Re Scott, Brian Ex Parte Australia & New Zealand Banking Group Ltd [1996] FCA 882

For the avoidance of doubt, we note that as we have discussed with you on more than one occasion, the settlement our respective clients have reached does not affect our client's claims against your client in relation to the debt of Security Planning International Pty Ltd. As discussed, our client is still considering its position in relation to that matter. The creditor's petition herein was issued 7 February 1995 but was not served at that time, and shortly afterwards, on 10 February 1995, a further instalment of $1,000 was paid to the Bank's solicitors by a cheque drawn again on the debtor's personal account with the Commonwealth Bank. The debtor and his wife have both deposed that two further cheques, each for $1,000, were drawn on an account of Romlik Nominees Pty Ltd on 5 March 1995 and 5 April 1995. Each was said to have been signed by the debtor's wife and forwarded to the Bank's solicitors. However, they were not presented for payment. Copies of those cheques were kept on behalf of the debtor but not of the earlier cheques drawn on the debtor's personal account. On 17 May 1995 the debtor, in person, paid to a member of the accounting staff of the Bank's solicitors the sum of $3,000 which he contended was necessary for final performance of the agreement which had been concluded on 7 December 1994. However, that cheque was returned by the solicitors for the Bank on 18 May 1995. An exchange of letters between solicitors occurred on that day. The letter from the debtor's solicitors was in these terms: Re: Scott & ANZ Bank I refer to the Bankruptcy Petition issued in the matter on 8th February, 95.

At the time my clients had offered a compromise which was accepted by your clients, and the first payment was made on 23rd December. The cheque cleared through my clients' Bank on 10/1/95; A second payment was made on the 10th February, after the issue, and was also cleared; Two other cheques were forwarded on the 5/3/95 and 5/4/95; These cheques, my client finds, have not been presented for payment; The final cheque for $1,000 was to be sent on the 5/5/95 when the Petition was served. My client has on 17/5/95 paid the sum of $3,000 to yourselves. To date, the compromise offer has not been determined by yourselves, and payment in full has been made. My clients require the Bankruptcy Petition to be discontinued, and failing your agreement to this, by 12 noon today, an application in opposition will be filed, and this letter will be used as to costs in the matter. The reply from the Bank's solicitors recited: Australia and New Zealand Banking Group Limited v Brian Scott We refer to your telephone conversation with James Barber this afternoon. Your client's attempted payment of the sum of $3,000.00 yesterday is not accepted by the Bank, and accordingly we enclose by way of return the cheque left with our accounts staff. We note that this cheque was delivered by a person who did not give his name (we assume it was either you or your client), nor did he ask for Mr Barber who is handling this matter as you well know, but instead approached our accounts staff directly, from whom he procured a receipt. We consider this behaviour extraordinary and we think it sharp practice. In view of the fact that, as you were informed by Mr Barber on 15 May 1995, the Bank was no longer bound by the agreement reached in December 1994, we assume that the course of action adopted by you or your client was due to your surmising that if payment of the $3,000 had been offered to Mr Barber, it would have been refused. We further suggest that this course was also adopted in order to procure a receipt on our letterhead which (despite Mr Barber's informing you at 12.55 pm today that the cheque would be returned) has now been annexed to your client's affidavit in an attempt to create the misleading impression that payment had been accepted by on behalf of the Bank. The return of the cheque for $3,000 was effected by the Bank's solicitors with the concurrence of the Bank. There have been tendered in evidence documents produced on subpoena by the Commonwealth Bank which indicate that account number 1003/9920 in the name of Romlik Nominees Pty Ltd had been closed on 26 May 1994 when it had a debit balance of 11 cents. However, Mr Scott has sworn that he had never been advised by the Commonwealth Bank of the closure of that account and that on or about 15 or 16 May 1995 he was told on making enquiry of that Bank, that neither of the cheques in issue had been presented for payment. By leave granted by Northrop J on 5 July 1995 the Bank was allowed to amend its petition to rely on two separate debts as follows: 2A. The debtor is justly and truly indebted to Australia and New Zealand Banking Group Limited (ACN 005 357 522) in the sum of $12,482.38 (being the sum of $13,482.38 less the sum of $1,000 received from the debtor on 14 February 1995) being the amount due and payable by the debtor to Australia and New Zealand Banking Group Limited (ACN 005 357 522) under a final judgment obtained by Australia and New Zealand Banking Group Limited (ACN 005 357 522) in the County Court of Victoria at Melbourne on the 26th day of January 1989. 2B. The debtor also was as at 7 February 1995 and remains justly and truly indebted to Australia and New Zealand Banking Group Limited (ACN 005 357 522) in the sum of $57,236.20 being the amount due and payable by the debtor to Australia and New Zealand Banking Group Limited (ACN 005 357 522) under a guarantee dated 7 May 1987 given by the debtor and another to Australia and New Zealand Banking Group Limited (ACN 005 357 522) for the indebtedness to Australia and New Zealand Banking Group Limited (ACN 005 357 522) of Security Planning International Pty Ltd (in liquidation). The petition as amended is opposed on the following grounds:

1. THAT the Petitioning Creditor through their Solicitors Blake Dawson Waldron agreed to accept a compromise of the debt and such compromised amount has been paid to them and no debt is now owing.
2. THAT at the time of the issue of the Bankruptcy Petition based on a balance of debt of $13,482.38 the debt had been compromised by agreement between the Debtor and the Petitioning Creditor on 7 December 1994, and the first payment of $1000 had been made, and that after the issue of the Bankruptcy Notice on 7 February 1995, a further payment was made by the Debtor and accepted under the compromise agreement; two further payments were made, but not banked and a further lump sum payment of $3000 was made, but not banked and a further lump sum of $3000 was made, completing the compromise. At the time of the issue of the Bankruptcy Petition the debt that the Petitioning Creditor relied on was not still owing.

3. THAT the Court in the exercise of its discretion ought not to make a sequestration order by reason of the fact that the Petition was issued at a time when there was an agreement between the Petitioning Creditor and the Debtor to compound the judgment debt which agreed had not been rescinded. The Petition was not issued in good faith and was issued in breach of the said agreement.
4. THAT the Debtor denies the debt claimed for the sum of $57,236.00 but if such a debt exists which is denied then the said debt is and was at all material times statute barred.
5. THAT in any event the Petition was amended to include the said claim for the sum of $57,236.20 more than six months after the date of the occurrence of the act of bankruptcy. For the debtor, it has been contended that an agreement to compromise the original debt of $14,482.38 had been concluded before the issue of the petition and had annihilated the debt on which the petition is based. Alternatively, it was said that, despite breaches of that compromise agreement, the Bank had not given any notice of rescission of it before the payment or tender of the $3,000 necessary to complete the performance of the debtor's obligations thereunder. Ms Strong for the petitioning creditor pointed first to the fact that the cheques relied on as effecting payments of the instalment due on 7 February and 7 March, if they ever reached the Bank, had been drawn on an account which had been closed almost 12 months earlier. In the second place, it was argued for the Bank that the agreement of compromise relied on by the debtor was ineffectual because it was an agreement to accept a smaller sum in payment of a debt represented by a larger liquidated amount. Consequently, there was no good consideration in the sense required by Pinnel's Case as applied in Foakes v Beer (1884) 9 AC 605 and D & C Builders Ltd v Rees [1966] 2 QB 617. In the latter case, Lord Denning MR noted that the strictness of the common law rule had been mitigated by the broad equitable principle enunciated in Hughes v Metropolitan Railway Co. (1877) 2 App. Cas. 439 of which Lord Denning said, at 624: This principle has been applied to cases where a creditor agrees to accept a lesser sum in discharge of a greater. So much so that we can now say that, when a creditor and a debtor enter upon a course of negotiation, which leaves the debtor to suppose that, on payment of the lesser sum, the creditor will not enforce payment of the balance, and on the faith thereof the debtor pays the lesser sum and the creditor accepts it as satisfaction: then the creditor will not be allowed to enforce payment of the balance when it would be inequitable to do so. Here it was said that it was not inequitable to allow the petitioning creditor to maintain a claim for the larger debt because the smaller sum had not been paid and the debtor had been seriously in breach of the agreement to pay it by instalments. Alternatively, that agreement was said to be an "accord executory" which was never consummated by satisfaction as explained in McDermott v Black (1940) 63 CLR 161 and Scott v English [1947] VLR 445. In the latter case, Fullagar J observed, at 453: The question is likely to arise wherever a time is fixed for performance of the defendant's promise. In the present case, where a time is so fixed, if the compromise is a mere accord, the plaintiff could sue on the original cause of action at any time before acceptance of performance; he would not be bound to accept performance. If, on the other hand, the compromise is a new contract, he cannot sue on the original cause of action unless the time for performance has passed and there is no performance. But, if the time for performance by the defendant has passed and there is no performance, can he sue only on the new contract, the original cause of action being absolutely discharged by the new contract, or can he, at his option sue for breach of the new contract, or, rescinding the new contract, proceed on his original cause of action? The question, I think, is to be decided as a matter of construction of the new contract. In answer to the Bank's reliance on Foakes v Beer and the other cases to which I have referred, Mr Irlicht for the debtor referred to Central London Property Trust Ltd v High Trees House Ltd [1947] 1 KB 130 and invoked the concept of promissory estoppel as precluding the Bank, after it had made the compromise agreement, from relying on the original debt of $14,482.38 to found its petition. It has to be remembered that this Court is not concerned with enforcing payment by the debtor to the Bank of the original debt of $14,482.38. The curial foundation for enforcement of payment of that debt has already been laid by the judgment or order of the County Court of Victoria referred to in the bankruptcy notice. It was non-compliance with that bankruptcy notice which constituted the act of bankruptcy and enlivened this Court with jurisdiction under s. 43 of the Bankruptcy Act, on a petition presented by a creditor, to make a sequestration order against the estate of the debtor. Accordingly, the enquiry on which the Court is required to embark at the hearing of the petition is directed by s. 52(1)(c) to whether "the debt or debts on which the petitioning creditor relies is or are still owing". In my view, it is only if the compromise agreement can be said, in the events which have happened, to have extinguished the debt, that there would be lacking proof that the debt on which the petitioning creditor relies is still owing. I am not persuaded that at the date either of the issue or the hearing of this petition, the debt relied on by the Bank was not owing. The compromise agreement was clearly not effective, for lack of consideration, to extinguish it immediately upon the making of that agreement. Even construed as an "accord executory" in the sense discussed in Scott v English (supra), I consider that, on its proper construction, the compromise agreement effected only a conditional discharge, merely suspending the Bank's right to recover the original debt for the period allowed for performance of the compromise agreement. If, contrary to the view just expressed, it could be said that the original debt, and not merely the Bank's right to recover it, had been suspended by the compromise agreement, that suspension, I consider, was no longer operative on 7 February 1995. The letter from the Bank's solicitors of 4 January 1995 recited that the Bank "insists" on payment of each of the remaining instalments of $1,000 on the seventh day of each month from January to April 1995. That sufficed to make time of the essence of the compromise agreement in respect of each of those instalments. As Barwick CJ pointed out in Mehmet v Benson (1965) 113 CLR 295: A mere extension of time where a new date for performance is substituted for the contracted date does not result in time ceasing to be of the essence either for performance of the obligation in respect of which the extension is granted or in respect of the performance of other obligations: Barclay v. Messenger (1874) 30 L.T. 351, at p. 354; Solomons v. Halloran (1906) 7 S.R. (N.S.W.) 32, at p. 47; Tropical Traders Ltd. v. Goonan (1964) 111 C.L.R. 41, at pp. 53-55. But it is otherwise where one party by his conduct gives the other ground to believe that precise performance on time as contracted will not be insisted upon. The waiver which is constituted by such conduct may be simply as to the time for performance of one or more specific obligations or it may be as to the time for performance of all further obligations remaining to be performed at specified times. The extent of the waiver will be a question of fact in the circumstances of each case.

In the circumstances of this case there was a breach of the compromise agreement in respect of the instalment due on 7 January 1995 which, if waived at all, was not waived until after acceptance of the second cheque which occurred on 7 February 1995. However, on that very day there occurred a second breach in respect of the instalment due on 7 February 1995 which, as I find, was never waived by the Bank. Accordingly, on and from 7 February 1995 until service of the petition, the debtor was continuously in breach of the compromise agreement so as to entitle the Bank to treat it as at an end. I do not regard the tender by the debtor and acceptance by some employee of the Bank's solicitors of the sum of $3,000 on 17 May 1995 as amounting to an agreement by the Bank to reinstate the compromise agreement. It is unnecessary on this aspect of the case to determine whether some equitable principle analogous to promissory estoppel might, after 7 February 1995, have been available to dissuade a court from enforcing the original debt at the instance of the Bank. It remains to consider whether, in the exercise of its discretion, this Court should decline, notwithstanding proof of the matters enumerated in s. 52(1), to make a sequestration order. Bearing on this question is an issue raised in respect of the second alleged debt on which the Bank has been allowed to rely by reason of the insertion of paragraph 2B in the petition pursuant to the amendment granted by Northrop J on 5 July 1995. That paragraph, it will be recalled, alleges a debt in the sum of $57,236.20 due from the debtor and another under a guarantee. An affidavit sworn by Phillip Leslie Falla on 30 May 1995 and filed on behalf of the Bank discloses that a form of guarantee was executed by the debtor on 7 May 1987 and on 12 October 1988 a demand thereunder was forwarded by certified mail addressed to "Bruce Scott" requiring payment of $15,003.31 together with accrued interest and fees amounting in all to $15,210.10. Mr Irlicht pointed to the discrepancy between the name of the addressee of the letter of demand and the name of the debtor "Brian Scott" which corresponds with the name in both the body of the guarantee and its attestation clause. As well, it was pointed out that the demand was addressed to "Bruce Scott, C/- Security Planning International Pty Ltd, 298 Victoria Street, Richmond" which was the address shown in the deed of guarantee as that of the principal debtor whereas the address of Mr Scott as guarantor was shown as "44 Merryn Grove, Wantirna South". It was also suggested that there was some evidence that the demand as posted had been undelivered and returned to the Bank marked "Return to Sender". The guarantors' covenants under the deed of guarantee commenced with these words: The Guarantor hereby guarantees the payment by the Customer to the Bank upon service upon the Guarantor of the Bank's written request for payment under the hand of any of the Officers of the Bank or by the Solicitors of the Bank delivered personally to the Guarantor or any one or more of them (if more than one) or left or sent through the Post Office addressed to the Guarantor or any one or more of them (if more than one) at his or their place of abode or business or the place of abode or business of any of them last recorded in the books of the Bank (the production of the receipt of the Post Office for such request being conclusive proof of the service of any request so sent at the time when the same ought to be delivered in due course of post and although such request may be returned through the Post Office undelivered) or served in any other manner permitted by law... It was also submitted on behalf of the debtor that the debt due on the guarantee had become statute-barred from the date on which the company which was the principal debtor had "ceased to operate". That, Mr Irlicht contended, was more than six years before the commission by the debtor of the act of bankruptcy and more than six years before the issue or amendment of the petition. Mr Scott, the debtor, acknowledged that Security Planning International Pty Ltd had occupied offices at 298 Victoria Street, Richmond in May 1987 but had vacated them later in that year. He claimed, under cross-examination, to have learned only in December 1994 that the Bank was demanding payment under the guarantee. If 298 Victoria Street, Richmond had been, in October 1988, a "place of business" of the debtor or his place of business last recorded in the books of the Bank, it may be that the Bank's demand effectively complied with cl. 1 of the deed of guarantee so that the six year time limit stipulated by s. 5(1)(d) of the Limitation of Actions Act 1958 (Vic) started to run on 12 October 1988. Ms Strong for the Bank accepts that the analysis which I have just outlined of the effect of the statute of limitations is open, although she contends, in the alternative, that there may have been no effective demand under the guarantee until December 1994 or the amendment of the petition. However, in reliance on Motor Terms Co Pty Ltd v Liberty Insurance Co Ltd (1967) 116 CLR 177 she argued that a creditor's petition may be founded on a debt which became statute-barred after the date of the act of bankruptcy but before the presentation of the petition. In the Motor Terms Case the question for determination by the High Court was whether a debt due to a petitioning creditor which had become statute-barred after the presentation of a petition to wind up a company but before the making of a winding up order, could support the order. A majority of the High Court (Kitto J dissenting and Owen J expressing no opinion) held that it could. Taylor J at 191, after referring to Ex parte Ross (1827) 2 Gl. & J. 330, observed: However, since that time there has been a marked change in the provisions of the bankruptcy legislation dealing with the relation back and the commencement of the bankruptcy (see note Williams on Bankruptcy, 16th ed. (1949), p. 243) and I can see no reason why, if a debtor's property is to be expropriated as from the commencement of the bankruptcy, whether it be found in the hands of the debtor or in the hands of persons to whom he had disposed of it after the commencement of the bankruptcy, it is not reasonable to conclude it was intended that the trustee should be bound to admit the claims of creditors whose debts were not statute-barred at that point of time. This would, of course, include the claims of creditors, whose debts having been paid in full after the commencement of the bankruptcy and before they had become statute-barred, have been compelled to make a refund to the trustee at a time when their debts have become statute-barred. It seems to me that having regard, particularly to ss. 223, 226, 227 and 228 of the Companies Act, 1961, the same considerations are applicable to a winding up and that a creditor whose debt has not become statute-barred at the commencement of the winding up may prove in the winding up, notwithstanding that at the time of the making of the order his debt has become statute-barred unless it appears that after the commencement of the winding up it has been validly discharged. The learned authors of McDonald Henry & Meek, Australian Bankruptcy Law & Practice, 5th Edn. p. 1312 suggest that the reasoning in Motor Terms "would apply where the debt became statute-barred after the date of the act of bankruptcy". In the present case the act of bankruptcy occurred on 7 August 1994, well before the earliest date on which the debt due from the debtor under the guarantee could have become statute-barred. Mr Irlicht for the debtor pointed out, correctly, that the references in Motor Terms to principles of bankruptcy law were obiter and insisted that by application of s. 5 of the Victorian Limitation of Actions Act, any action which might have been brought by the Bank on the guarantee had become statute-barred in October 1994 after the expiration of six years. That having occurred before the making of a sequestration order, on Mr Irlicht's argument, there could be no debt to support the making of such an order and the position could not be saved by the doctrine of relation back. Further, Mr Irlicht argued that, if the existence of a debt depended on the giving of notice which so far had not been given, the Bank had not discharged the onus imposed on it by s. 44(d)(2) of the Bankruptcy Act of establishing a debt payable either immediately or at a certain future time. Because of my conclusion that the balance of the judgment debt of $14,482.38 was available to found the creditor's petition at the date of its issue, it is unnecessary for me to resolve the complex and interesting question of whether a debt which became statute-barred after the commission of an act of bankruptcy but before presentation of a petition is similarly available. Nor need I determine the underlying questions which would arise if the Bank were to seek judgment against the debtor on the guarantee or to prove for that debt in bankruptcy, of whether, and if so when, that debt became statute-barred. It is sufficient for the purposes of the exercise of the Court's discretion under s. 52 to acknowledge that, in addition to being owed the balance of the judgment debt, the Bank had, at the date of presentation of its petition, an arguably valid claim to recover from the debtor, or prove in his bankruptcy for, a debt in excess of $50,000. In this context, Mr Irlicht urged that the Court in the exercise of its discretion should refuse to make a sequestration order because the petition had been issued for the ulterior purpose of holding it over the debtor's head to compel performance of the compromise agreement. I am not able to make a finding attributing that purpose to the Bank. In the first place, the bankruptcy notice on which the petition was founded had been issued before any compromise agreement was proposed. Even after the delay in payment of the first monthly instalment due on 7 December 1994, the Bank did not threaten, in its solicitor's letter of 4 January 1995, to issue a creditor's petition although it must have been in the contemplation of the parties and their advisers that it would have to be issued by 8 February 1995 in order to rely on the debtor's act of bankruptcy in August 1994.

The debtor has not sought to discharge the onus cast on him by s. 52(2) of showing that he is able to pay his debts generally. However, the complete absence of evidence as to other creditors tells slightly in favour of exercising the discretion in favour of dismissing the petition because it is a reasonable inference that had other creditors been pressing for payment, the existence of their claims would have come to light in the period in excess of six years which elapsed after his company, Security Planning International Pty Ltd, became insolvent in 1987. The principal consideration which, on balance, has induced me to exercise the discretion in favour of dismissing the petition is the absence of explanation by the Bank as to why it declined to accept payment of the balance of $3,000 due under the compromise agreement when it was tendered on 17 May 1995. There is no suggestion that the cheque proffered on that day would have been dishonoured. Had it been accepted, the compromise agreement would effectively have been performed in accordance with its terms as outlined in the letter from the Bank's solicitors of 4 January 1995 although payment of the full amount due would have been over one month late. Had the Bank's refusal to accept that performance been actuated by a concern for interest foregone as a result of delays in making each of the five monthly payments on time, or because additional costs had accrued after 10 February 1995, the Bank could easily have said so and given the debtor an opportunity, before the hearing of the petition, to pay an additional amount in respect of reasonable interest and the additional costs if any had been incurred. In these circumstances, the inference remains open that the Bank, notwithstanding its recent readiness to accept a compromise of the judgment debt, had determined to press for a sequestration order because it regarded its prospects of recovering the much larger amount more dubiously due on the guarantee as better in an administration in bankruptcy than by endeavouring to obtain judgment for it against the debtor personally. In these circumstances, I have been persuaded, on balance, to exercise the Court's discretion by dismissing the petition. However, in light of what I have found to be the Bank's prima facie entitlement to present the petition, there should be no order as to costs.

I certify that this and the preceding sixteen (16) pages are a true copy of the Reasons for Judgment of his Honour Justice Ryan.

Associate: Date: Counsel for the debtor : Mr T. Irlicht Solicitors for the debtor : Irlicht & Broberg

Counsel for the petitioning creditor : Ms E.A. Strong Solicitors for the petitioning creditor : Blake Dawson Waldron

Date of Hearing : 29, 30 August 1995 Date of Judgment : 8 October 1996