MACKENZIE v REES
65 CLR 11941 - 0728A - HCA
(Judgment by: DIXON J)
Between: MACKENZIE
And: REES
Judges:
Rich ACJ
Dixon JMcTiernan J
Williams J
Subject References:
Bankruptcy
Interest-bearing debt
Entry into deed of arrangement
Whether debt revived
Claim for interest
Legislative References:
Bankruptcy Act 1924 No 37 - s 60(2); s 81; s 84(5); s 89; s 112(1); s 116(2); s 118; s 121(2)
Bills of Exchange Act 1909 No 27 - s 62
Judiciary Act 1903 No 6 - s 23(2)
Judgment date: 28 July 1941
SYDNEY
Judgment by:
DIXON J
This is an appeal under s. 26 (2) of the Bankruptcy Act 1924-1933 from an order made upon an application for directions under s. 105 (i) by a trustee of a deed of arrangement. The realization of the estate produced a surplus over the amount of the proved debts, and the material question upon which the trustee sought directions is whether out of the surplus certain creditors holding promissory notes should receive interest upon the amount of their debts for the time being unpaid, calculated with respect to the period between the time when the deed of arrangement took effect and the time when the final dividend was paid.
Philp J., who heard the application, directed that, upon proof by such creditors holding overdue promissory notes for damages for interest (scil., under s. 62 (a) (ii) of the Bills of Exchange Act 1909-1936), the trustee should compute the damages for interest at the rate of five per cent per annum on the whole of each debt up to the time of the first dividend, and then subtract the amount of that dividend and compute interest on the balance until the next dividend, and so on, and when the total damages had thus been calculated for each creditor, he should share ratably with the others in the surplus up to that amount.
The debtor appeals from the order upon the ground that he is entitled to the surplus over the debts proved and ascertained as at the date when the operation of the deed commenced without any allowance to the creditors in question on account of intermediate interest.
Although the order is expressed in general terms, we need concern ourselves with one creditor only, namely, the respondent Thomas Brown & Sons Ltd That creditor was at the time of the deed the holder of a promissory note made by the debtor for PD5,062 with a currency of twelve months, of which some five weeks were still to run. The note had been given by the debtor in pursuance of an arrangement with some of his creditors by which they were to give him twelve months credit free of interest, he giving them promissory notes. It appears that the original debt upon which this particular note was founded bore interest, probably at seven per cent per annum.
The deed of arrangement, which was duly registered, contained a clause by which the creditors and each of them thereby released and discharged the debtor from all debts and liabilities due, owing or incurred by the debtor to them or any of them, which under the Bankruptcy Act would have been provable under his bankruptcy had he been adjudicated bankrupt on the day of the date of the deed. The trusts of the deed required the trustee, after payment of costs, charges and expenses and of certain preferential claims, to pay and apply the proceeds of realization in paying to the creditors, by such dividends and at such times and in such amounts as the trustee should deem expedient, 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 law of bankruptcy. The trusts required him lastly to pay the surplus, if any, to the debtor.
It appears to me, upon the terms of this deed, that the question whether the creditor, Thomas Brown & Sons Ltd , is entitled to receive interest for the period beginning with the date of the deed depends upon the answer to the further question, whether the demand for that interest is such a debt or claim of the creditor as would by the law of bankruptcy be entitled to rank for dividend upon the estate of the debtor.
The deed differs in its operation from the law of bankruptcy inasmuch as, in respect of the entire liability of the bankrupt to the creditor, it effects a discharge which is immediate and is not left to the end of the liquidation: Cf. Bankruptcy Act, ss. 121 (2) and 60 (2). But, while this must be borne in mind, the general principle of the deed is to give to creditors the same claims against the estate as they would have in bankruptcy.
It has been a principle of English bankruptcy law, since the time at all events of Lord King, that no proof should be allowed for interest accruing after the commencement of the bankruptcy, even upon interest-bearing debts (Viner's Abridgment, vol. 7, p. 110, Lord King; Ex parte Bennet, [F8] Lord Hardwicke. But if there were a surplus then intermediate interest might be allowed as against the debtor. If, according to the tenor of the obligation, a debt bore interest, the debtor could not obtain the surplus until interest accruing after the commencement of the bankruptcy had been met thereout (Bromley v Goodere [F9] ).
The rule and the qualification had their origin in the fact that the earlier bankruptcy laws excluded future debts alike from proof against the assets and from the relief those laws gave the debtor by the discharge of the debtor's accrued debts. Future interest not accrued at the act of bankruptcy or other commencement of the bankruptcy was not a debt provable, and therefore interest stopped at that event for the purposes of proof. Correspondingly, the debtor was not discharged from his liability to such interest, and it was therefore equitable that it should be deducted from the surplus before it was paid over to him: Cf. Ex parte Mills, [F10] Lord Loughborough. But afterwards changes were made in the statutory provisions, and the reasons for the rules about interest were placed on quite different grounds.
The principal rule, namely, that excluding intermediate interest from proof, came to be regarded as a rule of convenience in administration, as a practice of the Court of Bankruptcy designed to secure equality and justice among creditors where there was a deficiency. Thus, in Ex parte Kensington; Re Lancaster, [F11] at p. 305, Sir George Rose says:
"The rule that interest stops at the bankruptcy is not a rule of law nor of equity; it is the practice in bankruptcy, adopted for convenience, as any other course might lead to many difficulties."
In Re Browne & Wingrove; Ex parte Ador, [F12] Lindley L.J. says:
"The rule which prevents proof for future interest is not a positive enactment, it is rather a rule of convenience."
The principle is accepted in the United States of America, and the foundation upon which it rests as a necessary principle in the administration of the estate is well stated in Re Kallak, [F13] at pp. 277, 278:
"There are two reasons why ordinary claims of creditors are not permitted to draw interest subsequent to the adjudication: First, it is important that the proportionate interest of the several creditors in the estate be ascertained and fixed. If interest were to accrue, however, after the adjudication, the amount of the several claims would vary from time to time, according to their respective rates of interest and the proportionate share of the several creditors would be subject to constant readjustment. The second reason is the convenience of administration. If, at the declaration of every dividend, a new basis of apportionment were required, depending on varying rates of interest, the administration of the estate would be seriously complicated."
In Chemical National Bank v Armstrong, [F14] Taft C.J. (then a Circuit Judge) discussed the principles which, in his view, 0resulted from the distinction between, on the one hand, the claim of the creditor in reference to the sequestered assets of the debtor and, on the other hand, the debt against the debtor:
"The amount of the claim as proven is a mere measure of the creditor's right and interest in the fund realized from the assets. ... As against the insolvent bank the debt of the creditor continues to bear interest. As against the assets, interest is calculated only to the date of the suspension and the vesting of the title of the assets in the receiver. ... Upon the transfer of the assets by operation of law to a trustee for creditors, the rights of creditors in the assets are fixed, and are to be determined as of that date, and are not affected by what may subsequently affect the debt by reason of which they acquire their interest therein, subject always to the limitation that the amount to be received by them from all sources shall not exceed their original debt and interest" [F15]
See, further, White v Knox, [F16] and Johnson v Norris. [F17] In the latter case the court discusses an objection that the subsequently accruing interest should not be paid, because it has never been proved as a debt. "We do not think this objection is sound. The proof of an interest-bearing claim is proof of the interest collectible on such claim. Interest is an incident of, or a part of, the debt, and no separate proof of it is required." The principle which stops interest upon debts for the purposes of proof upon assets, so that the rights of creditors may be equitably adjusted, but allows it to run on as a claim upon a surplus, has been applied in the winding up of companies: See Warrant Finance Co 's Case. [F18]
The principle has long received statutory recognition and, to some extent, expression: Cf. 6 Geo. IV. c. 16, s. 132; 12 & 13 Vict. c. 106, s. 197; rule 77 of Bankruptcy Rules 1870 under 32 & 33 Vict. c. 71; 46 & 47 Vict. c. 52, s. 40 (5); and 4 & 5 Geo. V. c. 59, s. 33 (8), and cf. s. 66. But the Commonwealth Bankruptcy Act 1924-1933 contains no analogous provisions. Indeed, some difficulty may be felt in reconciling the operation of the principle as part of our law of bankruptcy with the express language of some provisions of the Act. But it is possible, I think, to give effect both to the principle and to the form in which the legislation is cast by treating the principle as one determining the order in which debts are to be discharged in the course of administration; that is, by accepting the more modern view that the rule is one of justice and convenience, as opposed to the earlier view that it 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 s. 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, s. 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. Section 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. Section 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 s. 40 (4) of the English Bankruptcy Act 1883, and yet, by sub-s. 40 (5), express provision was made for the payment of intermediate interest out of the surplus. In Re Browne & Wingrove [F19] 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."
It is to be noted that the provision speaks of "debts proved":"all debts proved in the bankruptcy shall be paid pari passu." The principle in question may be regarded as dealing with the proof of debts and as postponing proof for interest to accrue or accruing after sequestration until a surplus is established. So regarded, the principle does not conflict with s. 89 because, until there is a surplus, the claim for intermediate interest cannot be a "debt proved." At all events, it has been decided in Australia that the principle applies to a bankruptcy under the Commonwealth Act and under the similar New-South-Wales Acts. In Re Low; Ex parte Low, [F20] at pp. 61, 62 Walker J. decided that under the enactments of New South Wales intermediate interest must be paid on interest-bearing debts out of a surplus. The provision corresponding to s. 118 of the Commonwealth Act made "payment in full of all his creditors with interest" a condition of the bankrupt's title to the surplus, and that no doubt influenced the decision. But in Re Paul & Gray Ltd [F21] Harvey C.J. in Eq., after a full argument, held that it was the intention of the Federal legislature that "interest was to be paid according to the old common-law rule of bankruptcy." Speaking with reference to interest payable by contract, he formulated that rule as follows:
"There was no release of future interest. The liability to the interest still remained a liability, but, for convenience, the proof of it was carried out in two stages. First, up to the date of the sequestration. If that exhausted the assets there was an end of it, and the bankrupt was relieved from any further liability. If, on the other hand, there were still assets left after that distribution, then the liability to pay the interest was a continuing liability which also could be proved before the surplus assets were distributed to the bankrupt. That was the law until various Acts were passed in England and the various States. That was what might be called the common-law of bankruptcy."
In Re Hyman [F22] Lukin J. had arrived at the same conclusion. Both Harvey C.J. in Eq. and Lukin J. followed and applied Re Low. [F23] See, too, Re Richards, [F24] at p. 46.
In my opinion the view so adopted is correct, and a bankruptcy under the Federal Act is governed by the principle of administration which allows no proof for interest accruing or to accrue after sequestration unless and until a surplus is found to exist, and then allows creditors to claim upon the surplus for interest accruing since sequestration upon interest-bearing debts.
But this is only the first step in the consideration of the case in hand. The next step is to apply the rule to the particular claim of the creditor Thomas Brown & Sons Ltd Can the debt of that creditor be treated as interest-bearing within the meaning of the principle? Primarily the creditor bases its claim to interest upon s. 62 of the Bills of Exchange Act 1909-1936, which, in effect, provides that when such a promissory note is dishonoured the measure of damages, which shall be deemed liquidated damages, is to include interest thereon from maturity, but that such interest may, if justice require it, be withheld wholly or in part. No interest, of course, was reserved by the promissory note and it did not become overdue until after the date of the deed of arrangement. A distinction has always existed between the amount of the bill, which is the debt, and interest awarded as damages. "Where the interest is expressly agreed to be paid, it may be considered as part of one aggregate debt; but where a specified sum only is agreed to be paid, there interest is recoverable as damages, and it may depend upon external circumstances, whether any and what interest is to be recovered" (Cameron v Smith, [F25] at p. 380], per Holroyd J.).
If a bill or promissory note did not reserve interest, the holder was never considered entitled to claim upon a surplus in a bankruptcy in respect of interest by way of damages. Lord Hardwicke, in Ex parte Marlar, [F26] at p. 98] said:"But as the commissioners have established 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, [F27] said: "I 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, [F28] at pp. 134, 135], 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 rule, 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 foresee."
The Court of Appeal adopted the same view in Ex parte Charman; Re Clagett. [F29]
It follows that, in respect of the promissory note, Thomas Brown & Sons Ltd cannot sustain a claim against the surplus for intermediate interest. For such interest would be recoverable as damages only, and, even if the promissory note had become due before the deed of arrangement, it would not have been within the rule. The proof in respect of the debt was founded upon the promissory note alone, but, in support of the order against which the debtor appeals, it is contended that the creditor may fall back upon the original debt, which, it is said, was interest-bearing. Now the promissory note was clearly not taken as a mere collateral security for the debt. It was intended to operate, at lowest, as a suspension of the liability, and it must therefore be treated as payment, though conditional no doubt and not absolute. The presumption is that a bill or note given in respect of a debt operates as payment subject to a condition subsequent or qualification by way of defeasance. If a bill of exchange or promissory note were taken absolutely in discharge of a prior indebtedness it would amount to an accord and satisfaction, not to payment. But the taking of a bill or note as a means of paying the debt was not so considered.
Though pleaders regarded it as an anomaly springing from the law merchant, such a transaction might be pleaded specially and was treated as amounting to conditional payment. Thus, in James v Williams, [F30] at p. 349], Alderson B. said that the rule was that when bills of exchange were stated to have been delivered for or on account of a promissory note or any other sum in the declaration mentioned, then it was to be taken as a conditional payment; but that this rule was confined to negotiable instruments alone and that it must appear on the face of the plea that the plaintiff took an interest in the negotiable instrument. It became usual to say that the taking of the bill or note suspended the remedy during the currency of the instrument. Convenient as it might be thus to speak of the transaction, it is not accurate in principle so to express it. For at common law once the right to bring an action was suspended by act of parties the cause of action went completely. "It is a very 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" (Ford v Beech, [F31] per Parke B., where the older authorities are collected).
It is the cause of action, the debt, not the remedy, that is "suspended." The principle recognizes a discharge by payment subject to a condition subsequent. The condition is that if the bill or note is dishonoured it shall no longer be considered payment, and the original debt shall "revive," that is, be no longer affected by the receipt of the bill or note as payment: Cf. Belshaw v Bush. [F32]
In the present case the promissory note was never dishonoured; it never became due. For at the date of the deed it was current and operated as payment. By the deed it was released and discharged. The original debt, therefore, never revived and must be considered paid and satisfied, and that as from the date of the giving of the promissory note (Marreco v Richardson [F33] ).
It is true that as at the date of the deed the creditor had an expectancy that on maturity of the promissory note the original debt would revive, and, if his interpretation of the facts is to be accepted, bear interest. But the clause of the deed of arrangement relating to debts provable cannot be construed as enabling him to claim as at the date of the deed in respect of such an expectancy. In the event, the expectancy did not become actual. For the deed itself prevented its doing so, by discharging the debt constituted by the promissory note. In fact, there was never any liability for interest after the giving of the note, from that time up to the present.
There is some authority for the position that if during the currency of a bill of exchange given as conditional payment of an antecedent debt the debtor commits an act of bankruptcy by making an assignment to which the creditor holding the bill does not assent, the latter may base a petition in bankruptcy on the original debt and need not petition as holder of the bill of exchange (In re Raatz [F34] ). The decision relates only to the form of the petition, because of course a negotiable instrument not yet due constitutes a sufficient foundation for a petition. Vaughan Williams J. and Wright J. appear to have regarded the debtor's conduct as entitling the creditor "to treat the bill as dishonoured."
It is not easy to understand how a promissory note or bill of exchange which is not overdue but is still current can be treated as dishonoured before the date of maturity. There is no English decision which applies the doctrine of anticipatory breach to contracts completely executed on one side, still less to promissory notes and bills of exchange. It is settled in the United States that the repudiation or renunciation of a bill or note not yet due cannot be treated as an immediate breach of contract entitling the holder to sue upon the note: See Roehm v Horst, [F35] at p. 960], where Fuller C.J., speaking for the court, said: "In the case of an ordinary money contract, such as a promissory note, or a bond, the consideration has passed; there are no mutual obligations; and cases of that sort do not fall within the reason of the rule."
The principle there accepted is that the doctrine does not apply to unilateral obligations to pay money: See Harvard Law Review, vol. 14, p. 438, and Harvard Law Review, vol. 39, p. 268. The rule is stated in the following passage from the American Restatement of the Law of Contracts, Art. 318 e, p. 477:
"The doctrine of anticipatory breach is not extended to unilateral contracts unless the promisor's duty is conditional on some future performance by the promisee. It is immaterial whether the contract was originally thus unconditionally unilateral or has become so by the performance of one party. In neither case can a breach arise before the time fixed in the contract for some performance. There must be some dependency of performances in order to make anticipatory breach possible."
It is also the principle adopted in Canada. In Melanson v Dominion of Canada General Insurance Co, [F36] at p. 464, Baxter J. quoted the following passage from a judgment delivered in Upper Canada in 1858:
"Suppose a bond given conditioned to pay a sum of money, at the expiration of ten days after the happening of some named event, or a bill of exchange payable at thirty days after sight, the most positive declaration of the obligor or the acceptor, that he meant to dispute his liability, would not render the debt payable a day sooner than was stipulated for by the instrument. The declaration of an intention to dispute the right to recover payment, would not alter the time at which the right would accrue."
It is worth noticing that Anson, in his first edition of the Law of Contracts, (1879), p. 271, in dealing with the discharge by renunciation before performance due, speaks only of a contract which is wholly executory. The code contained in the Bills of Exchange Act 1909-1936 states exhaustively what amounts to dishonour, and does not recognize any such thing as a dishonour cy-pr? Perhaps a justification for the decision of the Divisional Court in the case of In re Raatz [F37] should be sought in the nature of the condition to be implied when a negotiable instrument is taken for and on account of a debt. The learned judges do not expound their reasons, but possibly they contemplated an extension of the traditional statement of the condition involved. That statement is to be found in the notes to Williams' Saunders, vol. 2, p. 103 b: "The acceptance of a negotiable note or bill `for or on account' of a debt must be taken prima facie to be in satisfaction of that debt until it appears that the note or bill remains unpaid in the possession of the creditor without any laches by him." Should the decision in In re Raatz [F38] be taken as meaning to add as an alternative "or until the debtor commits an act of bankruptcy"? It is difficult to believe that the learned judges would adopt such a view without entering upon any examination of the doctrine or its history or of the difficulties involved.
Perhaps, instead of endeavouring to reconcile the decision with principle, it is better to treat it as dealing only with a point of bankruptcy practice, as deciding what will suffice in a petition. But, however that may be, I am unable to think that the decision affects the present case. It related to a state of facts quite different from those under present consideration. It depended on the fact that before the bankruptcy in reference to which the question arose the debtor had made an attempt to assign his estate for the benefit of his creditors. The holder of the bill refused to assent to the assignment, but regarded the attempt as an act of bankruptcy, and as relieving him from the necessity of relying on the bill alone. In the present case there was no antecedent assignment or act of bankruptcy. There was nothing prior to the making of the very deed of arrangement under which the creditor proved that could amount to a renunciation of the promissory note or to the breach of the condition attached to the receipt of the promissory note as payment, whatever extension may be made in the traditional understanding of that condition. The deed took effect upon a state of facts in which the promissory note was in operation as a subsisting payment. It was to that state of facts that the release clause applied. No doubt the release is accompanied by a provision turning the debts released into rights of proof. But what is turned into a right of proof is the debt then subsisting, and that was the debt constituted by the promissory note. The antecedent debt was paid by the note, though of course subject to the condition subsequent. But the condition subsequent could not occur.
It is impossible, in my opinion, to split the transaction between the debtor and his creditors when the deed of arrangement was made into two separate steps. It cannot be conceived first as the making of an assignment by the debtor so as to amount to a renunciation of obligation or breach of condition, followed afterwards by an independent and separate act of the creditor, an assent by them to the deed. It is, I think, impossible in any such way to regard the operation of the promissory note as terminated before the creditor became bound. It is a deed constituted of a single transaction inter partes and the order in which the deed was executed or assented to is immaterial. In fact we do not know whether the deed was put forward by the debtor or by the creditors. But even if we did know, it is an instrument operating as the deed of all, and must in point of law be considered as binding all the parties simultaneously.
Accordingly, uno ictu, the debtor and the creditor concurred in turning the existing debt into a right of proof against assets and otherwise discharging it by release. It was, I think, in accordance with the true intention of the parties to the deed that the rights of the creditors should be fixed as they existed at the date of the deed, and, consistently with that intention, the creditor Thomas Brown & Sons Ltd cannot maintain its claim to interest out of the surplus.
For these reasons I am of opinion that the appeal should be allowed and the order of the Supreme Court discharged except as to costs. In lieu thereof it should be ordered and declared that the debts mentioned in the application for directions do not carry interest, and that no payment out of the surplus in the hands of the trustee should be made in respect of interest thereon accruing since the date of the deed of arrangement. The costs of all parties should be paid out of the estate, those of the trustee as between solicitor and client.