Law v James

[1927] 2 NSWLR 573

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(Judgment by: Jacobs JA)

Law
vJames

Court:

Judges:
Jacobs JAHardie JA
Hope JA

Hearing date: 13 September 1972
Judgment date: 1 November 1972

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Judgment by:
Jacobs JA

The appellant was at all material times the chairman of directors of Northside Properties Pty. Ltd. This company was wound up by the court on 4th August, 1970, the ground of the winding up being inability to pay debts. The petition was presented to the court on 1st May, 1970, was served on 11th May and was advertised on 21st and 22nd May, 1970.

At these times the appellant was indebted to the company in the sum of $6,021.33 and two other shareholders, Jorgenson and Marks were creditors of the company in the respective sums of $3,235.55 and $2,653.25. In this situa tion Jorgenson and Marks assigned to the appellant their respective debts. On 27th May, 1970, the assignments were notified to a meeting of the directors and thereafter, according to the minutes:

"It was noted that Mr. James owed the Company the sum of $6,021.33 by way of Loan Account.

It was further noted that by virtue of the assignment of the debts from the said Christine Laura Anne Jorgenson and Dianna Marks to him Anthony James owed the Company the sum of $132.53, being the balance of his Loan Account.

Mr. James then tabled at the meeting his cheque in the sum of $132.53 drawn in favour of the Company by way of repayment of the balance of the Loan Account.

It was resolved to accept the sum of $132.53 in repayment of the Loan Account.

It was further noted that the Loan Accounts of the Shareholders had now been completely amortized."

The liquidator declined to accept the validity of these transactions in extinguishment of Mr. James' debt to the company and he commenced the present proceedings to challenge the validity of the set-off. Street J. held that there was in the circumstances no right of set-off at the time when the trans actions took place and from that decision Mr. James now appeals: see Re Northside Properties Pty. Ltd. and the Companies Act (1).

The Companies Act , 1961, does not itself provide for set-off of credits and debts, but applies the provisions of the Bankruptcy Act 1966-1970 (Cth) by the following provision in s. 291 (2): "291. (2) Subject to section two hundred and ninety-two in the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and debts provable and the valuation of annuities and future and contingent liabilities as are in force for the time being under the law of the Commonwealth relating to bankruptcy in relation to the estates of bankrupt persons and all persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company may come in under the winding up and make such claims against the company as they respectively are entitled to by virtue of this section."

The Bankruptcy Act in s. 86 provides as follows:

"86.(1)

Subject to this section, where there have been mutual credits, mutual debts or other mutual dealings between a person who has become a bankrupt and a person claiming to prove a debt in the bankruptcy--

(a)

an account shall be taken of what is due from the one party to the other in respect of those mutual dealings;

(b)

the sum due from the one party shall be set off against any sum due from the other party; and

(c)

only the balance of the account may be claimed in the bankruptcy, or is payable to the trustee in the bankruptcy, as the case may be.

(2)

A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the person who has become a bankrupt or at the time of receiving credit from that person, he had notice of an available act of bankruptcy committed by that person."

The rules of set-off laid down by s. 86 are among the rules required to prevail and be observed by virtue of s. 291 (2). Hiley v. Peoples Prudential Assurance Co. Ltd . ( in Liq .) (2). The question is--how are they to prevail and be observed? Before they can prevail or be observed there must be a transposition of language so that the language of s. 86 becomes apt to be applied to a company. I propose to examine the section with the necessity for this transposition in mind. First, there are the words "subject to this section". The effect of these words can only be that the set-off allowed by sub-s. (1) is subject to the limitation in sub-s. (2). Next, there must have been mutual credits, mutual debts or other mutual dealings. These concepts are interchangeable between person and company. Next in the case of a bankruptcy those dealings must be between a person who has become a bank rupt and a person claiming to prove a debt in the bankruptcy. Here there must certainly be a transposition of language. A "bankrupt" is defined in s. 5 of the Bankruptcy Act to be a person against whose estate a sequestration order has been made or who has become a bankrupt by virtue of the presentation of a debtor's petition. Clearly the transposition here required is to a company in respect of which a winding up order has been made and which has thereby gone into liquidation. Whether or not the words also include a company which has gone into liquidation as a result of a creditor's voluntary winding up it is not necessary to determine in the present case, but there would not appear to be any reason why they should not include such a winding up. See Halsbury's Laws of England , 3rd ed., vol. 6, p. 747. Next, the words "a person claiming to prove a debt in the bankruptcy" clearly mean a person claiming to prove a debt in the winding up and the word "bankruptcy" in s. 86 (1) ( c ) must be given its equivalent as "winding up".

That brings me then to s. 86 (2). A person is not entitled under s. 86 to claim the benefit of a set-off if, at the time of giving credit to the person who has become a bankrupt or at the time of receiving credit from that person, he had notice of an available act of bankruptcy committed by that person. The words"Person who has become a bankrupt" must mean the same as they mean in s. 86 (1), i.e., a company against which a winding up order has been made, and possibly a company the subject of a creditor's voluntary winding up. Then there is the requirement of "notice of an available act of bankruptcy" and these are the important words in the present case. Mr. Priestley on behalf of the appellant has submitted that they are incapable of any transposition from the law of bankruptcy to the law of companies. If he be right then the limitations of s. 86 (2) are not imported into s. 86 (1). In the case of a company they have no content and therefore nothing whereby to limit the language of s. 86 (1).

I am of the opinion that it is possible to transpose into the law of companies the concept of "notice of an available act of bankruptcy". "Avail able act of bankruptcy" is defined in s. 5 of the Bankruptcy Act to mean "an act of bankruptcy available for a petition against the debtor at the date of the presentation of the petition on which or by virtue of the presentation of which the debtor becomes a bankrupt". The Bankruptcy Act is an Act dealing with insolvents and by s. 291 (2) of the Companies Act these rules respecting insolvent persons are to prevail and be observed in the case of insolvent companies. Any concepts, therefore, relating to the winding up of companies other than insolvent companies may be put aside and attention may be directed to the position of an insolvent company only. Under the law of bankruptcy there are created by s. 40 of the Bankruptcy Act a number of acts which, when committed by a debtor, are acts of bankruptcy. The majority of these acts, which also include omissions, are acts which lead to the inference that the debtor is insolvent. They are acts of insolvency, of inability to pay debts. A company is quite as capable of being unable to pay debts as a person and I find no difficulty in the transposition of the concept of an act of bankruptcy to the concept of inability to pay debts and insolvency in the case of a company.

But the transposition must be of the whole concept of "notice of an available act of bankruptcy". An available act of bankruptcy is an act of bankruptcy available for a petition against the debtor at the date of the presentation of the petition. I find little difficulty in transposing this concept into the law of com panies and determining that in the law of companies the equivalent concept is "notice of an act or omission of the company related to its solvency or insolvency which would be a ground for a petition to the court for the winding up of the company under s. 222 (1) (e) and (g) (i) of the Companies Act , 1961". Certain acts or omissions of the company are set out in s. 222 (2). They include failure to comply with a statutory demand for payment of a debt and unsatisfied execution. There are also included any other acts or omissions of the company whereby it may be proved to the satisfaction of the court that the company is unable to pay its debts. I am, therefore, of the opinion that the rule laid down in s. 86 (2) of the Bankruptcy Act , when trans posed into a rule applicable to a company, becomes the rule that a person is not entitled under the rules in s. 86 (1) to claim the benefit of a set-off if, at the time of giving credit to the company which has been wound up or at the time of receiving credit from that company, that person had notice of any act or omission of the company which would found a petition to wind that company up upon the ground that the company was unable to pay its debts.

When this rule is applied in the present case it becomes clear that Mr. James had the necessary notice at the time when he carried through the transactions which led to him having credits against the company as well as debts owing to it. By that date the company of which he was a director had not only failed to comply with the demand for payment under s. 222 (2) (a) but had become the subject of a petition for its winding up for insolvency upon which petition the winding up order was subsequently made.

It seems to me that in the approach which I have made in this matter I have adopted the same approach as that by Buckley J. in Re Eros Films Ltd . (3). Buckley J. uses the word "analogy" to describe what I have preferred to describe as a transposition of concept between the bankruptcy law and the law governing the winding up of insolvent companies. With respect I prefer the idea of transposition rather than analogy in case the latter word should lead to a departure from the strict process of transposition of concept to a wider search involved in "the spirit of the law" of bankruptcy and of insolvent companies respectively.

Street J. was inclined rather to make the transposition from "available act of bankruptcy" to "presentation of a winding up petition". He does so, as I understand him, because an available act of bankruptcy relates back and, although in companies law there is no relation back in the full sense, there is a limited relation back from the date of a winding-up order to the date of presentation of the petition for winding up: see s. 223 (2). That being so, Street J. did not find it necessary to examine the argument advanced before him to the effect that the relevant analogy to be drawn in applying s. 86 to the winding up of an insolvent company was between an available act of bankruptcy on the one hand and on the other hand the existence of one of the statutory grounds upon which a winding up order can be made by the court under s. 222 (1). This is the argument which has appealed to me. A difficulty felt by Street J., that in contrast to the bankruptcy legislation a company may be wound up on a statutory ground quite unrelated to insolvency can, I think, be overcome by the recognition that we are dealing only with insolvent com panies and grounds of insolvency and, therefore, the application of the terms of s. 222 (1) may be relevantly limited to those dealing with insolvency.

Upon the approach which I have taken I do not find it necessary to determine whether the date for proof of debts is the date of the winding up order or the date of presentation of the petition for winding up. I am prepared to assume that, at least for the purpose of applying s. 86 of the Bankruptcy Act the relevant date is the making of the winding up order.

I am of the opinion that the appeal fails and should be dismissed with costs.