WESTPAC BANKING CORPORATION v G.V. MORTON

IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION

JUDGES MAKING ORDER H BOWEN C.J., FORSTER and LEE JJ. DATE OF ORDER t 29 APRIL 1988 WHERE MADE 2 PERTH

Note: Settlement and entry of orders is dealt with in

IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION

BETWEEN: WESTPAC BANKING CORP. Appellant and G.V. MORTON

In 198C G.V. and D.P. Morton carried on business, apparently in partnership, as restaurateurs. During that year Mr.

and Mrs. Morton, were customers of a branch of the Westpac Banking

Corporation ("the Bank") and they borrowed funds from the Bank as

proprietors of and for the purpose of the business.

The Bank obtained security for the moneys advanced to the account of Mr. and Mrs. Morton jointly by receiving a grant of mortgage from G.V. Morton over real property owned by hin. The

Bank duly registered its charge on the certificate of title to the

It appears that at some time in 1981 the business foundered and a meeting of creditors of Mr. and Mrs. Morton was convened on 12 January 1982 by a registered trustee ("the Trustee") authorised so to act by the debtors under s.188 of Part

Pursuant to 5.195 of the Act and r.100E of the Bankruptcy Rules, Mr. and Mrs. Morton were obliged to submit to the meeting of creditors a statement of their joint affairs and a

The meeting of creditors held on 12 January 1982 considered a proposal from the debtors, described as a Proposal for Composition. The proposal made by the debtors did not distinguish between creditors of the joint and separate estates of

the debtors. Perhaps all creditors were partnership creditors, thereby removing the need for a separate vote on the proposal

pursuant to r.100F and r.100C of Part IXA of the Bankruptcy Rules.

The proposal placed before the meeting of creditors was

"We, Gary Vincent and Darralyn Peta Morton formerly trading as "Whitby Falls Coach Restaurant", both of 2 Marsden Way, Padbury, Western Australia, do hereby make the following proposal for a composition in full settlement of our debts and covenant as follows:-

1. That Maurice Alexander Levi (hereinafter called the Trustee) be trustee of this composition having the

rights powers privileges and duties conferred upon him by part x of the Bankruptcy Act 1966 and all other powers him thereunto enabling.

a period of 3 years. The first payment will commence Tuesday 19th January 1982, thereafter to be made weekly.

(a) Apply all funds held in Trust by the solicitors, Messrs Warren, McDonald, French and Harrison of 63,019.89, to the debtors estate, and to be made available to creditors.

The trustee will distribute monies received pursuant to clause 2 and 3(a) hereof at such time or times as he shall in his absolute discretion think fit in the following manner:

(a) In payment of the costs, charges, remuneration and expenses of the trustee of an (sic)

incidental to the administration of this composition and

(b) The balance in payment to creditors of the debtors in accordance with the priorities stated in section 109 of the Act Preferential creditors for wages and group tax will be paid in full. Whereas unsecured creditors will be paid pro-rata according to the amount of debts due and owing to then. The amounts distributed, will at the end of 3 years he

considered as full satisfaction for the debts owing.

The trustee and his staff shall be entitled to he remunerated for their services as trustee on the basis of an hourly rate for time spent.

The debtors do covenant and agree that if clause 2 of this composition is not complied with at any time then the trustee will call a creditors meeting with a view to terminating the composition.

This composition is binding on the creditors in accordance with section 233 of the said Act.

This composition is made pursuant to part X of the Bankruptcy Act 1966."

The reference to 5.233 of the Act initem 7 of the proposal was an error. Section 233 makes deeds of arrangement binding on all creditors. Section 238 of the Act is the

The meeting duly resolved to accept the proposal for

It 15 not apparent whether the Bank voted at that meeting of creditors and if so, whether it furnished to the chairman of the meeting particulars of the security it held

against the separate estate of G.V. Morton and an estimate of the

Pursuant to sub~ss.198(5) and (6) of the Act, a secured creditor is not entitled to vote unless he surrenders his security

or provides the chairman with written particulars of the security

Section 5 of the Act defines a secured creditor as, "a person holding a mortgage, charge or lien on property of the

debtor as a security for a debt due to him from the debtor."

In bankruptcy the joint estate and separate estate of a

debtor are considered as distinct estates - see s.110 and Pt. IXA

of the Bankruptcy Rules- and a partnership creditor having

security over the separate estate of a debtor partner may prove

its debt against the joint or partnership estate without being

obliged to value or relinquish its security. See Ex parte West

Riding Union Banking Co. (1881) 19 Ch.D. 105 per Jessel M.R. at

pp.112-113; Rolfe and The Bank of Australasia v. Flower, Salting

and Co. C186531 L.R. 1P.C. 27 at 46; In re Rushton; Ex parte

National Westminster Bank Ltd. v. Official Receiver £1972] Ch.

197; Ex parte Peacock (1825) 2 Gl & J.27; Ex parte Bowden (1832) 1

Deac. & Ch. 135; In re Dutton, Massey & Co. £19243 2 Ch. 199 per

Pollock M.R. at pp.208-210; Atkin L.d. at pp.211-212; Sargant L.J. at pp.212-213. The reason for such a rule is that the realization, or the giving up, of the security over the separate

estate would not augment the joint or partnership estate in any

It would appear, therefore, that the Bank was entitled to vote on the proposal for composition submitted by Mr. and Mrs.

Morton without surrendering its security or estimating the value

It should be noted that s.243 of the Act does not expressly apply the provisions of s.110 to compositions made under Pt.X of the Act whereas it is made 50 applicable to deeds of assignment (5.231) and deeds of arrangement (5.237). It may have been considered unnecessary to state that s.110 applied to a composition being an arrangement between the creditors and a debtor pursuant to which the debts of the debtor would be

immediately compounded either by the payment of the debts in full

or by payment of a sum, or delivery of property, fora lesser amount or value than the amount of the debt. If the creditors accepted the proposal and entered a binding composition the trustee of the composition would not be required to make any decision as to how the respective joint and separate estates of a debtor would be distributed to comply with the provisions of s.110. The proposal for composition would necessarily involve a suggested division between creditors of the assets of the joint

estate and separate estate and each of the creditors of the

respective joint and separate estates would have to determine whether the proposal was in its interests or represented an improper allocation of the assets of the respective estates. As set out above there must be a separate vote by joint creditors and separate creditors on a proposal for composition and joint debtors are required to submit statements of their joint affairs and of their separate affairs respectively to the meeting of joint estate and separate estate creditors called to consider a proposal for

After the meeting of creditors had resolved to accept the proposal of composition the trustee of the composition apparently proceeded to duly administer the composition by receiving the payments due from the debtors under the composition between 1982 and 1985. Those payments augmented other funds held to the account of the debtors. A single and entire distribution of all funds remaining after payment of costs and charges was made

to creditors in satisfaction of the composition on 20 August 1985,

the debtors having met all the obligations undertaken in the

The trustee later issued a certificate pursuant to 68.243A of the Act stating that the terms of the composition "executed" on 12 January 1982 by the debtors had been carried out

on 20 August 1985 - the date of distribution of all monies held by

Section 238 of the Act states that a composition accepted by a special resolution of a meeting of creditors is binding on all creditors of the debtor. Section 240 states that a

composition operates to release a debtor from all provable debts

other than those that would not be released by a discharge from bankruptcy if the debtor had become bankrupt on the day the composition was accepted. There is no such release for a debtor by execution of a deed of arrangement under Pt.X of the Act but

there is a like release upon execution of a deed of assignment

The release of the debtor from all provable debts under 5.240 is subject to the composition being set aside (5.239),

declared void (8.222) or terminated (55.241 and 242).

To that extent the release is subject to a condition subsequent. However, on the facts of this case the Court can no

longer make an order declaring the composition to be void, the

final payment having been made under the composition (sub-s.222(6)). Furthermore, the time within which a creditor may apply to the Court to set aside the composition has long since expired (sub-s.239(1)) and it 12s unlikely that the Court has any power to extend that time under sub-s.33(1)(c) having regard to the express limitation in time imposed in sub-s.222(6) upon the power of the Court to declare the composition to be void for more serious matters of fraud and nondisclosure. In addition there 15 no longer power for the creditors or the Court to terminate the

composition pursuant to ss.241 and 242, the composition having

In these circumstances the release is no longer subject

The release of a debtor from all provable debts under 5.240 1n consequence of the acceptance of a composition is of Similar effect to the release of a bankrupt upon discharge from bankruptcy provided for in 5.153. A discharge from bankruptcy Operates to release a bankrupt from all debts, including secured debts, provable in the bankruptcy whether or not the secured

Sub-section 240(1) does not expressly refer to secured

debts in the same manner as sub-s.153(1) but it is a necessary implication of sub-s.240(2) that secured debts are otherwise

released except to the extent that they are saved by that

sub-section. The saving provisions with regard to secured debts contained in sub-s.153(3) are aidentical to the provisions of

Whether or not the Bank as a creditor of the partnership was obliged to furnish particulars of its security over the separate estate of G.V. Morton, 1t did so in the proof of debt it lodged with the trustee dated 18 January 1985. As discussed above, it may already have done so pursuant to the provisions of 5.198 of the Act prior to the meeting of creditors. If it did, s.207 of the Act prevented the Bank from estimating the value of the security for the purposes of proving its debt under the composition at any other amount than that which was specified for the purpose of obtaining the right to vote at the meeting, unless the Court approved such a variation of the estimated value. Section 90, contained in Pt.VI Div.1l relating to the proof of debts, stipulates that a secured creditor is entitled to prove the whole or part of the secured debt in the debtor''s bankruptcy in accordance with the succeeding provisions of the Division and not otherwise. With regard to compositions under Pt.X, the secured creditor's entitlement to prove its debt will also be subject to 5.207. The provisions of 5.207 are express provisions in respect of secured creditors for the purposes of Pt.X of the Act and although 5.243 stipulates that general provisions relating to secured creditors contained in ss.90-92 are applicable to compositions made under Pt.X, the provisions of 5.207 would

A provable debt in a composition referred to in 5.240 1s defined in s.82. Section 82 1s applied to compositions by s.243, as modified by r.84. It includes all debts and liabilities to which a debtor would have been subject as a bankrupt if a sequestration order had been made against the debtor on the day on

which the special resolution accepting the composition was passed.

The monies advanced by the Bank to Mr. and Mrs. Morton

were, therefore, a provable debt in the composition.

The options available to the Bank were as follows:-

1. It could have maintained that it was an unsecured creditor and proved in the composition for the whole of the debt owed by Mr. and Mrs. Morton and retained the full benefit of the security granted by G.V. Morton.

2. If the Bank regarded itself as a secured creditor it would have had the option of:

(a) Standing out of the composition and relying on the security to obtain payment of as much of

the secured debt as may be provided by realization of the security. The debtors

not met by the proceeds of realization of the security (sub-s.240(2)(a)).

(b) Surrendering its security to the trustee and proving in the composition for the whole of its debt (sub-s.90(2)).

(c) Realizing its security and proving in the composition for any balance of the debt remaining (sub-s.90(3)).

(d) Estimating the value of the security and proving in the composition for the balance of the debt remaining after deducting the estimated value of the security (sub-s.90(4)), and retaining the right to realize the security for the purpose of obtaining payment of that part of the debt for which it did not prove in the composition, mamely the amount deducted for the estimated value of the security (sub-s.240(2)(b)).

The Bank chose the latter course. The trustee took no steps under s.207 or s.91 to redeem the security for its estimated value and the creditor did not require the trustee so to act as it

The Bank estimated the value of its security to he $1,000.00 at the time it lodged its proof of debt. The amount of the debt owed to the Bank by Mr. and Mrs. Morton as at 12 January 1982 was 68,164.23. After giving credit for the estimated value of the security of $1,000.00, the Bank, by lodging its proof of debt, sought to participate in the composition as an unsecured creditor to the extent of $7,164.23. The trustee accepted that proof of debt and in due course, on 20 August 1985, the Bank was paid the

sum due to it under the composition in respect of a debt of

Pursuant to 5.240, Mr. and Mrs. Morton have been released from the debt due from them to the Bank as joint debtors, but the Bank retains the benefit of the security for the limited purpose permitted by sub-s.240(2)(b), namely, to realize or deal

with the security for the purpose of obtaining payment of that

part of the secured debt for which proof was not lodged in the

The Bank has treated the debt as a secured debt in the joint estate of Mr. and Mrs. Morton and it cannot now treat the security as security for a debt due in the separate estate of G.V. Morton, notwithstanding that the debt may arise from covenants

Whatever the reason may have been for the security being included in the joint estate, the Bank did s0 include it and it would not be proper for the Bank now to seek to rely upon the security to its full value as a separate security provided by G.V Morton. (See Couldery v. Bartrum (1881) 19 Ch.D. 394 per Haggallay

On the 18 January 1987, G.V. Morton sold the property over which the Bank had been granted its mortgage. At settlement of the sale the Bank maintained that a sum of $13,147.53 was payable to the Bank before G.V. Morton was entitled to call for a discharge of the Bank's mortgage. That sum was said to be comprised of the remainder of the principal debt of $6,534.91 and interest accruing until 10 February 1987 of $6,502.62 and fees of $110. The Bank's security was a second mortgage but the price obtained on sale in January 1987 was sufficient to discharge the first mortgage and to meet the amount for which the Bank claimed

security under its second mortgage. Settlement was effected by

placing the sum of $13,147.53 on deposit with the Bank to await

That litigation involved an application by G.V. Morton in the bankruptcy jurisdiction of this Court seeking a declaration that the applicant was "indebted ta the Respondent (Bank) in the sum of $1,000.00 together with interest thereon". In addition,

the Bank made application in the bankruptcy jurisdiction of this

Court seeking an order that the Bank be granted leave to amend its

proof GE" debt dated 18 January 1985 by deleting the estimated

varus Signe security therein of 61,000.00 and inserting by way of is ghee

he position of the trustee and his interest in the Led applicatipns may have been uncertain.

Pursuant to sub-s.204(4) and s.215 it was necessary for

the creditors to appoint a trustee of the composition and for the

e duties of such a trustee are partly found in the Pt.X and are otherwise derived from the application the provisions applicable to trustees of bankrupt

M-section 243(3) states that the provisions of 55.175,

183 and 184, inter alia, are to apply to compositions under Pt.x subject to any modifications prescribed in the Bankruptcy Rules.

No modifications are so prescribed. Sub-section 243(4), however, qualifies sub-s5.243(3) by stating that if a provision specified in

sub-s.243(3) is incapable of applying to a composition, it has no

Section 183 permits a trustee of a bankrupt estate to apply to the Court to be released from trusteeship and one of the grounds on which the Court may make such an order 1s where it 15 satisfied that the trustee has ceased to act by reason of the

approval of a composition under Div.6 of Pt.IV of the Act.

Section 184 provides that if a registered trustee has not been released from trusteeship by such a court order under 6.183 and has furnished the final account required by the Act, he is to be automatically released from trusteeship upon the

expiration of seven years from the date on which the final account

Section 175 requires the trustee of a bankrupt estate to furnish an account of receipts and payments in respect of the estate forthwith after the final dividend has been distributed. The provisions of Pt.X do mot make any other provision for accounts to be filed by the trustee of a composition. Part X does make such provisions with respect to the controlling trustee who controls the property of a debtor until a deed of arrangement or

assignment is entered into or a composition is accepted.

It is appropriate to construe s.175 as imposing an obligation on a trustee of a composition under Pt.X to file final accounts in respect of the administration and completion of the composition and as investing the Registrar with a supervisory

Although a trustee of a composition may have ceased to act, as far as the parties of a composition are concerned, after the composition has been completed, as a registered trustee he will have a continuing obligation under the Act to account for his

trusteeship and to submit that trusteeship to audit if required to

It does not appear on the papers before the Court that the trustee obtained an order for his release under 5.183 and it may be assumed thz' he has retained his trusteeship and remained

subject to the provisions of ss.175 and 184 of the Act.

The applications came on for hearing before Spender J. who found that the Court had no power to amend an estimate of value of the security after the obligations imposed on the debtor and trustee under the terms of a composition entered into under Pt.X had been fully satisfied. The Bank appeals from that decision. Its principal contention on the hearing of the appeal was that a proper construction of s.92 of the Act permitted the

Court to amend the proof of debt as to the estimated value of the

security, notwithstanding the completion of the composition and that it was proper in the circumstances of this case, that the

Court should make the amendments sought by the Bank.

"92(1) Where a secured creditor has lodged a proof of

debt in respect of the balance due after deducting the

estimated value of his security, he may, at any time,

apply to the trustee or the Court for permission to

amend the proof of debt by altering the estimated value. (2) If the trustee or the Court 1s satisfied -

(a) that the estimate of the value of the security was made in good faith on a mistaken basis; or

(b) that the value of the security has changed since the estimate was made,

the trustee or the Court may permit the creditor to amend his proof of debt accordingly.

(3) Where the Court permits a creditor to amend his

proof of debt, it may do so on such terms as it thinks just and equitable."

The Bank relies upon the words "at any time" and contends that a proper construction of s.92 requires a conclusion that a secured creditor 15 given a right of unlimited duration to

amend a proof of debt lodged in a composition and thereby reopen a

We are unable to agree. Section 92 in so far as it is made applicable to the provisions of Pt.X by 5.243 is to be read in the context of the various provisions which make up the framework of Pt.X permitting arrangeuents between creditors and debtors without sequestration and which display a particular

It 1s difficult to conclude that the words "at any time" are intended to give a secured creditor an unlimited right to apply to the Court to amend a proof of debt when the effect of a successful application, after a composition has been completed, would be to alter vested rights obtained by debtors and creditors upon completion of the composition and would amount to a further qualification on the nature of the release of the debtor from all provable debts provided in 5.240 when the express qualifications on release provided in sub-s.240(1) are very limited indeed. The fact that the Court is unable to make an order declaring the composition to be void after a final payment has been made in the composition notwithstanding that a debtor may have given false or misleading information to creditors at the meeting at which the resolution accepting the composition was passed, or may have omitted material particulars from the statement of affairs submitted to creditors at that meeting, is a clear indication by

the legislature that there is to be finality and certainty to flow

In addition the words "at any time" do not stand on their own in 5.92. They are repeated in 5.91 where the trustee is empowered "at any time" to redeem the security and the creditor is empowered "at any time" to require the trustee to elect whether he will exercise the power of redeeming the security or requiring it to be realized. It 1s evident that these words are intended to

provide rights to the trustee and creditor respectively in the

course of the composition and prior to its completion. Upon satisfaction of the composition, the trustee's duties to the creditors and debtor are complete. He has no other role to fulfil other than to issue a certificate if requested to do so by the debtor, to state that he 1s satisfied that the terms of the

composition have been carried out (s.243A) and to furnish a final

In addition, s.93, which deals with the consequences of a proof of debt being amended pursuant to 5.92, speaks of the repayment of excess dividends to the trustee and of monies being available for distribution as future dividends. It is apparent that the section is speaking prospectively and is based upon an assumption that the amendment of the proof of debt has taken place in the course of the composition and prior to its completion and

Similarly, s.94 which provides for the substitution of the actual value of the security for the estimated value upon realization of the security, and the consequential amendment of the proof of debt, must relate to an uncompleted composition as far as its application to Pt.X is concerned and it can have no application to the realization of a security pursuant to the provisions of sub-s.240(2), effected after the composition has

been completed, the security having been preserved for the Limited

Counsel referred to various cases in support of his argument but none related to variation of a proof of debt after a

composition had been completed and counsel advised that his

In In re Sadler; Ex parte Morris (1886) 17 QBD 728 where

the rules of the Bankruptcy Act 1883 under consideration were in Similar terms ta 5.92 of the Bankruptcy Act 1966 the creditor was

given permission in the course of administration of the bankruptcy

to amend the nominated value of the security set out in the proof

It may be noted that Lord Esher M.R. at p.731, stated that it could not be doubted that the words "at any time" were to have some limitation and one necessary implication of limitation was that the creditor's right was at anend after the trustee exercised his right to redeem the security for the value nominated

creditor was permitted to amend the proof of debt when the trustee sought to redeem the security at its originally nominated value in

In re Becher £19443 1 Ch. 78 was concerned with the

administration of an insolvent deceased's estate and although a

number of years had elapsed after the commencement of

administration and before the creditor was given leave to amend

the valuation of the security and the proof of debt, the estate

remained under the continuing control of an executrix and was

bankruptcy. The creditor was given permission to amend the proof

Receiver (1950) 16 ABC 96 involved administration of an insolvent deceased estate. The administration of the estate was continuing and the administrator was still carrying out his duties when the creditor sought to amend its proof of debt. Again the

circumstances are not equivalent to a completed composition.

In the case of In re Safety Explosives Limited £1904] 1

Ch.226, Stirling L.J., noted that amendment or withdrawal of a proof is not a matter of right but 28S subject to the control of

the Court and leave ought not to be given where the position of

all parties has been altered in the interim (at p.236).

In Re Patrick (1935) 8 ABC 124 there was a iate application by a creditor under a deed of assignment for leave to vary the estimated value of the security and to amend the proof of debt. Although the period of time that had elapsed between the

date on which the value of the security had been estimated and the

date on which application was made was almost four years, the deed of assignment had not been completed by the payment of a final dividend because of delay in realization of a major asset of the estate. There was no question of a right to amend having been lost because of new rights established in the debtor or other

In Couldery v Bartrum (supra) the creditor was refused leave to amend the proof of debt by substituting another value for the security and in the course of their judgments Baggallay L.J. and Lush L.J. expressed the view that it was inappropriate to grant such leave after the close of a composition, whereas a creditor might be allowed to alter a proof of debt during pendency

of such proceedings. (See Baggallay L.J. p.406 and Lush L.J. pp. 406-407.)

It is our view that in the instant case the Court had no power to vary the proof of debt after completion of the composition. If we are wrong in that view and the Court did retain such a power, the exercise of that power would have been a matter of discretion and having regard to the equities of this case, it would have been inappropriate to exercise that discretion

There is no doubt that pursuant to sub-s.92(2)(b) the Court would have been satisfied that the value of the security had

changed since the Bank's estimate of that value had been made, but

the Court would have been required to have regard to other considerations before exercising its discretion to grant leave to amend, including the fact that the composition had been completed, and having regard to those other matters it is our view that it is improbable that a Court could have been persuaded that it was just and equitable to exercise its discretion in favour of the

applicant creditor after due consideration of those additional

Firstly, notwithstanding that pursuant to 5.238 the composition was binding on all creditors upon the acceptance of it by the meeting of creditors the Bank, after the acceptance of the composition, required the debtors to adhere to arrangements made between the Bank and the debtors before the debtors had authorised the trustee to call a meeting of creditors under Pt.X and to further arrangements made between the Bank and the debtors subsequent to the acceptance of, and outside the terms of, the composition pursuant to which arrangements the Bank was to receive

payments from the debtors in reduction of the debt due to the Bank.

A statutory result of the acceptance of the composition was the creation of an accord between creditors to accept only the sum offered by the debtors in satisfaction of their respective

By accepting the composition the debtors and the creditors had concurred in, or had been statutorily bound by, an

arrangement to turn the existing debts into respective rights of proof against a fund to be accumulated and distributed by the trustee of the composition, and otherwise to discharge those debts by release. The rights of the creditors were fixed as they existed at the time of acceptance of the proposal for composition. (See Mackenzie v Rees (1941) 65 CLR 1 per Dixon J.at p.18.) The composition having been accepted, it would be wrong for the debtor to prefer any one of those creditors by further arrangements

unless such arrangements were the subject of acquiescence or

consent by the other creditors. (See Re Jacobs (1984) 53 ALR 93.)

The Bank was unable to rely on any arrangements made between itself and the debtors, either prior to or subsequent to the acceptance by the creditors of the composition under Pt.X, to

receive further payments from the debtors in reduction of the debt due to the Bank.

That was so whether or not the Bank voted on the proposal for composition; whether or not the Bank proved in the composition in respect of its provable debt; and whether or not

the Bank decided to regard itself as a secured creditor relying

entirely on the security it held for payment of the debt.

Upon acceptance of the composition, and subject only to 1ts due completion, the debtors were released from all provable debts (sub-s.240(1)) and thereafter the Bank was only entitled to receive payments in reduction of the debt from such distribution as was due to it under the composition in which 1t proved together with such sum a5 was recovered on realization of the security in

respect of that part of the debt for which the Bank had not proved

The debt due to the Bank was an interest bearing debt and as at the date of acceptance of the composition, 12 January 1982, the amount due to the Bank was a composite debt of principal and interest. Pursuant to sub-s.89(2), made applicable to compositions under Pt.X by sub-s.243(1), the estimate of the value of the security of $1,000.00 would have deemed to have been apportioned to principal and interest in the same proportions that

the principal bore to interest in the whole debt due to the Bank

According to the statement of account filed by the Bank with its proof of debt, the amount of principal appears to be

approximately $7,890.00 and accrued interest between 1 October

1981 and 12 January 1982 appears to be approximately $270.00.

The statement of account appears to have been calculated

by reducing the applicable interest rates of 16.5% and 13.5% to

12% presumably upon consideration of the terms of 5.112 of the Act

which prevents a creditor from receiving a higher rate of interest than 12% unless there 1s a surplus in the estate of the bankrupt.

Section 243(1) does not apply the provisions of 5.112 to

The question arises as to whether the Bank may claim interest pursuant to the terms of its interest bearing debt, such a provision surviving the release of the debt occurring upon the

As a matter of justice and convenience, the provisions of s.82 relating to provable debts have been taken not to include interest on interest bearing debts for any period subsequent to bankruptcy. Pursuant to 5.243 and r.84, which modifies sub-s.82(1) for the purpose of compositions under Pt.X, the application of that rule is even more clearly appropriate with respect to such compositions. Interest accruing subsequent to the date of acceptance of a composition is incapable of being proved in the composition and is only capable of being proved against a surplus in a bankrupt estate or a surplus arising under a deed of arrangement or ass51gnment. (See Mackenzie v Rees (supra) per Dixon J. at pp.8-11.) The general rule is that in the absence of a surplus there is no ability to prove for interest for any period subsequent to the bankruptcy and the rule applies whether the interest is on a secured or unsecured debt. (See Re _ Vellinagel; Whiteman v Hanson (1975) 6 ALR 80 per Burt J. at p.8l.) The rule is now expressly stated in sub-s.82(3B) inserted by the Bankruptcy Amendment Act 1987 (5.39).

By the operation of s.240 all provable debts are released upon the acceptance of the composition and with that release the accrual of interest would also cease. The saving Provision in sub-s.240(2) allowing a secured creditor to realize the security is a provision which allows the creditor to realize or deal with the security for the purpose of enabling the secured creditor to obtain payment of that part of the secured debt which was not proved in a composition, but not otherwise. It as arguable that an interest bearing debt may continue to accrue interest on that part of the debt which has not been proved in the composition and the security may be realized for obtaining payment of the remainder of the debt not proved in the composition and interest accruing on that portion subsequent to the acceptance of the composition. A better view would be that no such interest accrues on the deemed remainder of the debt and notwithstanding that a surplus may be obtained upon realizing or dealing with the security the surplus would not be available to meet any claim for

interest on a debt released by acceptance of a composition under

The Bank received approximately $1,697.00 1n payments made by the debtors subsequent to the acceptance of the

composition and outside the terms of the composition.

Those moneys were improperly paid by the debtors and, furthermore, in the absence of any entitlement to interest, are in excess of the sum the creditor would have been entitled to obtain

by realisation of its security pursuant to sub-s.240(2) of the

The creditor's action in requiring such payment to be made would disentitle the Bank from requesting the Court toa

exercise its discretion in equitable terms in favour of the

Furthermore, certain rights have become vested in the debtors as a result of the acceptance of the composition and its due completion. Pursuant to the provisions of Part X of the Act, they have been released from provable debts subject to the right of the Bank to realise its security for the amount which it has not proved in the composition and the debtors have been entitled to rely upon those rights as the bedrock for construction of their future financial affairs. A Court should be reluctant to

interfere with such rights, if it has a discretion todo 50,

His Honour, the primary judge, held that the Court had no power to amend the estimate of value after the composition had been completed and for the reasons set out above, we agree with his Honour's conclusion and, furthermore, we are of the opinion that if the Court has a discretion to grant leave to amend the

estimate of value it would be inappropriate to grant such leave.

I certify that this and the preceding twenty seven (27) pages are a true copy of the

Solicitors for the Appellant: Messrs Parker & Parker