MACKENZIE v REES

65 CLR 1
1941 - 0728A - HCA

---

(Judgment by: McTIERNAN J)

Between: MACKENZIE
And: REES

Court:

Judges: Rich ACJ
Dixon J

McTiernan JWilliams 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)

Hearing date: BRISBANE 18 June 1941; 19 June 1941
Judgment date: 28 July 1941

SYDNEY

---

Judgment by:
McTIERNAN J

The trustee's application for directions resolves itself into the question whether the deed of arrangement provided for the payment of interest on debts falling within the scope of the trusts declared by the deed. The trust for the payment of the debtor's liabilities in effect bound the trustee to pay out of the property assigned to him by the deed all such debts and claims as would have been provable against the debtor's estate if it had at the date of the deed been sequestrated in bankruptcy. The terms of this trust therefore make the solution of the present question dependent on the rule in bankruptcy in Australia relating to the payment of interest on debts provable against a bankrupt's estate.

The rules applicable where the bankruptcy is governed by the Australian bankruptcy law are conveniently stated by Harvey C.J. in Eq. in the case of Re Paul & Gray Ltd, ^[F39] at p. 135. He said:

"In my opinion the Federal legislature, in deliberately abstaining from following the then existing provisions of the English Act and the provisions of so many State Acts, meant to say not that no interest was to be paid, but that interest was to be paid according to the old common-law rule of bankruptcy; that is, interest according to the contractual rate only. The result is that out of the surplus creditors of interest-bearing debts are entitled to the full contracted rate of interest, but non-interest-bearing debts will not carry any interest out of surplus."

In the present case the trustee of the deed has paid the creditors the full amount of the debts which were proved against the debtor's property assigned by the deed and has a surplus. It is necessary to inquire whether the debts on which the creditors claim interest out of the surplus of the property were interest-bearing debts. In argument the case was limited to debts owing to the respondent company. It was, like the other creditors, a party to the deed of arrangement.

At the time the deed was executed the company was the holder of three promissory notes drawn in its favour by the appellant some time before the execution of the deed. The notes were due on a subsequent date. The company proved for the amount of each of these notes and received dividends in full payment. It is on the amount of each of these notes that the company claims that it is entitled to interest out of the surplus.

The notes are three of a series which the appellant drew in favour of his creditors in fulfilment of an arrangement of his affairs made by his principal creditors, including the company, some time before the execution of the deed. That arrangement in fact provided that the promissory notes were to be free of interest. But the company claims that it can revert to the original debt in payment of which it took the notes and that this debt was interest bearing. It relies on the familiar principle that when a promissory note is taken by a creditor instead of a money payment the presumption is that the parties intended the note to be only a conditional discharge of the debtor's liability, and that the creditor should be remitted to his prior rights if the note is dishonoured.

It may well be that the agreement under which the company took the notes was subject to the condition that if they were dishonoured at maturity the company's right to sue for the old debt and interest would be restored to it. But, nevertheless, the company agreed, subject to that condition, to take the notes instead of immediate payment of the original debt, and the appellant satisfied the company's claim by giving it the notes.

The deed of arrangement provided for the release of the appellant from all such debts and liabilities as would have been provable against his estate in bankruptcy. By virtue of the company's assent to the deed it became operative to release the rights conferred on the company by the promissory notes to receive payment in money for the amount of the notes on the due date. The deed operated to substitute the rights of the company as a cestui que trust under the deed for its rights as the holder of the notes. It released the appellant from its obligation to pay the notes at maturity, but it did not relegate the company to its right to enforce payment of the original debt in payment of which the company took the notes. The company having assented to the deed, there was a satisfaction of its rights under the notes, and the original debt was as effectually extinguished as if the appellant had, in lieu of entering with his creditors into the deed, paid the notes on the due date. For an explanation of the operation of a deed of arrangement, see Victor Western (Fabrics) Ltd v Morginsterns. ^[F40]

The execution of the deed of arrangement was an act of bankruptcy. As such it is relied upon as a renunciation by the appellant of the notes which the company held at the date of the deed. The insolvency of a buyer may give the vendor the right to refuse delivery of goods on credit (Gibson v Carruthers ^[F41] ). But it is not correct that the insolvency of a party per se puts an end to the contract. It is the renunciation of the contract which the insolvency may imply that would dissolve it if accepted by the other party. This principle is illustrated by the following cases: Ex parte Chalmers; Re Edwards, ^[F42] at p. 294; Morgan v Bain, ^[F43] at p. 26; Ex parte Stapleton; Re Nathan, ^[F44] at p. 590. See also Restatement of the Law of Contracts, vol. 1, s. 324. As the deed in the present case contained the arrangements of the appellant's affairs to which the company and the general body of creditors assented, its execution was a release, but not a repudiation, of the appellant's obligations under each note. In the case of In re Raatz ^[F45] it does not appear whether or not the petitioning creditors assented to the deed of assignment. It is well established that a creditor who has assented to a deed of arrangement is precluded from relying upon it as an act of bankruptcy on which to make the debtor bankrupt (Ex parte Stray; Re Stray ^[F46] ) - See also cases cited in Halsbury, 2nd ed., vol. 2, pp. 18-19. A creditor cannot succeed in an action outside the deed for a debt if he has assented to its being dealt with under the deed (Victor Weston (Fabrics) Ltd v Morginsterns ^[F47] ). If it was the fact in the case of In re Raatz ^[F48] that the petitioning creditors had not assented to the deed of assignment, that case is no authority for deciding that the notes held by the respondent company, which did assent to the deed of arrangement, were not released but in truth repudiated or dishonoured by its execution. Philp J. decided that the debt provable by the company in the liquidation was not an interest-bearing debt. But his Honour decided that the company was entitled to prove for interest on the promissory notes by way of damages. To admit the company to prove for interest on that footing would be contrary to many decisions which apply to bankruptcy under Australian law, and consequently to the liquidation under the deed. It is unnecessary for me to review these decisions, as that has been done by my brother Dixon.

In my opinion the appeal should be allowed and the application by the trustee for directions should be answered by saying that none of the debts mentioned in the application carries interest.