Mackenzie v Rees [1941] HCA 21

Mackenzie v Rees [1941] HCA 21 - HCA 1903 case summary — Zoe

[15]

such extension to be reviewed at the end of twelve months. The promissory notes to be drawn as from 11th J uly 1932, free of interest, but plus exchange and stamp duty. Creditors whose amounts did not total twenty pounds were to be exempt from the terms of the arrangement, and the debtor was to endeavour to arrange a com- position of ten shillings in the pound. Thomas Brown & Sons Ltd. received promissory notes for £56 10s. each, payable on 14th August 1932, and on the fourteenth day of each succeeding month up to and including 14th July 1933, and a further promissory note for £4,949 13s. 2d., payable on 14th July 1933. On 7th June 1933, when the debtor signed the deed of arrangement, the promissory notes for £56 10s., due on 14th June 1933, and for £56 10s. and £4,949 13s. 2d., due on 14th July 1933, had not been met. Thomas Brown & Sons Ltd. proved for the amount of each of these promissory notes. The estate was sufficient to enable the trustee to pay all amounts proved for, and there was a surplus left of £1,400. Thomas Brown & Sons Ltd. and other creditors who held promissory notes for their debts then claimed to prove for interest on the amounts of their debts outstanding from 7th June 1933. The trustee, George Rees, applied for directions under sec. 105 of the Bankruptcy Act 1924-1933, and Philp J., sitting in bank- ruptcy jurisdiction, directed that upon proof, by all the creditors holding overdue promissory notes, for damages for interest under sec. 62 (a) (ii) of the Bills of Exchange Act 1909-1936, the trustee should compute damages for interest at five per cent per annum upon the whole of each debt represented by the promissory notes up to the time of the first dividend, and then subtract the amount of that dividend from the whole debt and interest calculated upon the reduced principal up to the payment of the next dividend and so on until twenty shillings in the pound was paid on the principal debt, and that when the total amount, as damages, was computed each creditor should participate ratably in the ultimate surplus. From that decision the debtor appealed to the High Court.

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old and well-established principle of law, that the right to bring a personal action, once existing and by act of the party suspended for ever so short a time, is extinguished and discharged, and can never revive," is not of general application, as appears by his own judgment in Baker vy. Walker (1) and by Slater v. Jones (2), and, in my opinion, it is well established by the cases referred to by Walliams J., including the judgment of the Judicial Committee of the Privy Council in Allen v. Royal Bank of Canada (3), that if a promissory note be taken on account of a debt, then, in the absence of some arrangement to the contrary, the original debt still remains, but the remedy for it is suspended till maturity of the instrument in the hands of the creditor. Or, as it is put in Bullen and Leake, 3rd ed. (1868), p. 540, "the giving of a negotiable security on account of a simple contract debt operates as a conditional payment, ie. a payment if the security is paid when due; and it suspends the right of action in the meantime and is a good defence." In other words, it is not a payment at all, unless the condition of fulfilling the obligations of the negotiable security is complied with. The date from which the payment operates if the note is honoured is not material in the present case, because the note was not honoured. The relevant authorities have been discussed in two cases decided by the Supreme Court of New South Wales: Ashby v. Hayden (4) and Havyatt v. Gilder (5). In the case of In re Raatz ; Ex parte Raatz (6) the view appears to have been taken that if anything occurs which prevents the condition of the payment from ever being fulfilled, such as the commission of an act of bankruptcy from which bankruptcy in fact results, the suspension of the right of action on the original debt at once comes to an end, and the creditor is remitted to his rights thereunder. It is immaterial whether this be so or not: because in the present case the note was not met on its due date. The parties by clause 6 (3) of the deed of arrangement have evinced a clear intention that the law of bankruptcy is to be applied as to payment of dividends. Since, in the case of surplus of assets, the law of bankruptcy allows interest thereout on interest-bearing debts to creditors who held promissory notes in respect of their debts, it is in accordance with the expressed intention as to the applicability of the law of bank- ruptcy, as manifested in clause 6 (3), that interest should be allowed at the rate which, apart from the promissory notes, the debt in

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depended upon the exclusion of future interest from proof and also from the release or discharge given to the debtor. Thus the wide language of sec. 81 (1) may be taken as covering intermediate interest, so that it is not altogether excluded as a claim against the assets and, at the other end, sec. 118 may be regarded as conferring upon the debtor a right to the surplus only after intermediate interest has been paid. The principle then may be considered as operating between these two termini, so to speak, and as requiring that, for the purpose of adjusting the rights of creditors, interest accruing after sequestration shall be put out of consideration in the first instance, and shall be allowed only if and when a surplus is ascertained. Secs. 60 (2), 112 (1), 116 (2), and 121 (2) do not appear to me to create any difficulty. Sec. 84 (5) applies to interest accruing before sequestration, and it is unnecessary to consider whether its application would extend to intermediate interest. Rule 246 also deals with claims up to sequestration. Sec. 89, however, presents some difficulty. For it might be thought to require that every claim against the assets, not given priority by some express provision, should rank pari passu with every other such claim. But the section has its counterpart in the English legislation, and there no difficulty has been felt in treating the rule as consistent with the legislation. The provision appears in sec. 40 (4) of the English Bankruptcy Act 1883, and yet, by sub-sec. 40 (5), express provision was made for the payment of intermediate interest out of the surplus. In Re Browne & Wingrove (1) Lindley L.J. said: "The old rule that interest accruing after adjudication could not be admitted to proof was inflexible (See Cooke's Bankruptcy Laws, 8th ed., vol. 1, p. 205) ; and it has been recognized as subsisting in very modern times, notwithstanding that the class of liabilities provable has been from time to time enlarged, and has since 1869 embraced almost, if not quite, all contractual liabilities imaginable."

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If a bill or promissory note did not reserve interest, the holder was never considered entitled to claim upon a surplus in a bankruptey in respect of interest by way of damages. Lord Hardwicke, in Ex parte Marlar (2) said : - * But as the commissioners have estab- lished it as a rule, that note-creditors have no right to prove interest upon them, unless it is expressed in the body of the notes; I will not break in upon this rule. Even at law, where notes are for value received, and interest is not expressed, the jury do not give the plaintiff, in an action upon the notes, interest for them, but by way of damages only." Lord Thurlow, in Ex parte Champion (3), said : "TJ agree with Lord Hardwicke's rule, that where a contract is entered into for a certain sum, and interest could not be given at law but in the shape of damages, it is not the course of the court to give interest in bankruptcy." Lord Eldon in Ex parte Koch (A), a case of a demand note, said : - " If there is any contract for interest the debt will carry interest: but I have always understood the rule in bankruptcy, that debts, carrying interest, and no others, are in the case of a surplus, to have interest subsequent to the commission. It is very difficult to say, upon what ground originally in bankruptcy debts, carrying interest, were to have it out of the surplus: as the debt to be proved is the principal and interest due at the date of the commission ; and the principle of the bankrupt law is to pay the debts proved, and nothing afterwards. The court however has gone so far as to give subsequent interest out of the surplus with regard to debts, carrying interest by the contract; which is the expression of all these orders. Damages are not interest; and in the cases at law it has been considered as ascertained damages ; not as interest, due by the contract. It is better to abide by the tule, that has hitherto prevailed in this case of a surplus, than to introduce a new one; the consequences of which it is not easy to

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Pursuant to this resolution Thomas Brown & Sons Ltd. received promissory notes for £56 10s., payable on 14th August 1932, and on the fourteenth day of each succeeding month up to and inclusive of 14th July 1933, with a rest bill for the balance of their debt, namely, £4,949 13s. 2d., also payable on the last-mentioned date. The promissory notes for £56 10s. represented the share of this creditor in the sums of £150, which the debtor had agreed to pay each month in discharge of his indebtedness to his creditors to whom he owed over twenty pounds on Ist May 1932. The amount of the indebtedness to Thomas Brown & Sons Ltd. was calculated by leaving out of account the promissory note for £182 3s. 8d., which was paid in three monthly instalments commencing from 27th May 1932. On 7th June 1933 the debtor executed the deed of arrangement already mentioned. At the time the promissory notes for £56 10s. due on 14th June and 14th July respectively, and the promissory note for £4,949 13s. 2d., were still current. He also owed Thomas Brown & Sons Ltd. the sum of £480 10s. 7d. for goods sold and delivered, presumably on and after lst May 1932. By the deed of arrangement, clause 6, the trustee was directed after payment of costs, charges and expenses and preferential claims to apply the proceeds of realization of the debtor's estate "in payment to the creditors by such dividends and at such times and in such amounts as the trustee shall deem expedient of all such debts and claims of the creditors as would by the law of bankruptcy be entitled to rank for dividend upon the estate of the debtor and in such priorities and in accordance with such rules as would be applicable under the said law of bankruptcy and to pay the surplus if any to the debtor." By clause 16 the creditors released and discharged the debtor from all debts and liabilities due, owing, or incurred from or by the debtor to them or any of them which under the said Act would have been provable in his bankruptcy had he been adjudicated bankrupt on the date of the deed.

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In Byles on Bills, 20th ed. (1939), p. 240, the learned author states :

- Tf a bill or note is taken on account of a debt and nothing is said at the time, the legal effect of the transaction is this - that the original debt still remains, but the remedy for it is suspended till maturity of the instrument in the hands of the creditor. This effect of giving the bill has also been described as a conditional payment.' This state- ment is amply borne out by the authorities: See Baker v. Walker (1); Bottomley v. Nuttall (2); Cohen v. Hale (3); In re Romer & Haslem (4) ; Mears v. Western Canada Pulp and Paper Co. Ltd. (5) ; In re a Debtor; Ex parte the Debtor (6); Marreco v. Richardson (7); Allen v. Royal Bank of Canada (8); Ashby v. Hayden (9) ; Havyatt v. Gilder (10). In Currie v. Misa (11) Lush J. said :- - " The security is offered to the creditor, and taken by him as money's worth, and justice requires that it should be as truly his property as the money which it represents would have been his had the pay- ment been made in gold or a Bank of England note. And, on the other hand, until it has proved unproductive, the creditor ought not to be allowed to treat it as a nullity, and to sue the debtor as if he had given no security." On 7th June 1933 the balance of the original debt, which had not been discharged by the payments made commencing on 14th August 1932 and ending on 14th May 1933, was still in existence, but the remedy to recover this balance was suspended pending the maturity of the outstanding notes. The deed of arrangement constituted an available act of bankruptcy (sec. 52 (a)). Consequently no creditor with notice could have safely accepted payment of his debt within the following six months. The debtor had therefore placed himself in such a position that he could not fulfil the condition on which alone the conditional pay- ments would become absolute, namely, honourmg the notes at maturity. They had, in effect, "proved unproductive." This circumstance, in my opinion, put an end to the suspension of the remedy on the original debt, and Thomas Brown & Sons Ltd. could have filed a petition for a sequestration order based on this balance as a debt immediately payable (In re Raatz (12) ). I agree respect- fully with the view expressed by the two distinguished judges who comprised the Divisional Court in that case, and by Chalmers, Bills of Exchange, 6th ed. (1903), pp. 309-310, that the act of bankruptcy

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Judgment (142 paragraphs)