Between: MACKENZIE
And: REES

Judges: Rich ACJ
Dixon J
McTiernan 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)

SYDNEY

Judgment by:
WILLIAMS J

The debtor, Donald Mackenzie, trading at Goondiwindi as Mackenzie & Co , general merchant, entered into a deed of arrangement with his creditors dated 7th June 1933. On 5th July 1933 the deed was duly registered in accordance with s. 193 of the Federal Bankruptcy Act 1924-1933, and received the assent of a majority in number and value of the creditors.

Thomas Brown & Sons Ltd was one of the creditors of the debtor. It had supplied goods to him for some years prior to October 1931 on the terms that he gave promissory notes for the price, payable in four months time free of interest. If the notes were not met at maturity the debtor gave further extended promissory notes for varying periods, the amounts of which included interest at seven per cent.

The debtor became unable to pay his debts. On 14th October 1931 some of his creditors met, and, inter alia, agreed to allow him an extension of time to pay, he to give them promissory notes payable in six months, the amounts of which were to include interest at seven per cent. Thomas Brown & Sons Ltd took a promissory note for the sum of PD5,205 11s. 4d., being the amount of their account; and a separate one for PD182 3s. 8d., being the amount of the interest. The other creditors each took the one promissory note for the combined amount of principal and interest.

The debtor was unable to pay the promissory notes, and a further meeting of his creditors took place on 11th May 1932. It was resolved "that an extension of twelve months be granted to the debtor for payment of all his liabilities of twenty pounds (PD20) and over as at 1st May 1932, goods supplied after 25th April 1932 charged as at 1st May to be considered as supplied on 1st May 1932, and that the amount of such liability be reduced at the rate of PD150 per month, payable by the debtor's own promissory notes, drawn at from one to twelve months, with a rest bill for the balance; such extension to be reviewed at the end of twelve months. The promissory notes to be drawn as from 11th July 1932, free of interest, but plus exchange and stamp duty. Creditors whose amounts do not total twenty pounds to be exempt from the terms of this arrangement and the debtor to endeavour to arrange a composition of ten shillings in the pound."

Pursuant to this resolution Thomas Brown & Sons Ltd received promissory notes for PD56 10s., payable on 14th August 1932, and on the fourteenth day of each succeeding month up to and inclusive of 14th July 1933, with a rest bill for the balance of their debt, namely, PD4,949 13s. 2d., also payable on the last-mentioned date. The promissory notes for PD56 10s. represented the share of this creditor in the sums of PD150, which the debtor had agreed to pay each month in discharge of his indebtedness to his creditors to whom he owed over twenty pounds on 1st May 1932. The amount of the indebtedness to Thomas Brown & Sons Ltd was calculated by leaving out of account the promissory note for PD182 3s. 8d., which was paid in three monthly instalments commencing from 27th May 1932. On 7th June 1933 the debtor executed the deed of arrangement already mentioned. At the time the promissory notes for PD56 10s. due on 14th June and 14th July respectively, and the promissory note for PD4,949 13s. 2d., were still current. He also owed Thomas Brown & Sons Ltd the sum of PD480 10s. 7d. for goods sold and delivered, presumably on and after 1st May 1932. By the deed of arrangement, clause 6, the trustee was directed after payment of costs, charges and expenses and preferential claims to apply the proceeds of realization of the debtor's estate "in payment to the creditors by such dividends and at such times and in such amounts as the trustee shall deem expedient of all such debts and claims of the creditors as would by the law of bankruptcy be entitled to rank for dividend upon the estate of the debtor and in such priorities and in accordance with such rules as would be applicable under the said law of bankruptcy and to pay the surplus if any to the debtor." By clause 16 the creditors released and discharged the debtor from all debts and liabilities due, owing, or incurred from or by the debtor to them or any of them which under the said Act would have been provable in his bankruptcy had he been adjudicated bankrupt on the date of the deed.

The effect of the deed was to make the property assigned to the trustee available to satisfy all such debts and liabilities as would be provable under s. 81 of the Act if a sequestration order had been made on 7th June 1933 and to release the debtor from all such debts and liabilities. By this section a very wide range of debts and liabilities are deemed to be debts provable in the bankruptcy, but it expressly provides that demands in the nature of unliquidated damages arising otherwise than by breach of contract, promise or breach of trust shall not be so provable.

But the section must be construed in the light of the "general rule in bankruptcy-whether a right and a reasonable rule or not-that there is to be no proof in bankruptcy for interest subsequent to the bankruptcy," because "the theory in bankruptcy is to stop all things at the date of the bankruptcy, and to divide the wreck of the man's property as it stood at that time" (per James L.J. in In re Savin, ^[F49] at p. 764). Whenever, therefore, there is a deficiency of assets, no proof for interest accruing after adjudication will be allowed. The rule applies whether the interest is on a secured or unsecured debt. So, too, in the case of a partnership, separate creditors cannot have interest out of the separate estate until the joint creditors have received twenty shillings in the pound (In re Savin; ^[F50] Ex parte Bath, In re Phillips; ^[F51] In re Browne & Wingrove; Ex parte Ador; ^[F52] Ex parte Mills; ^[F53] Ex parte Findlay; Re Collie; ^[F54] Ex parte Reeve ^[F55] ).

The trustee of the deed therefore acted correctly when he only allowed the creditors to prove in the first instance for the principal of their debts with interest, if any, accrued due up to 7th June 1933.

But the estate was sufficient to enable the trustee to pay twenty shillings in the pound on the amounts of these proofs, and still to leave a surplus of PD1,400, against which the six creditors, Thomas Brown & Sons Ltd , S. Hoffnung & Co Ltd , E. Rich & Co Ltd , D. & W. Murray Ltd , Robert Reid & Co Ltd , and R. F. Evans, then claimed to prove for interest on the amounts of their debts outstanding from time to time after the date of the deed until payment.

The claim was made in two ways: (1) that the original debts were interest bearing by contract, or, alternatively, (2) that from the maturity of the promissory notes interest at five per cent per annum by way of damages should be awarded under the Bills of Exchange Act 1909-1936, s. 62.

The trustee applied to Philp J., sitting in bankruptcy, for directions whether the respective debts due to these creditors or any of them carried interest or, if so, from what date or dates and at what rates. From his affidavit it appears that at the date of the deed the creditors other than R. F. Evans each held three promissory notes similar to those held by Thomas Brown & Sons Ltd R. F. Evans held a promissory note for PD115 13s., payable on 31st December 1932, which was duly presented for payment and dishonoured. The date of maturity of all the other promissory notes was therefore subsequent to that of the deed of arrangement.

In the case of T. Brown & Sons Ltd , there was evidence to show an agreement with the debtor that the amounts owing for goods supplied for more than four months should commence to carry interest at seven per cent until payment. Philp J. held that the trustee, upon proof by creditors holding overdue promissory notes for damages for interest, should compute the damages for interest at the rate of five per cent per annum on the whole of each of the debts represented by the promissory notes up to the time of the first dividend; and then the amount of that dividend should be subtracted from the whole debt and interest calculated upon the reduced principal up to the payment of the next dividend; and so on until twenty shillings in the pound was paid on the principal debt; and that when the total damages for interest of each such creditor were computed such creditor should participate ratably in the ultimate surplus according to the amount of damages so computed.

It is against this order that the debtor has appealed to this court.

I am satisfied, for the reasons given by my brother Dixon, that creditors who have debts which bear interest by contract can prove against the surplus for the interest which accrues after the date of adjudication on the respective amounts of their debts outstanding from time to time. To the authorities to which he has referred I will add Page v Commonwealth Life Assurance Society Ltd, ^[F56] at pp. 97, 98 and Jowitt v Callaghan. ^[F57]

The debt of PD5,205 11s. 4d. owing by the debtor to Thomas Brown & Sons Ltd on 11th May 1932 was a debt which, by the contract between the parties, bore interest at seven per cent per annum. On that date the creditor agreed with the debtor to give him an extension of time to pay the debt, the terms being that it should be reduced by twelve monthly instalments of PD56 10s., and the balance to be paid at the end of twelve months. The promissory notes already mentioned were to be given for these instalments and balance. The debtor therefore received three months' credit to pay the first instalment, with an additional month to pay each succeeding one, and fifteen months to pay the last instalment and the balance.

In Byles on Bills, 20th ed. (1939), p. 240, the learned author states:"If a bill or note is taken on account of a debt and nothing is said at the time, the legal effect of the transaction is this-that the original debt still remains, but the remedy for it is suspended till maturity of the instrument in the hands of the creditor. This effect of giving the bill has also been described as a conditional payment." This statement is amply borne out by the authorities: See Baker v Walker; ^[F58] Bottomley v Nuttal; ^[F59] Cohen v Hale; ^[F60] In re Romer & Haslem; ^[F61] Mears v Western Canada Pulp and Paper Co Ltd, ^[F62] at pp. 359, 360; In re a Debtor; Ex parte the Debtor; ^[F63] Marreco v Richardson; ^[F64] Allen v Royal Bank of Canada; ^[F65] Ashby v Hayden; ^[F66] Havyatt v Gilder. ^[F67] In Currie v Misa, ^[F68] at p. 164 Lush J. said:"The security is offered to the creditor, and taken by him as money's worth, and justice requires that it should be as truly his property as the money which it represents would have been his had the payment been made in gold or a Bank of England note. And, on the other hand, until it has proved unproductive, the creditor ought not to be allowed to treat it as a nullity, and to sue the debtor as if he had given no security." On 7th June 1933 the balance of the original debt, which had not been discharged by the payments made commencing on 14th August 1932 and ending on 14th May 1933, was still in existence, but the remedy to recover this balance was suspended pending the maturity of the outstanding notes. The deed of arrangement constituted an available act of bankruptcy (s. 52 (a)). Consequently no creditor with notice could have safely accepted payment of his debt within the following six months. The debtor had therefore placed himself in such a position that he could not fulfil the condition on which alone the conditional payments would become absolute, namely, honouring the notes at maturity. They had, in effect, "proved unproductive." This circumstance, in my opinion, put an end to the suspension of the remedy on the original debt, and Thomas Brown & Sons Ltd could have filed a petition for a sequestration order based on this balance as a debt immediately payable (In re Raatz ^[F69] ). I agree respectfully with the view expressed by the two distinguished judges who comprised the Divisional Court in that case, and by Chalmers, Bills of Exchange, 6th ed. (1903), pp. 309-310, that the act of bankruptcy entitled the creditor to treat the notes as "practically dishonoured." It derives strong support from the cases which show that, where a purchaser becomes insolvent, the lien of an unpaid vendor, who is the holder of promissory notes which are still current, immediately revives. This lien, or in other words the right to retain possession of the goods until they have been paid for, is a security for the payment of the original debt (Dixon v Yates, ^[F70] at pp. 816, 817.]; Gunn v Bolckow Vaughan & Co, ^[F71] at p. 501).

Assuming that a sequestration order had been made, and that I am wrong in believing that the right to sue on the original debt revived upon the execution of the deed, the position would still be that when the notes were dishonoured at maturity the creditor could have proved in respect of the original debt, to use the words of Cockburn C.J. in Cohen v Hale, ^[F72] at p. 373, as "a debt subsisting all along, just as if the cheque" (in this case notes) "had never been given." So, too, the lien of an unpaid vendor would then have revived, if it had not already done so at the earlier stage (Miles v Gorton; ^[F73] Griffiths v Perry; ^[F74] Ex parte Chalmers; Re Edwards; ^[F75] Grice v Richardson, ^[F76] at pp. 323, 324).

Instead of presenting such a petition Thomas Brown & Sons Ltd preferred to assent to the debtor's estate being liquidated out of court, the terms of the deed being sufficiently wide to give them the same rights of proof as they would have had if a sequestration order had been made. The fact that the deed released the debtor from personal liability is immaterial. The debts themselves were not discharged. They were converted into rights to prove against the estate (Jowitt v Callaghan, ^[F77] at p. 190).

It is true that Thomas Brown & Sons Ltd proved on the promissory notes, but at that time there was no question of any surplus. They should now be allowed to amend their proof or lodge a new proof, but no so as to disturb prior dividends (Ellis & Company's Trustee v Dixon-Johnson, ^[F78] at p. 357). A similar position to the present one arose in Ex parte Hankey, ^[F79] affirmed sub nom. Ex parte Mills, ^[F80] and discussed in Ex parte Boyd; Re Boyd, ^[F81] at pp. 296, 297. There, a creditor, who had proved on the notes, was allowed to amend and prove on the original debt in order to recover interest out of the surplus. In Ex parte Mills ^[F82] Lord Loughborough L.C. said: "I cannot distinguish the case of interest due by contract, where there is no note, from the case where there is a note." The notes were payable on demand but appear to have been current at the date of the bankruptcy, and it was not suggested that this prevented proof of the original debt.

The effect of the arrangement made on 11th May 1932 was to suspend the running of interest on the original debt so long as the promissory notes were duly paid from time to time. The last note that was paid was the one which matured on 14th May 1933. Interest at seven per cent would therefore commence to run from the date of the "practical dishonour," namely, 7th June 1933.

The further question arises whether, even if the original debts were not interest bearing by contract, the creditors could claim interest at five per cent per annum by way of damages under s. 62 of the Bills of Exchange Act for non-payment of the promissory notes at maturity. I think it must be answered in the negative, in view of the authorities referred to by my brother Dixon, which show that such damages cannot be proved against the surplus in the absence of express statutory provision. To those authorities I will add Ex parte Sammon; Re Sammon and Pierson ^[F83] and Ex parte Phillips; Re Phillips, ^[F84] and mention that Re Horatio Clagett; Ex parte Charman ^[F85] is also reported in the Times Law Reports. ^[F86]

It follows that in my opinion the appeal fails substantially and should be dismissed, but the order of the court below, except with respect to costs, should be discharged. The trustee should be advised that Thomas Brown & Sons Ltd are entitled to prove against the surplus for interest at the rate of seven per cent per annum from 7th June 1933 on the amount of their debt of PD5,062 13s. 2d. outstanding from time to time after that date; and the other creditors should be allowed to prove pari passu if they can establish that their original debts carried interest by contract. The motion should be referred back to the learned judge to do what is just in accordance with this advice.

Having regard to the radical alterations made in the order of the court below, the costs of all parties of this appeal should be paid out of the surplus; those of the trustee as between solicitor and client.