Miles v Official Receiver in Bankruptcy

(a) To the first mortgagee £2,007 19 8 (b) To the second mortgagee £4,640 3 7 (c) Selling expenses £ 714 1 10 £7,362 5 1

The contest between the appellant and the trustee - who in the proceedings before the Court of Bankruptcy and this Court took the part of the creditors - arose in this way. On 28th June 1957 Miles, who was the registered proprietor of land at Moorabbin, mortgaged it to The Australasian Temperance and General Mutual Life Assurance Society Ltd. (which we shall call "the Society") in consideration of a loan of £11,000. On the same day the deceased gave the Society further security for the loan by assigning to it a policy issued by it to the deceased on 12th June 1957 whereby he was insured for £10,000 payable upon attaining the age of sixty years or his death at an earlier date. This assignment was registered on 7th July 1957. On 11th August 1958 the deceased gave a second mortgage over the land to Marjorie Wilson Thomson. The deceased died on 7th October 1960 before reaching the age of sixty years and thereupon the policy moneys became payable. These have been treated as amounting to £9,981. It is common ground that, at the date of the death of the deceased, the principal moneys secured by the mortgage were due and payable because interest and premiums were in arrears. After his death the Society applied the policy moneys as follows: -

Proceeds of Policy £9,981 18 0 Principal on Mortgage £10,400 0 0 Interest to date of death 168 9 4 Life Premiums due to 1.10.1960 1,190 0 0 Interest on Charges 16 13 4 Balance 1,793 4 8 £11,775 2 8 £11,775 2 8

Thereafter on 29th June 1961 an order was made upon the petition of the appellant for the administration in bankruptcy of the estate. The land was sold on 11th October 1961 for £16,500 gross and the trustee applied £7,362 5s. 1d. in the manner already stated, leaving a balance in his hands of £9,137 14s. 11d., to which the appellant laid claim as policy moneys to which she was entitled by virtue of s. 92 of the Life Insurance Act 1945-1959 Cth.

The foregoing statement shows that no part of the £9,137 14s. 11d. is in fact policy moneys but is the balance of the proceeds of the land sold after the deduction of selling expenses and moneys remaining owing and charged upon the land by mortgage. The appellant's case is, however, that although the Society in fact applied the whole of the policy moneys to satisfy pro tanto moneys owing to it and secured by the assignment of the policy as well as by the mortgage, it should on equitable grounds be deemed not to have done so but to have had what was owing to it satisfied either in full out of the proceeds of the land or out of the policy moneys and the proceeds of the land pro rata so that as between the appellant and the unsecured creditors the sum of £9,137 14s. 11d. was either wholly or in part policy moneys protected by s. 92.

Before going further it is perhaps desirable to point out that the nett proceeds of the land, £15,786 approximately, would not have sufficed to have paid all the moneys secured by the two mortgages thereon had the policy moneys not been applied as they were, for the Society would then have been owed £11,989 17s. 8d. (including £1,190 premiums due up to 1st October 1960) and the second mortgagee £4,640 3s. 7d., a total of £16,630 1s. 3d., so that, if any departure from what actually occurred were upon equitable grounds to be deemed to have occurred, the second mortgagee would have been in a position to contend that, as between herself and other claimants, the Society should have been deemed to have been satisfied in part at least out of the policy moneys in order to make good her security upon the land. We do not pursue this, although we will refer again to it, because we have come to the conclusion that, in applying the policy moneys in satisfaction pro tanto of moneys due and payable and secured both by the assignment of the policy and by the mortgage, the Society did what it was entitled to do under s. 92 (2) of the Life Insurance Act and what it was bound to do by reason of the provisions of the policy and the mortgage, so that no basis in equity exists for deeming something different to have occurred in order to give the appellant an advantage to the prejudice of the creditors of the estate of the deceased whose personal representative she is.

By the policy the Society covenanted to pay "the sum for which this policy is issued", viz. £10,000, to Miles upon proof of the attainment of the age of sixty years or his earlier death provided "that all moneys to become due from the Society in respect of this policy shall be paid after deduction of the amount of any unpaid annual premiums or unpaid instalments of annual premiums or other indebtedness of the payee to the Society". When the assignment of this policy to the Society was registered, s. 87 sub-ss. (3) and (4) of the Life Insurance Act applied. These are as follows: - "(3) The transferee under a duly registered assignment shall have all the powers and be subject to all the liabilities of the transferor under the policy, and may sue in his own name on the policy (4) The receipt of the transferee shall be a discharge to the company for all moneys paid by the company under the policy." The oddness of the result of the application of these provisions in the case of an assignment to the company which had itself issued the policy was not surprisingly found to merit special provision. This is to be found in s. 90A of the Act, which provides: - "The rights and liabilities arising under a policy shall not be deemed, either at law or in equity, to be merged or extinguished by reason only of an assignment of the policy, whether at law or in equity, to the company that issued the policy." So it is that after the registration of the assignment here the policy remained on foot, notwithstanding that the Society, having granted the policy to Miles, took Miles' place as to both powers and liabilities thereunder and was authorized to pay money to itself and to give itself a receipt for moneys paid to it under the policy.

When Miles died the Society's covenant to pay the grantee obliged it, because of the assignment to itself, to pay itself the policy moneys but perhaps only after the deduction of whatever moneys were owing to it by Miles, although the use of the words "indebtedness of the payee to the Society" in the proviso already quoted from the policy raises some doubt whether, in a case where a policy has been assigned, the indebtedness of the assignor is deductible because, by reason of s. 87 sub-ss. (3) and (4), the assignee, not the assignor, has become the payee. It is not necessary to settle this doubt here, for what seems to us of critical importance is that, when the policy moneys become payable out of the Society's life fund as it stands, the only feasible method of payment in a case such as this is to apply such moneys in discharge of what is owing to the Society. That was done here and included in what was owing was the outstanding loan, £10,400, and interest thereon, £168 9s. 4d., secured by the mortgage. The policy does not contemplate the Society's keeping alive any indebtedness which the policy moneys, when payable, would be available to discharge by way of set-off. The circumstance that by reason of an assignment by way of security the Society had become both the payer and the payee of the policy moneys renders it less tenable that, when the policy moneys became payable, the debt which the policy was assigned to secure could nevertheless at the will of the Society be kept alive, notwithstanding the payment of the sum for which the policy was issued with the consequential discharge of the policy. Section 90A does prevent an assignment by itself from resulting in a merger or extinguishment but an entirely new element is introduced as soon as moneys become payable under the policy assigned, for in such a case what really happens is the realization of the security - that is, the assigned policy - and the application of the proceeds in pro tanto satisfaction of what is owing to the Society. Any doubt that this is so which might exist if attention were to be confined to the policy and the effect of its assignment - and the decision in In re Wertheim [1] raises such a doubt - is resolved here by the express terms of the mortgage, for it is therein provided as follows: "It is hereby agreed and declared that notwithstanding anything hereinbefore contained if at any time during the currency of the term of this mortgage any moneys shall become payable under the said policy or policies of assurance such moneys shall thereupon be applied by the mortgagee in payment pro tanto of the moneys hereby secured and in such method of appropriation as the mortgagee in its absolute discretion shall think fit and such application and appropriation shall to the extent of such policy moneys be deemed to be in satisfaction pro tanto of the obligation of the mortgagor to pay the said principal sum and other moneys hereinbefore covenanted to be paid by the mortgagor". This provision, it seems to us, would apply whether or not at the time the mortgage debt was due and payable, for it is a provision requiring the discharge pro tanto of the debt secured by the mortgage when the policy moneys become payable. Having regard to this provision, we think in the circumstances of this case the Society would have been in breach of its obligations to the appellant as executrix of the will of the deceased had it not done what it did with the policy moneys and it had no right to keep the policy moneys in suspense and maintain that the obligation of the mortgagor to pay the mortgage moneys in full still remained. Were that possible, the Society could at its will keep in existence a mortgage debt carrying a rate of interest higher than the rate then current and, if there were default under the mortgage, sell the property mortgaged, notwithstanding that it had in its hands policy moneys sufficient to discharge all obligations secured by the mortgage. When the language of the mortgage means the opposite, there is every reason against attributing to it a meaning that would produce such an unfair result. For the appellant it was argued that cl. 8 of the mortgage required the proviso which we have quoted to be understood in a manner contrary to the plain meaning of the words used, but that clause does no more than preserve the rights or powers of the mortgagee under or by virtue of any covenant or power implied in the mortgage by virtue of the Transfer of Land Act. We find no inconsistency whatever between cl. 8 and the proviso we have quoted with the meaning we have attributed to it but, if there were any such inconsistency, the proviso was introduced by the words "notwithstanding anything hereinbefore contained" which, in the case of any inconsistency with cl. 8, would make the proviso paramount.

The foregoing considerations have satisfied us that in applying the policy moneys as it did the Society acted strictly in accordance with its obligations as the assignee of the policy and under the mortgage. It resorted to what for it was the primary fund for the satisfaction in part of what was owing to it.

What next requires consideration is whether, when the Society did what it was obliged to do and did not merely exercise an option to resort to the policy moneys rather than its mortgage for the satisfaction of what was owing to it, there is any room for equitable marshalling of assets in favour of the appellant to the prejudice of creditors or for any like application of the equitable principles that underlie the doctrine of marshalling. The equitable principle is stated by Lord Eldon in Aldrich v. Cooper [1] ; 1 White & Tudor's Leading Cases in Equity 9th ed. (1928) p. 29 in these words: - "If a party has two funds a person having an interest in one only has a right in equity to compel the former to resort to the other, if that is necessary for the satisfaction of both. The principle in some degree is, that it shall not depend upon the will of one creditor to disappoint another" [2] . In Jenkins v. Brahe & Gair [3] a'Beckett J., after observing that the Court would not control the choice of a creditor, said: - "But it appears to be settled law that the jurisdiction of the Court is not ousted by the act of the mortgagee" (that is, in resorting to one fund rather than the other) "when the Court can obtain control of the assets which the mortgagee could have applied to the discharge of his debt and out of which other creditors can be satisfied. "If the mortgagee having a double fund has exercised his option in such a way as to disappoint a creditor by taking the only fund to which he could resort, such exercise of option will not have the effect of disappointing the creditor with one fund only, who will therefore be entitled to stand pro tanto in the place of the former": See notes to Aldrich v. Cooper 1 White & Tudor, 7th ed. (1897) p. 61, and the authorities which support the proposition referred to in the notes" [1] . One of the authorities is Webb v. Smith [2] , in which Lindley L.J. when dealing with claims of competing creditors said: - "The general principle of marshalling was stated by Sir William Grant, M.R. in Trimmer v. Bayne [3] in the words that "a person having resort to two funds shall not by his choice disappoint another, having one only" [4] . That appears to be a correct statement of the law. The vice of the argument for the plaintiff is that in truth there were not two funds to which the defendants could resort, that is, two funds standing upon an equal footing" [5] .

1. (1803) 8 Ves. Jun. 382 [32 E.R. 402]. 2. (1803) 8 Ves. Jun., at pp. 388, 389 [32 E.R., at p. 405]. 3. (1902) 27 V.L.R. 643. 4. (1902) 27 V.L.R., at p. 648. 5. (1885) 30 Ch. D. 192. 6. (1803) 9 Ves. Jun. 209 [32 E.R. 582]. 7. (1803) 9 Ves. Jun., at p. 211 [32 E.R., at p. 583]. 8. (1885) 30 Ch. D., at p. 202.

Referring to Lord Eldon's statement, it is clear that if the appellant could have been regarded as in a position equivalent to that of a creditor with resort to one fund only, she would have had no right in equity to compel the Society to resort to the mortgage instead of the policy moneys, particularly as its obligation to the appellant as the executrix of Miles in accordance with its covenants was to apply the policy moneys in reduction of the debts secured by the mortgage. Nor is the principle stated by a'Beckett J. applicable even by way of analogy, because as we have already decided the policy moneys constituted the primary fund to which the Society was obliged to resort, it had no option to do anything other than what it did. As it is said in the notes to Aldrich v. Cooper 1 White & Tudor, op. cit. p. 41, "There must be two funds already in existence before the question of marshalling is raised, and the prior creditor or claimant must have equal rights against each fund".

Furthermore, there is the circumstance already adverted to that the application of the equitable doctrine of marshalling to the case of the second mortgagee would seem to have required the Society to resort not to the fund arising from the sale of the mortgaged land but to that constituted by the policy moneys for the satisfaction of the debts owing to it so as to free the fund constituted by the proceeds of the sale of the land, which was the only fund to which the second mortgagee could look for security. See In re W_______ (a lunatic) [1] and In re Wertheim; Williams v. Wertheim [2] . Marshalling in this way would to some extent at least stand in the way of the marshalling sought by the appellant.

1. (1901) 11 Q.L.J. 108. 2. [1934] V.L.R. 321.

Finally, we are not satisfied that, independently of the considerations to which we have already referred, the appellant would have an equity to call for marshalling in her favour against unsecured creditors notwithstanding that she is by virtue of the Life Insurance Act put in a position of limited protection in relation to policy moneys. Here we come to what will be seen to be a vexed question. In considering the question it is, we think, important to observe the limited nature of the protection which the Act confers, for it is recognized that the creditor who holds a charge over a policy may have resort to policy moneys for the satisfaction of his claim. Accordingly, one effect of s. 92 (2) is that, if a person whose life is insured should raise money by charging his policy, the moneys payable thereunder on his death are not protected from the creditor holding the charge, notwithstanding in the absence of an express direction that policy moneys should be applied in payment of debts, such moneys are protected against the claims of other creditors and are so protected to the extent provided in favour of the beneficiaries of his estate. It is apparent, therefore, that nothing contrary to the section or the policy underlying it occurred here when the Society applied the policy moneys in part satisfaction of the debt secured by the assignment of the policy. Because nothing outside the policy of the legislation occurred, it is difficult to treat that policy as affording the appellant any equity to require a departure from what did in fact occur or, by subrogation, to put her in the position of the Society vis-à-vis unsecured creditors. As between the appellant and the creditors other than the Society, the section would, of course, have protected policy moneys from debts, but, because the Society has done just what the section contemplates it would and has left no policy moneys for anyone else, it is not easy to grasp how the section or the policy underlying it can be regarded as giving the appellant a right of any sort to have a fund consisting of the proceeds of the sale of land treated as a fund comprising policy moneys.

In support of the contention that there is such an equity, Mr. Aickin relied principally upon the decision of the Supreme Court of Victoria (Full Court) in In re Crothers; Crothers v. Crothers [1] in which Cussen J. said: - "The Legislature evidently took the view that it was in the interests of the community and the encouragement of thrift, that persons should make such provision, even though creditors, it may be many years afterwards, when the assured had fallen on evil times, would be deprived of some rights that they otherwise would have had. It does not seem to me in accordance with equitable principles generally to say that an equitable rule to the effect that ordinarily the doctrine of marshalling will operate so as to give priority to unsecured creditors against executors, administrators and beneficiaries, should be applied even when those last-named are provided for in the way I have mentioned by special enactment. It might, indeed, be argued that the widow here, whether through the executor or not, should have the doctrine of marshalling applied so as to give her priority against the creditors, but I am not prepared to go so far as this, as each of the two has a right of resort against one fund The effect of the Victorian legislative enactments is, I think, to put the executor and beneficiaries of a testator, in relation to a question whether the doctrine of marshalling applies, in a position in which their rights are not subordinate to but are co-ordinate with those of unsecured creditors claiming against assets. Before these enactments the rights of "third parties", as Lord Eldon calls them, were always considered, but now the representatives of the debtor are in certain circumstances put in as strong a position as third parties" [2] . On this basis a debt owing by a deceased policy holder to a bank amounting to £11,548, which was secured by the assignment of a policy which brought in £1,069, and by a charge upon other property which when realized brought in £12,216, so constituting a fund of £13,285, was treated as spread rateably over all the securities so that the surplus after providing for the debt to the bank, interest and incidental expenses - that is, £868 - should be apportioned as between the widow and the unsecured creditors in the ratio of 1,069 to 12,216. It is to be observed that the fund so apportioned was a fund comprising policy moneys and other moneys subject to the security to which the secured creditor was entitled to resort without, so far as can be discovered, any provision requiring resort to the policy moneys first, whereas the fund in respect of which directions are here sought by the trustee in bankruptcy does not comprise policy moneys which were applied by the Society in conformity with its covenants. It should also be observed that s. 91 (b) of the Bankruptcy Act excludes policies of life assurance from the "property of the bankrupt" and this Court has held in Lloyd v. Public Trustee (N.S.W.) [1] that, in the case of the estate of a deceased person being administered in bankruptcy, this provision applies and its effect in such a case is that the proceeds of policies of life assurance held by the deceased at his death are not assets of his bankrupt estate. There is no justification for treating a fund properly in the trustee's hands as comprising moneys which the trustee was not entitled to receive. If some equity were to be found entitling the appellant here to some process of marshalling in her favour to the prejudice of the unsecured creditors of the estate, it might perhaps be possible to have regard to the estate as a whole rather than to have regard merely to that part of the estate which is now in the hands of the trustee in bankruptcy, or even what could properly come to his hands. However, assuming it is now possible in the manner indicated to go beyond the particular fund about which the trustee seeks and is entitled to directions, we have said enough to show that we think that the decision in In re Crothers [2] would still be inapplicable because of the assignment of the policy to the Society and the terms of the mortgage requiring it to resort to policy moneys first. Because it is so clearly distinguishable we think we should refrain from expressing any opinion whether that decision was correct either in according to the widow there any equity to have the estate marshalled in her favour against creditors or in treating the creditors of the estate as having resort to a fund not available to the widow to provide the basis for marshalling by way of apportionment which was applied. In deciding that the widow had such an equity, the Court overruled Jenkins v. Brahe & Gair [3] (a'Beckett J.) and differed from Re Holland; Ex parte Holland [4] (Long Innes J.) and In re W_______ (a lunatic) [5] (Griffith C.J.). Subsequently, in Queensland and New Zealand courts have declined to follow In re Crothers [2] : see Re Wood [6] and In re Tremain [7] . In Victoria the Full Court has refused to reconsider In re Crothers [2] , saying (in In re Wertheim [8] ): - "We were invited to reconsider this decision on the ground, amongst others, that it was given practically without argument on the point in question. But it was a considered judgment, in which the three members of the Court concurred, and Cussen J. in the leading judgment reviewed earlier authorities, distinguishing some in the other States, and expressly overruling a decision of a'Beckett J., of long standing in this State. Such a judgment, until overruled by the High Court, is binding upon this Court" [1] . In the Court of Bankruptcy, Clyne J., both here and in Re Lin; Law v. Lin [2] has adopted the view - inconsistent with In re Crothers [3] - that because s. 92 (2) of the Life Insurance Act enables a secured creditor to resort first to policy moneys, there is no room for the introduction of the doctrine of marshalling, whereas in Re Este [4] Lukin J. followed the New Zealand case of In re Watkins [5] where In re Tremain [6] was distinguished and marshalling in favour of a widow against unsecured creditors was directed. It is apparent, therefore, that the question whether In re Crothers [3] was correctly decided is one both of difficulty and of far-reaching importance which, when it must be decided by this Court, will warrant the fullest consideration that can be given to it. We are content, therefore, to decide this appeal on the grounds (1) that the fund in question does not comprise policy moneys, and (2) that because what the Society did was in accordance both with its covenants with the deceased - in whose place the appellant now stands - and with the Life Insurance Act, s. 92 (2), there is - independently of other considerations - no basis for treating the fund as if it did comprise policy moneys.

1. [1930] V.L.R. 49. 2. [1930] V.L.R., at pp. 62-64. 3. (1930) 44 C.L.R. 312. 4. [1930] V.L.R. 49. 5. (1902) 27 V.L.R. 643. 6. (1928) 28 S.R. (N.S.W.) 369; 45 W.N. 88. 7. (1901) 11 Q.L.J. 108. 8. [1930] V.L.R. 49. 9. [1949] Q.S.R. 17. 10. [1934] N.Z.L.R. 369. 11. [1930] V.L.R. 49. 12. [1934] V.L.R. 321. 13. [1934] V.L.R., at p. 328. 14. (1960) 18 A.B.C. 142. 15. [1930] V.L.R. 49. 16. (1940) 11 A.B.C. 179. 17. [1938] N.Z.L.R. 847. 18. [1934] N.Z.L.R. 369. 19. [1930] V.L.R. 49.

In our opinion the order made by Clyne J. was correct and this appeal should be dismissed.