(b) the trustee of the composition were the trustee in his bankruptcy.

(2) In the application of the provisions of this Act specified in sub-section (1) in relation to a composition, a reference to a provable debt shall be read as a reference to a provable debt within the meaning of this Part.

There is only one "prescribed modification" which is relevant to these appeals. It is to be found in r. 84 of the Bankruptcy Rules (Cth) and is to the effect that, for the purposes of the application of s. 82(1) to a composition, the sub-section is altered to read: Subject to this Division, all debts and liabilities to which a bankrupt was subject at the date of the bankruptcy are provable in his bankruptcy. It is unnecessary to determine what, if any, is the practical effect of that alteration.

It has often been pointed out that the object of set-off in bankruptcy is, in the words of Parke B. in Forster v. Wilson [3] , "to do substantial justice between the parties, where a debt is really due from the bankrupt to the debtor to his estate". Where there are genuine mutual debts, credits or other dealings, it would be unjust if the trustee in bankruptcy could insist upon having 100 cents in the dollar upon the whole of the debt owed to the bankrupt but at the same time insist that the bankrupt's debtor must be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him. It was to prevent such injustice that the "mutual credits" and "mutual debts", and later "mutual dealings", provisions were introduced into bankruptcy legislation: see, e.g., In re Daintrey; Ex parte Mant [4] ; Day & Dent Constructions Pty. Ltd. v. North Australian Properties Pty. Ltd. [5] . To the extent necessary to achieve that legislative purpose of "substantial justice" to the parties, it is established by authority that a provision such as s. 86 of the Act should be given "the widest possible scope": see, e.g., per Mason J., Day & Dent Constructions [6] , quoting Lord Esher M.R. in Eberle's Hotels and Restaurant Company v. Jonas [7] .

1. (1843) 12 M. & W. 191, at p. 204 [152 E.R. 1165, at p. 1171]. 2. [1900] 1 Q.B. 546, at pp. 572-573. 3. (1982) 150 C.L.R. 85, at p. 95. 4. (1982) 150 C.L.R., at p. 108. 5. (1887) 18 Q.B.D. 459, at p. 465.

On the other hand, "substantial justice" requires that the operation of set-off in bankruptcy be confined within limits which protect the creditors of the bankrupt from being disadvantaged by a set-off being allowed in circumstances where debts, credits or other dealings have not been genuinely mutual as a matter of substance, such as where beneficial ownership is not the same or where, after bankruptcy or notice of an act of bankruptcy, a debtor of the bankrupt has bought up liabilities of the bankrupt at a discount for the purpose of setting them off against his own indebtedness: see, e.g., Day & Dent Constructions [5] . Thus, it is established by the cases that set-off under a provision such as s. 86 is not available in circumstances where the beneficial entitlement and liability in respect of the countervailing credits and debits do not correspond: see, e.g., In re City Life Assurance Co. [8] ; Hiley v. Peoples Prudential Assurance Co. Ltd. [9] . In so far as manipulation of set-off by a debtor of the bankrupt to avoid payment to the trustee is concerned, s. 86(2) provides protection in a case where the relevant steps have been taken before bankruptcy but after notice of an available act of bankruptcy. Protection against abuse of the section by steps taken after bankruptcy lies, in the main, in the confinement, by the cases, of set-off under s. 86 to circumstances where the requirement of mutual debts, credits or other dealings is satisfied at the date of bankruptcy: see, e.g., Hiley [10] ; Day & Dent Constructions [11] . In this context, the date of bankruptcy is to be understood as being the date of the actual making of the sequestration order: see, generally, In re Daintrey [12] ; Day & Dent Constructions [13] .

1. (1982) 150 C.L.R. 85, at p. 95. 2. [1926] Ch. 191, at pp. 216-217. 3. (1938) 60 C.L.R. 468, at p. 497. 4. (1938) 60 C.L.R., at pp. 480-487, 490, 495-496. 5. (1982) 150 C.L.R., at pp. 90-91, 98. 6. [1900] 1 Q.B., at pp. 549-556, 572, 573. 7. (1982) 150 C.L.R., at p. 99.

As has been seen, s. 243 of the Act applies ss. 82 to 107 (inclusive), subject to prescribed modifications, to a composition under Pt X as if a sequestration order had been made on the day the special resolution accepting the composition was passed and as if the trustee of the composition were the trustee in bankruptcy. That means that the availability of a set-off in the circumstances of the present case is to be determined on the hypothetical basis that sequestration orders were made against Gye and Perkes and that Mr. Andrew was appointed as trustee of their bankrupt estates on the respective dates when the special resolutions were passed. If those things had occurred, the right of action of each bankrupt against Mrs. McIntyre for damages in deceit, being an action for damages for pecuniary loss sustained in a commercial context, would have vested in Mr. Andrew as trustee (the Act, s. 58 and see, generally, as to s. 116(2)(g)(i), Hodgson v. Sidney [14] ; Merry v. The Queen [15] ; Timmings v. Treadgold [16] ; Nyssen v. Minerva Centre Ltd. and Martin [17] ; Official Assignee v. Dowling [18] ). At the same time, and putting to one side the possible effect of a set-off under s. 86, the debt owing to Mrs. McIntyre under the judgment in her favour would have become a provable debt in the bankruptcies pursuant to s. 82 as modified by r. 84. The question arises whether, in those hypothetical circumstances, s. 86 would have been applicable to allow or require a set-off of the debt owing to Mrs. McIntyre against the debt owing by her to the trustee in bankruptcy.

1. (1866) L.R. 1 Ex. 313. 2. (1887) 13 V.L.R. 264, at p. 267. 3. [1923] N.Z.L.R. 73, at pp. 75-77. 4. (1940) 57 W.N. (N.S.W.) 112, at p. 114. 5. [1964] N.Z.L.R. 578, at p. 583.

Logically, the first requirement of s. 86 is that there be two persons of the kind described in the introductory words of the section. Clearly, on the basis postulated by s. 243, Gye and Perkes would each be "a person who has become a bankrupt". It is not so clear that Mrs. McIntyre would, on that basis, be "a person claiming to prove a debt in the bankruptcy". If those words were construed as referring only to a person who has lodged a formal proof of debt, it would be at least arguable that Mrs. McIntyre, not having proved as a creditor in either of the compositions, was not such a person notwithstanding the fact that, but for the possible operation of s. 86, the judgment debt would have been a provable debt. The words should not, however, be given that narrow and technical meaning.

As its terms make plain, s. 86 was intended to operate regardless of whether the result of a set-off under the section would be that there was a balance in favour of or a balance against the person who has become bankrupt. In a case where there is a set-off under the section and the sum due to the person who has become bankrupt exceeds the amount due from him, the section expressly provides that "only the balance of the account is payable to the trustee". In such a case, it would be pointless for the other party to seek to prove as a debt in the bankruptcy the amount which was extinguished by the set-off under s. 86 and which that section precluded from being claimed in the bankruptcy. In that context, the words "a person claiming to prove a debt in the bankruptcy" in s. 86 should not be construed in the technical sense of referring only to a person who lodges a formal proof of debt. The words should be, and have been, construed as extending to a person who seeks to answer a claim brought against him, by a trustee in bankruptcy, by a set-off of a claim against the person who has become bankrupt which would have otherwise been provable in the bankruptcy. As Wright J. observed in relation to the corresponding English provision in In re Daintrey [19] :

although by its terms the enactment seems to be confined to set-off as between the bankrupt and a person proving or claiming to prove in the bankruptcy, yet it is settled that the same right of set-off may be claimed in an action brought or in other proceedings taken in the bankruptcy by a trustee or liquidator. See, also, Peat v. Jones [20] ; Mersey Steel and Iron Co. v. Naylor Benzon & Co. [21] ; In re Daintrey [22] ; Telsen Electric Co. v. Eastick [23] ; Mitchell v. Purnell Motors Pty. Ltd. [24] . In effect, that means that the words "a person claiming to prove a debt in the bankruptcy" shall be understood as including a person who, but for set-off under s. 86, would be entitled to prove a debt in the bankruptcy. That construction can be partly, but not wholly, rationalized by the consideration that a person who asserts a set-off against a trustee in bankruptcy may be loosely said to be indirectly claiming to prove in the bankruptcy, albeit by retaining the full amount as distinct from seeking a dividend. It is supported by considerations of "substantial justice" in that it enables the section to operate regardless of whether set-off produces a positive or negative (or nil) balance from the point of view of either party. It is also supported by a consideration of the operation of the section. 1. [1900] 1 Q.B., at p. 549. 2. (1881) 8 Q.B.D. 147. 3. (1882) 9 Q.B.D. 648, at pp. 662-664, 667-669, 671. 4. [1900] 1 Q.B., at p. 568. 5. [1936] 3 All E.R. 266, at pp. 269-270. 6. [1961] N.S.W.R. 165.

Section 86 is a statutory directive ("shall be set off") which operates as at the time the bankruptcy takes effect. It produces a balance upon the basis of which the bankruptcy administration can proceed. Only that balance can be claimed in the bankruptcy or recovered by the trustee. If its operation is to produce a nil balance, its effect will be that there is nothing at all which can be claimed in the bankruptcy or recovered in proceedings by the trustee. The section is self-executing in the sense that its operation is automatic and not dependent upon "the option of either party": see, per Lord Selborne L.C., In re Deveze; Ex parte Barnett [25] . Indeed, the traditional and better view would appear to be that the statutory rule of set-off contained in s. 86 will, where the requirements of the section are satisfied, prevail over a contrary agreement of the parties: see, e.g., Mersey Steel and Iron Co. v. Naylor Benzon & Co. [26] ; Victoria Products Ltd. v. Tosh & Co. Ltd. [27] ; Rolls Razor Ltd. v. Cox [28] ; National Westminster Bank Ltd. v. Halesowen Presswork & Assemblies Ltd. [29] . It is, however, unnecessary to pursue that particular question. Even if one were to accept the dissenting view of Lord Cross of Chelsea in the National Westminster Bank Case [30] to the effect that the otherwise automatic operation of a provision such as s. 86 may be excluded by an antecedent agreement, it would be wrong to attribute to the legislature the illogical intent that a directive which was intended to be otherwise automatic in its operation and to apply in circumstances where set-off produced a nil balance should not operate at all unless and until either the bankrupt's creditor saw fit to exercise the option of lodging a formal proof of debt or the trustee in bankruptcy instituted proceedings for recovery of a debt due to the bankrupt.

1. (1874) 9 Ch. App. 293, at p. 295. 2. (1884) 9 App. Cas. 434, at p. 438. 3. (1940) 165 L.T. 78, at p. 80. 4. [1967] 1 Q.B. 552, at pp. 570, 573. 5. [1972] A.C. 785, at pp. 803, 808-809, 824. 6. [1972] A.C., at pp. 813-818.

It follows that, if a sequestration order had been made at the time of passage of the special resolution accepting the relevant composition, Mrs. McIntyre and each of Gye and Perkes would, for the purposes of s. 86, have been respectively a "person claiming to prove a debt in the bankruptcy" and "a person who has become a bankrupt". It becomes necessary to consider whether the respective claims between them would, in those circumstances, have been in respect of mutual credits, mutual debts or other mutual dealings for the purposes of that section.

The introduction of the reference to "other mutual dealings" in bankruptcy set-off provisions such as s. 86 was intended both to give a more extended right of set-off and to ensure that the intended scope of such provisions was not frustrated by a narrow or technical approach to what constituted "credits" or "debts": see Peat v. Jones [31] . The phrase "or other mutual dealings" (emphasis added) does, however, give rise to a linguistic problem in that "credits" and "debts" will ordinarily represent the outcome of dealings rather than the dealings themselves. Conversely, "dealings" commonly do not, of themselves as distinct from their outcome, represent credits or debts susceptible of direct set-off. That being so, s. 86 necessarily speaks of a set-off of what is due " in respect of those mutual dealings" (emphasis added). In that context, the requirement of mutuality in respect of "other dealings", as distinct from "credits" or "debts" susceptible of immediate set-off, is directed not so much to the relationship between the dealings as such but to the relationship between the claims which have arisen from them. There will, for the purposes of s. 86, be mutual dealings at the date of the sequestration order if there existed at that date "dealings" which involved the bankrupt and the other party and which were capable of giving rise to, and subsequently did give rise to, "mutual" claims between them in the sense in which the word "mutual" is used in s. 86.

In the context of s. 86, the word "mutual" conveys the notion of reciprocity rather than that of correspondence. It does not mean "identical" or "the same". So understood, there are three aspects of the section's requirement of mutuality. The first is that the credits, the debts, or the claims arising from other dealings be between the same persons. The second is that the benefit or burden of them lie in the same interests. In determining whether credits, debts or claims arising from other dealings are between the same persons and in the same interests, it is the equitable or beneficial interests of the parties which must be considered: see, e.g., Hiley [32] . The third requirement of mutuality is that the credits, debts, or claims arising from other dealings must be commensurable for the purposes of set-off under the section. That means that they must ultimately sound in money.

The requirement that the credits, the debts or the claims arising from other dealings be commensurable does not mean they must be vested, liquidated or enforceable at the decisive date, that is to say, at the time of the sequestration order or special resolution accepting the composition. Provided they exist as contingent at that date and are of a kind which will ultimately mature into pecuniary demands susceptible of set-off, the requirement of the section may be satisfied in relation to them. In so far as "dealings" are concerned, Dixon J. pointed out in Hiley [33] :

It is enough that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set off. If the end contemplated by the transaction is a claim sounding in money so that, in the phrase employed in the cases, it is commensurable with the cross-demand, no more is required than that at the commencement of the winding up liabilities shall have been contracted by the company and the other party respectively from which cross money claims accrue during the course of the winding up. In support of the above, Dixon J. referred to comments in the judgments of Byles J. and Montague Smith J. in Naoroji v. Chartered Bank of India [34] dealing with the meaning of "mutual credits" in the set-off provision of the 1849 English bankruptcy legislation. Those comments are applicable to s. 86 and succinctly identify what is involved in the notion of mutual credits and mutual dealings. Byles J. [35] remarked that mutual credits are "reciprocal demands which must naturally terminate in a debt" (emphasis added). Montague Smith J. said [36] that, to bring a case within the set-off provision, "it is not necessary that the credits should be dependent the one upon the other, nor that there should have been any agreement beforehand". He added that the operation of the provision was to require that an "account shall be taken of all such credits and dealings as in the natural course of business would end in debts, and the balance shall be the debt due from the one to the other" (emphasis again added). 1. (1938) 60 C.L.R., at p. 497. 2. (1868) L.R. 3 C.P. 444. 3. (1868) L.R. 3 C.P., at p. 451. 4. (1868) L.R. 3 C.P., at p. 452.

As we followed the argument, it is not disputed in the present case that the claim of Mrs. McIntyre under her judgment against each of Gye and Perkes and the relevant countervailing claim against her for fraudulent misrepresentation are claims between the same parties in the same interests. The claims of the respective parties were, at the time of the special resolution accepting the relevant composition, also commensurable in the sense that they sounded or would ultimately sound in money: Mrs. McIntyre's claim was, in each case, for a liquidated judgment debt; the claim against her was, in each case, for a pecuniary amount as compensation for the loss which had been actually caused by the fraudulent misrepresentation. It follows from what has been said above that the respective claims were "mutual". It is strongly arguable that they constituted "mutual credits" in the sense that, in the above-quoted words of Byles J., they represented "reciprocal demands which [would] naturally terminate in a debt". It is, however, unnecessary to determine that question since they were, in any event, in respect of "mutual dealings" for the purposes of s. 86.

The word "dealings" is used in a non-technical sense in s. 86. It has been construed as referring to matters having a commercial or business flavour: if "one man assaults another or injures him through negligence, that gives rise to a claim, but is not a dealing" (per Lord Esher M.R., Eberle's Hotels [37] ). The word is, nonetheless, one of very wide scope which embraces far more than a legally binding contract or "deal". Even if it be correct to construe dealings in s. 86 as confined to a commercial or business setting, it covers the communings, the negotiations, verbal and by correspondence, and other relations which occur or exist in that setting. Whatever may be the outer limits of the word "dealings" in s. 86, it encompasses, as a matter of ordinary language, commercial transactions and the negotiations leading up to them. Where a fraudulent misrepresentation is made in the course of such negotiations, the fraudulent misrepresentation is itself part of the relevant "dealings" (cf. In re Mid-Kent Fruit Factory [38] ; Tilley v. Bowman Ltd. [39] ).

1. (1887) 18 Q.B.D., at p. 465. 2. [1896] 1 Ch. 567, at pp. 571-572. 3. [1910] 1 K.B. 745, at p. 753.

In the present case, each of Mrs. McIntyre, Gye and Perkes was involved, in one or more capacities, in the negotiations leading up to the sale and purchase of the Wilberforce properties. They were also involved as parties to the second mortgage. As has been seen, it is established by authority that the words of s. 86 of the Act should be generously construed. On that approach, dealings in which a creditor and a bankrupt have been involved before the making of a sequestration order and which give rise to mutual claims between them - that is to say, commensurable claims between them in their own interests - are mutual dealings for the purposes of s. 86 notwithstanding that other parties may have been involved in the dealings, that either the creditor or the bankrupt may have been involved in the dealings in more than one capacity or that those dealings also give rise to different claims between other parties or between the same parties in different beneficial interests. The critical matters for the purposes of s. 86 are that there had been dealings in which the creditor and the bankrupt were both involved and that those dealings gave rise to mutual claims between them in the relevant sense.

It follows that the claims of the parties in each of the present appeals were claims in respect of mutual dealings for the purposes of s. 86 notwithstanding the fact that Mrs. McIntyre was not a party to the actual contracts of sale of the Wilberforce properties. As has been seen, Mrs. McIntyre's claim against each appellant was a liquidated claim for the amount of a judgment debt which would have been provable in his bankruptcy if a sequestration order had been made in respect of his estate. The claim of each appellant against her would, if such a sequestration order had been made, have vested in his trustee in bankruptcy. Prima facie, s. 86 would, if sequestration orders had been made against the appellants on the respective dates of the special resolutions, have required a set-off in each case. It was, however, submitted on behalf of Gye and Perkes that set-off was neither required nor allowed in the circumstances of the present appeals for three related reasons.

First, it was submitted that a set-off is neither required nor allowed in the circumstances of the present appeals for the reason that Gye's and Perkes' respective claims against Mrs. McIntyre did not pass to Mr. Andrew under their respective compositions. There was, it was said, no case in Australia, England, New Zealand or, so far as counsel could ascertain, the United States in which it has been suggested that a bankruptcy set-off provision in terms corresponding to s. 86 can apply where the debt owed by the third party is not an asset which passes to the trustee.

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.

The Act does not define what, if any, existing property of a debtor is vested in the trustee of a composition under Pt X. That is something which falls to be determined by the terms of the composition. Thus, a composition may provide that only specified existing assets (such as the assets of a particular business) are to vest in the trustee or it may leave all of the assets of the debtor in the debtor's hands on the debtor's undertaking to make future monetary payments to the trustee. The Act does, however, bind creditors of the debtor under a composition regardless of whether they supported the special resolution accepting the composition (see s. 238). It releases the debtor from debts provable under s. 82 of the Act (as applied to a composition by s. 243) and converts the claims of creditors in respect of those debts into claims in the composition. In these circumstances, it would be quite contrary to the considerations of substantial justice which, as has been seen, provide the rationale of s. 86 if a statutory majority of the creditors could, by excluding a claim of the debtor against a particular creditor from the property vesting in the trustee of the composition, deprive that creditor of the benefit of a set-off to which he would have been entitled if a sequestration order had been made. It follows that the words of s. 243 should not be construed as impliedly confined in some way which would preclude a set-off being allowed, in the case of a composition, in respect of any claim by the debtor which did not, by reason of the terms of the composition, vest in the trustee of the composition.

The second submission on behalf of the appellants was to the effect that no set-off under s. 86 could be allowed in respect of "an unliquidated claim in tort which could not, in the converse situation, be proved in a bankruptcy". It would follow that the application of s. 86 to a composition would not require or allow a set-off in respect of such a claim.

This submission, like the first, finds no support in the words of s. 86. There is nothing at all in the Act which requires that a claim of a person who has become bankrupt which vests in his trustee should, for the purposes of s. 86 (or, for that matter, any other section), be subjected to the additional test of whether, if the debtor of the bankrupt had himself become bankrupt, the claim would have been a provable debt in the debtor's bankruptcy. Nor is there any reason in fairness or common sense why such an additional test should be imposed.

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.

1. [1980] 1 W.L.R. 1589, at pp. 1607-1612; [1980] 3 All E.R. 513, at pp. 526-530. 2. [1984] 1 W.L.R. 14, at pp. 19-21; [1983] 3 All E.R. 218, at pp. 221-223.

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.).

It is, however, arguable that some support can be found in the decided cases for the view that set-off of claims which are contingent or unliquidated at the time of a sequestration order is precluded unless they "arise out of" contract. The convenient starting point of a consideration of those cases lies in the judgment of the Queen's Bench Division (Mathew and Cave JJ.) in Jack v. Kipping [43] .

The question in Jack v. Kipping was whether a purchaser of shares, who was sued for the purchase price by the trustee of the vendor who had become bankrupt, was entitled to set off a claim for unliquidated damages for a fraudulent misrepresentation whereby he had been induced to purchase the shares. The applicable set-off and "debts provable" provisions (Bankruptcy Act 1869 U.K., 32 and 33 Vict. c. 71, ss. 39 and 31) relevantly corresponded with ss. 86 and 82 of the Act. It was held that the purchaser was entitled to set off his claim. The court's ex tempore judgment, which was delivered by Cave J., relied upon the judgment of Jessel M.R. in Peat v. Jones [44] , as support for the proposition that "claims arising out of [a contract of sale and purchase] are mutual dealings within the statute" [45] . Reference to Jessel M.R.'s judgment indicates that Cave J. did not intend, by that proposition, to suggest that the claims were themselves mutual dealings or that mutual dealings meant "contracts". It would seem that his Lordship meant that the claims were, in the words of Jessel M.R., "reciprocal obligations" arising out of the contract of sale and purchase which was "in its nature mutual".

1. (1881) 8 Q.B.D., at p. 149. 2. (1882) 9 Q.B.D., at p. 116.

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.

1. (1882) 9 Q.B.D., at p. 117. 2. (1882) 9 Q.B.D., at p. 117. 3. (1882) 9 Q.B.D., at p. 117.

In Palmer v. Day & Sons [47] , Lord Russell of Killowen C.J. (delivering the reserved judgment of the Divisional Court) made the comment that the set-off provision of the Bankruptcy Act 1883 U.K. had "been held applicable to all demands provable in bankruptcy, and so to include claims as well in respect of debts as of damages liquidated or unliquidated provided they arise out of contract " (emphasis added). The qualification "provided they arise out of contract" may well have been a reference to the judgment in Jack v. Kipping. Regardless of whether that be so, the qualification can be readily understood, in the context of a set-off claimed against the liquidator and the express reference to "demands provable in bankruptcy", as involving no more than an acceptance of the proposition that an unliquidated claim against the bankrupt could be set off under the relevant statutory provision only if it would otherwise have been provable in the bankruptcy. In In re Mid-Kent Fruit Factory [48] , Vaughan Williams J. quoted Lord Russell C.J.'s remarks and commented that the qualification "provided they arise out of contract" "clearly limits the operation of the section". Vaughan Williams J.'s comments were not essential to the actual decision: see the discussion of the case in the judgment of Brightman J. in In re D. H. Curtis (Builders) Ltd. [49] . If they were intended to convey more than the proposition that only a provable claim can be set off as against the trustee (or liquidator in a winding up), they went further than Lord Russell's remarks justified. It should be mentioned that Vaughan Williams J. explained [50] the judgment in Jack v. Kipping on the basis that the misrepresentation in that case itself constituted part of the "mutual dealings" for the purposes of the set-off provision:

the claim of the trustee, being for the price of goods, the misrepresentation which led to the purchase of the goods was a mutual dealing as between the purchaser and the bankrupt vendor. In our view, that explanation of Jack v. Kipping should be accepted as correct. 1. [1895] 2 Q.B. 618, at p. 621. 2. [1896] 1 Ch., at p. 571. 3. [1978] Ch. 162, at pp. 169-170, 172-173. 4. [1896] 1 Ch., at pp. 571-572.

In Tilley v. Bowman Ltd., a contract for the sale of goods upon credit was induced by the fraud of the purchaser. The purchaser became bankrupt and his trustee in bankruptcy brought an action against the vendor for recovery of the amount paid to the vendor on account of the purchase price. It was held that the vendor was entitled, under the applicable bankruptcy legislation (Bankruptcy Act 1883 U.K., s. 38), to set off the damages caused by the fraud of the bankrupt. In his judgment, the trial judge, Hamilton J., quoted in full both of the above passages from the judgment of Vaughan Williams J. in In re Mid-Kent Fruit Factory and adopted Vaughan Williams J.'s explanation of the effect of Jack v. Kipping and held that the vendor was entitled to set off his claim for fraudulent misrepresentation against the trustee's claim against him on the ground that [51] :

The defendants' claim for damages for the fraudulent misrepresentation, which is in one sense a claim in respect of a tort, may be allowed to come within the mutual dealings clause upon the ground that, the claim of the trustee being in the nature of a claim under the contract, the misrepresentation which led to the contract was a mutual dealing as between the vendors and the bankrupt purchasers. Hamilton J. did not refer to the question whether the vendor's claim was, apart from the set-off, a provable debt in the bankruptcy. 1. [1910] 1 K.B., at p. 753.

The final case in this series to which specific reference should be made is a decision of the Supreme Court of Queensland (Webb J.) in In re Canada Cycle & Motor Agency (Queensland) Ltd. [52] . In that case, Webb J. refused to allow a set-off in respect of a liquidator's claims against the director of a company on the ground that the claims did not arise out of contract. His Honour referred [53] to what had been said by Lord Russell C.J. in Palmer v. Day & Sons and expressed the view that set-off under s. 82 of the Bankruptcy Act 1924 Cth, which corresponds to s. 86 of the present Act, was confined to claims arising out of contract. It is relevant to note that counsel for the liquidator did not "contend that the mutual dealings need not arise out of contract" [53] .

1. (1931) 4 A.B.C. 27. 2. (1931) 4 A.B.C., at p. 33. 3. (1931) 4 A.B.C., at p. 33.

The above examination of decided cases discloses three things. The first is that the only case in which the actual decision supports a general proposition precluding the set-off of claims (or of unliquidated claims) which do not arise from contract is In re Canada Cycle. In that case, however, the point had been conceded. The second is that there is not to be found in any of the judgments in the above cases a reasoned justification of such a general proposition. The third is that the foundation statements of Cave J. in Jack v. Kipping and Lord Russell C.J. in Palmer v. Day & Sons do not, when properly understood, support such a general proposition. In In re D. H. Curtis (Builders) Ltd. [54] , Brightman J. examined the cases and pointed out that a general proposition that set-off in bankruptcy was confined to claims arising from contract was unjustified by the words of the relevant statutory provisions and was contrary to the actual decision of Clauson J. in Mathieson's Trustee v. Burrup Mathieson & Co. [55] . His Lordship concluded that s. 31 of the Bankruptcy Act 1914 U.K. (which relevantly corresponds with s. 86) should not be construed as being so confined. His conclusion in that regard has been subsequently accepted in other cases in England: see Re Cushla Ltd. [56] ;In re Unit 2 Windows Ltd. [57] . It should be apparent from what has been said above that we agree with that conclusion. Accordingly, the appellants' third submission should, in our view, be rejected.

1. [1978] Ch., at pp. 169-176. 2. [1927] 1 Ch. 562. 3. [1979] 3 All E.R. 415. 4. [1985] 1 W.L.R. 1383; [1985] 3 All E.R. 647.

It follows from the foregoing that the conclusion of the Full Court of the Federal Court that there should be a set-off in each of the present appeals was, on the basis upon which the appeals have been argued, correct. The appeals should be dismissed.