Hiley v Peoples Prudential Assurance Company Limited (in Liquidation) [1938] HCA 40

Hiley v Peoples Prudential Assurance Company Limited (in Liquidation) [1938] HCA 40 - HCA 1938 case summary — Zoe

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on behalf of the company his former beneficial interest in the mort- gage takes it with all the bank's freedom from set-off. The liquidator must be regarded as having asserted with success claims vested in the company at the time when the liquidation began. The present absolute right of the company to the mortgage arose out of such claims, and is the outcome of a right belonging to the company at that time, a right which has materialized in a debt presently owing by the appellant to the company. The company had an equity of redemption in the mortgage and a claim to set aside the transfers by way of sub-mortgage. To this extent the appellant was indirectly liable to the company. One part of the decision in Lee & Chapman's Case (1) is that, so far as a balance might arise in the hands of a mortgagor or chargor, it is liable to set-off. As I view the matter, without any new transaction, i.e., without any original acquisition of the mortgage debt, the liquidator has managed to get rid of the entire encumbrance upon the mortgage and to reduce the mortgage into the possession of the company. I think it must come back subject to the claim of the appellant to set off the company's liability to him upon the policy as a mutual dealing. The case of In re City Life Assurance Co. Ltd, (2), although no doubt somewhat confusing, does not appear to have anything to do with the question whether the existence at the time of liquidation of an encumbrance or other dealing in favour of third parties upon or with a debt or chose in action in respect of which the set-off is sought operates to defeat the set-off in favour of the company when that encumbrance has been cleared off after the commencement of the winding up or that dealing has been got in or nullified. On the other hand, it clearly approves of Lee & Chapman's Case (1), which decided two points, one of which is directly material to the present case and, as I think, ought to control its decision. In my opinion the appeal should be allowed.

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mortgage debts to the trustees. Clearly no set-off could have been available to them if the mortgages had been the subject of legal assignments to the trustees for value and without notice of the mortgagors' claims to have the mortgage moneys answered out of the policy moneys. But the assignment to the trustees was equitable only and the mortgagors had received no notice thereof. Thus the legal right to recover the mortgage moneys, the debt, and the legal tight to enforce the security were vested in the liquidating company. Accordingly there were cross-demands between the policy-holders as proving creditors and the company, in the winding up of which they would prove. The argument was that under the rule in bank- tuptcy the antecedent equitable assignment without notice could not intercept the right of set-off resulting from the situation. The distinction was rested on the absence of notice. It will be seen that the question at issue was not of the same description as that upon which the present case turns and depended upon quite different principles. In the City Life Assurance Co.'s Case (1), if equities were ignored and legal titles only were considered, there would be two mutual debits and credits resulting in a set-off between proving creditor and liquidating company. But on it appearing that the equitable interest of the liquidating company in its credit or claim was the subject of an outstanding assignment, although an assign- ment of which no notice had been given, the question arose whether, in the absence of notice, the set-off should be maintained, notwith- standing that it would defeat or impair the equitable interest of the assignee. The argument was that the set-off prevailed because of the want of notice to the mortgagors, that is, to the debtors, who, on the cross-demand, were proving creditors. The Court of Appeal decided against this argument, and the reason is expressed in two sentences of Warrington L.J.: - '" In my opinion that distinction is immaterial. The argument founded upon it rests on what is with all respect, in my opinion, a misapprehension of the effect of notice in questions of equitable assignment. The equitable assignment itself is absolute and complete whether notice is given or not " (2). This reason is also given by Sargant L.J. (3). But, though Pollock MR. propounds the question in the same way, namely, whether the decision in favour of allowing a set-off "can be extended so as to include the case of policy-holders and mortgagors whose mortgages

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were equitably assigned to the trustees of the trust deed antecedent to the winding up" (1), yet when he proceeds to give his reasons for a negative answer, he speaks throughout of assignments of the Policies, not of the mortgages. Possibly his Lordship considered that the policy-holders could not rely upon the liability of the com- pany to them under their policies because they had given a security over them to the company for their mortgage debts and that security had been assigned to the trustees. If this be the explanation, however, the point made has even less bearing on the present case. But more probably the substitution of references to the assignments of the policies for references to the assignments of the mortgages is nothing but a slip. The decision that the equitable assignments even without notice operated to prevent a set-off means, of course, that equitable or beneficial interests, as opposed to purely legal interests, are to be regarded and this tends to support, rather than to detract from, the conclusion which I have adopted. But there is one point which, owing to the meagre report of the facts, may appear to present a difficulty. It would seem to be fairly clear that the equitable assignment of the mortgages to the trustees was by way of security and, indeed, at various places in the reports the assignment is described as a sub-mortgage. If there was any prospect of a residue remaining after realization of the security and payment of the amount of the encumbrance, then as against the company as distinguished from the trustees the policy-holders would have been entitled to set off their claims against that residue. This would be the result of so much of the decision in Lee & Chapman's Case (2) as relates to the residue of the debt there assigned or charged remaining after the deduction of the £1,900 secured by the assign- ment or charge. But I think that it is evident that there could have been no prospect of a balance or residue in favour of the City Life Assurance Co. after the claims of the trustees were satisfied. For Warrington L.J. refers to Lee d& Chapman's Case (2) for the decision that, as against the assignees or chargees, there could be no set-off. He said: "It was recognized in argument that that decision in Lee & Chapman's Case (2) would be conclusive against the appellants but for one circumstance of distinction, and that - was that in Lee d& Chapman's Case (2) a notice of the assignment in favour of Lee & Chapman had been given to the Commissioners

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Before

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Judgment (202 paragraphs)