Gye v McIntyre; Perkes v McIntyre

[1990] HCATrans 201

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IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No SS4 of 1990

B e t w e e n -

CLEMENT ANTHONY GYE

Appellant

and

ITALA BELINDA McINTYRE

Respondent

Office of the Registry

Sydney No SSS of 1990

B e t w e e n -

RAYMOND DAVID PERKES

Appellant

and

ITALA BELINDA McINTYRE

Respondent

MASON CJ
BRENNAN J

Gye(2) 1 29/8/90

DEANE J

DAWSON J

TOOHEY J

GAUDRON J

McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 29 AUGUST 1990, AT 10.19 AM

Copyright in the High Court of Australia

MR D.M.J. BENNETT, QC:· In each of these matters, if

Your Honour pleases, I appear for the appellant

with my learned friend, MR V.R.W. GRAY. (instructed

by Gye & Perkes)

MR B.W. COLLINS, QC: If Your Honours please, in each appeal

I appear with my learned friends, MR P.R. GARLING

and MR J.THOMSON (instructed by Price Brent)

MASON CJ: Yes, Mr Collins. Mr Bennett.

MR BENNETT:  Your Honours, I hand up 11 copies of the

submissions.

MASON CJ: Thank you.

MR BENNETT:  Your Honours, the first question arising in

this appeal is one which, although put in argument,

was not referred to, either at first instance or by

the Full Court, and in our respectful submission,

it is a short simple reason why the result reached

at first instance was correct and the result in the

Full Court was wrong. One starts with the four

short propositions on page one of the submissions,

none of which are really susceptible of doubt or

controversy. The first is that there are, of

course, two types of set-off. There is set-off

under the general law which may be common law,

equity or the old statutes of set-off, before they

were repealed in New South Wales. They are all

matters of State law. On the other hand, one has

set-off under section 86 of the Bankruptcy Act and

slightly different principles apply.

It was conceded, at first instance, that for reasons not presently material, although

Your Honours will no doubt see them as the appeal

proceeds, there was no set-off under the general

law available, the question was whether the wider

set-off provisions of section 86 were applicable.

The third matter is that - and this is the key

factor in the present case - the claim by the
debtors against the respondent for damages for

fraud was, by agreement of creditors, excluded from

the composition. It was not an asset which passed

to the trustee. That is the factor which

distinguishes this case from every reported case

which we have found dealing with section 86 or its

counterparts in England, New Zealand, or even the

United States, and the significance of that will

become apparent in a moment.	I will just show you
the reference to that.	It is page 39 of the appeal

book, line 14. Your Honours will see Mr Andrew,

who was the trustee:

Gye(2) 29/8/90

gave evidence that at the meeting of creditors

at which the compromise was accepted there was

a discussion concerning the legal proceedings

between the debtor and the creditor. He says,

inter alia, that the creditors had indicated

that they were not willing to finance the

litigation against Mrs McIntyre and that

Mr Gye had informed the meeting in such circumstances he could not propose to include

any moneys received through litigation among

the assets to be vested in the trustee for the

benefit of creditors.	It seems ..... it was
disclosed -

and so on.	It was excluded for that reason from
the composition.	The fourth proposition that there

is no case discussing this I have already put.

Having laid the background may I now, going to

page 2, take Your Honours to the argument.	One starts with
a short question of statutory construction.	The section is

conveniently set out on page 9 of the appeal book, the top

of the page, and Your Honours see that the section starts

with the familiar words:

where there have been mutual credits, mutual

debts -

and that is the second part of the argument in this

case -

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 .....

(b) the sum due from the one party shall be

set off -

and then the key result is set out in

paragraph (c). This is the consequence of the

application of the section, the substantive

consequence:

(c) only the balance of the account may be

claimed in bankruptcy, or is payable to the

trustee in the bankruptcy, as the case may be.

In other words, what the section is dealing with is the account between the trustee and the third

party. If there is a debt owing to the bankrupt

the trustee sues for it. If there is a debt owing

by the bankrupt it is proved in the bankruptcy.	In
either event, depending on which is larger, there
is to be a set-off.	The proof is to be reduced or

the trustee's claim is to be reduced.

Gye(2) 29/8/90

But what it is talking about is the bankrupt

estate. It is simply not dealing with the question

of claims which do not pass to the trustee, the
bankrupt's exempt property. It is not dealing, for
example, with a claim for damages for personal

injury or assault which does not pass to the

trustee. It is not dealing with a claim for

defamation which does not pass to the trustee.	It
is simply concerned with the accounting in the
estate itself.

That is the point which I make in

paragraph 1.6 of the submissions - that the law of

bankruptcy is primarily concerned with the

administration of the property of the bankrupt

estate. Except for the purpose of exempting it, it

is not concerned with the administration of exempt

property. If the bankrupt has a bed which is

exempt under section 116 he can do what he likes

with it. The law of bankruptcy is not concerned

with the administration of that bed. And

similarly, if he has an asset which is excluded

from a composition or for some other reason does

not pass to the trustee, sections dealing with

accounts between the trustee and a creditor simply

have no application. It is not as if the result of

that is that there can be no set-off and the

creditors are disadvantaged where there are

competing claims. All that happens is the State

law, the general law, applies.

One is dealing with a claim between certainly

a person who has become, subject to a composition

or is bankrupt on the one hand, and a third party

on the other, but it is a matter which is resolved

outside the estate.	The two claims are effectively
now between two different parties.	If there is a

right of set-off under the general law so be it.

That travels with the debt. But this is the

additional right of set-off in bankruptcy and that,
in our respectful submission, simply has no

application.

DEANE J:  Mr Bennett, have we got the composition before us?

MR BENNETT:  No, Your Honour. It was certainly part of the

material before the primary judge but it has not

been reproduced in the appeal book.

DEANE J: Because, if what you say is correct - and by a

selective inclusion of assets a set-off which would

otherwise be available has become unavailable, that

is, if your subsequent arguments be not accepted -

one would have thought that was a very powerful

reason for setting aside the composition.

Gye(2) 4 29/8/90

MR BENNETT:  Yes. Your Honour, that is certainly so but that

was not done and the compositions are now, in one

case, totally finalized and in one are

substantially finalized. There has been, one would

have thought, the most severe laches. There was,

in fact, an application to set it aside on other

grounds which was heard at the same time as these

proceedings and which failed. But, Your Honour, I

concede fully that the argument I am putting would

have been a powerful argument in favour of the

composition being set aside ab initio had that

argument been taken at the right time but they

failed to do that and the consequence is that the

set-off is not available.

Having said that, Your Honour, I may just say

this: there are arguments which would have been no

doubt used in such proceedings - Your Honours need

not be concerned with them - but, in a sense, if

one assumes that there is a set-off not allowable

under the general law there is nothing particularly

unfair about such a set-off not being allowed in
bankruptcy. It is no more unfair than the fact
that any creditor only receives some cents in his
dollar instead of his full debt.

If there are totally unrelated claims - take

the extreme case where a creditor has an action
against the debtor for money lent and the debtor
has an action against the creditor for damages for

assault. Now, there is simply no reason why that

creditor should be in a better position than other
creditors because of the existence of a claim which

cannot be set-off at common law.

DEANE J: Yes, except, whatever be the technical position,

it does seem extraordinary if in circumstances

where an execution on a judgment debt is being

stayed by reason of a cross action at the suit of

the party entitled to that cross action bankruptcy

law does not allow a set-off when there is a

subsequent bankruptcy or composition.

MR BENNETT:  Your Honour, the stay had no relevant effect

because the stay would not have prevented the

lodgment of a proof of debt.

DEANE J: Well, it may have had a relevant effect in so far

as mutuality is concerned, but I can see the point

you are making in relation to this first argument.

MR BENNETT:  Yes. Well, Your Honour, there are other

aspects if one wants to try and weigh comparative

fairness; for example, the judgment for damages for

fraud was only for one-fifth of the loss in the
case of each of the debtors whereas the judgment

against them at the suit of Mrs McIntyre was for

Gye(2) 29/8/90

the full amount because it was a joint and several

debt so one could take all sorts of factors and say

there are differences but, Your Honour, so far as

this Court is concerned, it is really rather like

the abortion question in the Supreme Court of the

United States. The question is not for or against

abortion; the question is, should the States be

allowed to control it and the question here is not

whether there should or should not be the more

extensive set-off; the question simply is, is this

a matter which is within State law? We submit it

is and the result under State law is conceded and

it is because of the exclusion of the debt owed by

the creditor from the composition.

I should say also that Mr Justice Brownie when

he gave judgment in relation to the fraud claim had

before him all the details of the composition, knew

about it and discussed it in his judgment. It is

not as if it is something - and he refused to set

off at common law so it is not as if there is any

concealment in relation to that.	Now, there is
a - - -

BRENNAN J:  How did Mr Justice Brownie then arrive at the

assessment of damages? What was the loss which he

found to have been established?

MR BENNETT:  He took the losses of the joint venture and

divided them by five, basically. I am sorry, I

take that back. It was the difference between the value of the property as represented - I am sorry,

would Your Honour pardon me?

DEANE J:  It was the purchase price less the true value, was

it not?

MR BENNETT: Yes, I think that is so, divided by five.

DEANE J: Which means a windfall to your client in that in

the purchase price what is taken account of is the

whole of the payment representing the mortgage debt

but, under the composition, only what - one-fifth

or one-sixth of it is payable.

MR BENNETT:  Yes, but we are debited - but the claim against

us, of course, is a claim for the whole of the

purchase price.

DEANE J: But your damages were assessed on the basis that

you had paid the whole of the purchase price,

whereas $200,000 of that was represented by a

mortgage in respect of which you are only going to

pay one-fifth or one-sixth.

MR BENNETT: Well, Your Honour says "represent by", and I

will come to this when I get to the second part of

Gye(2) 6 29/8/90

the argument, it was clear - and this is referred

to at page 3 of the appeal book - - -

DEANE J:  Mr Bennett, I am taking you out of your course

with questions of merits. You deal with it later in

your own course.

MR BENNETT:  Your Honour, I am content to just answer that

last question now, if I may.	Your Honour will see
from the passage on page 3 of	the appeal book, that
there was no relationship, in	that sense. If
Your Honour sees - I am sorry	it is not page 3,

page 4 I am sorry.	The first	line on page 4
Your Honour sees:

How this second mortgage came about is not

explained in the judgment or in any evidence

before me. However it has been agreed between

the parties that there was no reference to

this mortgage in the contract between the

syndicate members and Mawsons Hotels Pty

Limited. So far therefore as appears, that

financing transaction was a quite independent transaction from the sale transaction. While

it may be surmised that there could have been

a relationship between Mrs McIntyre and

Mawsons Hotels Pty Limited there is no evidence of such a relationship and the case

has been conducted before me on the basis that
in all respects Mrs McIntyre was at arm's

length from Mawsons Hotels Pty. Limited.

And there is also a short reference in the judgment

of Mr Justice Pincus at page 69 where, at line 23,

he says:

there was a gap of nearly a year between the
settlement of the respondent's purchase and

the execution of the mortgage, but there seems

to have been no dispute that the money

borrowed was used in the purchase.

Your Honour, the writers have not reproduced the

judgment of Mr Justice Brownie which is quite long,

which was before His Honour Mr Justice Hale along

with copies of the composition and other evidence.

It is a case where perhaps there has been error on

both sides on the side of skimpiness, rather than

the usual error on the side of unnecessary

material, but it is our submission that one really

does not go into that material any more than I have

indicated from the appeal book to analyse the legal

issues involved.

There is a short passage which I should remind

Your Honours of in Derham's book on the Law of

Set-off and I hand to Your Honours eight copies of

Gye(2) 29/8/90

that, at page 73. At the same time I will hand

Your Honours another passage from that book at

page 94 which I will deal with later. Your Honours

will see at page 73, under the heading 2.6 The Mode

of Balancing the Accounts:

It is sometimes assumed that the occurrence of

a bankruptcy, or the commencement of a

winding-up, brings about an automatic

cancellation of cross-demands, though in fact

this does not appear to be the case. The

right of set-off in bankruptcy is procedural
in its operation, and the parties remain

indebted to each other until such time as an

account is taken, either in the content of a

proof lodged ..... or when the set-off is

raised -

I will come to the significance of that in relation

to timing later on when I get to the third

submission, but it is important to note that it is

a procedural right and that also supports the

submission that it is the procedure involving

either the filing of the proof of debt or the claim

by the trustee which is involved. Section 86 is

not saying, "There substantively shall be a

set-off.", it is saying, "As a matter of procedure,

in two types of action, there shall be a set-off."

One is the action - although "action" is not

perhaps the correct word - constituted by the

filing of the proof of debt; the other is the

action brought by the trustee, not by the debtor

himself, against the third party. ·

At 1.8 we make a slightly more remote point

that there is an analogy in relation to exempt

property. Your Honours would be aware that

sections 90 and 91 of the Bankruptcy Act impose

certain obligations on secured creditors in

relation to property and they apply where a

creditor holds security over property of the

debtor. That is because of the definition of

"secured creditor". They do not arise where the

creditor holds security over the property of a

third party.

So if one just considers the two situations:

a creditor who has security over the debtor's

property can either value it and prove in the

bankruptcy for the difference or he relies on the

security and realizes it, in which case the trustee

has certain rights in relation to the surplus and,

of course, he is subrogated to the debtor's rights

if he acts recklessly; where the creditor has

security over a third party's property that is

nothing to do with the trustee, fairly obviously,

because the third party is going to be subrogated

Gye(2) 29/8/90

to the creditor's rights and the rule against

double proof prevents them both corning into it.

So where one has security over the property of

a third party, one simply ignores it and as far as

the trustee is concerned one proves as an unsecured

creditor; it is outside the bankruptcy. And re

Turner is a useful example of that - Your Honours

need not go to it. The passage is in the judgment

of the Master of the Rolls at page 112 and what is

stressed in that passage is that where security is

given by a stranger it does not affect the

bankrupt's estate at all and, therefore, one

completely ignores it. It is a little bit the same

here. The set-off is not a set-off of property of

the estate; it is a set-off of the property of the

bankrupt.

As I point out in 1.9, there would be a

distinct unfairness to the debtor if a set-off not

existing under the general law were to be allowed

against him. May I just illustrate that by way of

a slightly different example. Let me put the

extreme case of an action for an assault. The

creditor who knows he is not going to be paid comes

up to the debtor and assaults him - ignore the

criminal consequences - the debtor has an action

against the creditor for assault which does not

pass to his trustee. It would be surprising if one

were to say that under section 82 one could require

the debtor to accept a set-off in relation to the

debt which the creditor has to prove in the

bankruptcy. Clearly the creditor there has to

prove in the bankruptcy and has to pay the debtor

in full.

It would be quite unfair to the debtor, in

that example, to require him to give up his

personal asset, the damages he has for assault,
because of the set-off against his estate in which

the creditor is going to get a few cents in the

dollar. Now, that extreme example illustrates the

proposition rather clearly. Once something is

excluded from the composition, certainly if there

is a set-off inherent in it, if there is a set-off

under the general law, the debtor's asset is

subject to that and he must take subject to that,

but if one is outside the general law set-off why

should the bankruptcy provision, which is concerned

with accounts between the trustee and the third

party, be used against the debtor, and we submit it

is not.

Your Honours, that is the first submission.

It is totally novel, I cannot take Your Honours to

authority in relation to it, I can express it as an

advocate by saying no third party has ever sought

Gye(2) 29/8/90

to suggest before that he is entitled to a set-off

in such a situation, but whether one puts it that

way or simply one says it has not arisen, there is

no helpful authority that we have been able to

find; but we submit when one looks at the language

of the section, the purpose of the section, and the

nature of set-off in bankruptcy, it becomes clear

that no set-off can be allowed in this case.

BRENNAN J: 

Mr Bennett, could I just take you back to Justice Brownie's judgment again.

MR BENNETT: 

Yes.

made, as you have said, with full awareness of the
composition, and yet damages were assessed on the

BRENNAN J: 

This assessment of damages, I take it, was

footing that what had been lost was the difference
between the debt incurred in purchasing the

property and the value of the property?

MR BENNETT:  Your Honour, may I check that. One would

have thought that the normal fraud measure of

damages is the loss one has suffered by entering

into the transaction rather than the difference in

values of the properties. So, although that was

whispered to me a few moments ago, I would like to

just check that, if I may, before I answer

Your Honour's question.

He took the difference between the actual

value of the property at the time of the purchase

in the true state of the property and the purchase

price, which is the correct measure of damages.	He
did not.look at what it would have been worth had

the representation been true, which would not have

been the correct measure. That would have been the
measure in contract. But he took the correct tort

measure as the difference between what the purchase

price was and what the true value was on the basis

that the fraud induced the contract.

BRENNAN J: And the money advanced by Mrs McIntyre was

irrelevant to that assessment of damages?

MR BENNETT:  Yes, Your Honour, because that came after. It

was not something contemplated at the time of the

contract. I think the evidence was - and I am not

sure if this was all in evidence before His Honour

Mr Justice Hill though it may have been in the judgment - but I think the evidence was that the

contract was entered into. The contract

contemplated a second mortgage from some financial

institution. Efforts to obtain that failed, and

then the fresh negotiations opened with

Mrs McIntyre who was the licencee of the hotel, and

Gye(2) 10 29/8/90

in consequence of those negotiations she advanced

the $200,000.

BRENNAN J:  As part of an amended contract?

MR BENNETT:  No, Your Honour. It was not an amended

contract. It was simply performance in a manner

different to that originally contemplated by

consent of all parties. In one sense there may

have been an implied amendment. But she was never

a party to the contract, of course. The contract

was between the owner, Mawsons Hotels, and us and

our partners.

BRENNAN J:	What is the mutuality which is relied on by your opponents?
MR BENNETT:	Your Honour, it is different in different

judgments. In the judgment of the majority of the

Federal Court, Mr Justice Gummow and

Mr Justice Von Doussa, what they have said is that

one looks at the time of the commencement of these

proceedings, which were proceedings for a

declaration as to set-off, which is after the

judgment, and they say, "Well, at that time, there

are two judgments and there is no reason - they are

both money demands - why they cannot be set off".

When I get to the second and third submissions I

will be directing submissions as to why that cannot

be done.

One of the primary reasons that cannot be done

is that at that stage there is no mutuality of parties, because at that stage the claim by us

against Mrs McIntyre is a claim vested in us.	Her
claim for the $200,000 is a claim against the
trustee.	So at that stage there is no mutuality in
that sense.

But that was the way they put it. The other

way of putting it - and the argument I have just

put is part of the third argument - the other way

which is part of the second argument is this: they

say at the time of the composition where the

parties were the same, there was a debt owing by us

to Mrs McIntyre and there was a claim by us against

Mrs McIntyre which, in the fullness of time in

proceedings, would lead to a judgment debt.	And
they say it is a claim of a type which can be

set-off because of a case called Jack v Kipping

which I will be coming to, and therefore there is

mutuality at that stage.

So as I understand the case I have to meet, it

is put on those two alternatives. One takes either

the date of composition and relies on

Jack v Kipping, or one takes the date of judgments

Gye(2) 11 29/8/90

which the Full Court did, but then one has to

answer the absence of mutuality.

BRENNAN J:	Thank you.
MR BENNETT:	Your Honours, the second submission is that

there is no right of set-off where the claim by the

bankrupt or his estate is an unliquidated claim in

tort which could not, in the converse situation, be

proved in the bankruptcy.

If I could just very briefly remind

Your Honours of the provisions of section 82(2) of the Act -I do not think that is reproduced

anywhere - but if Your Honours have the

Bankruptcy Act, section 82 is the section dealing with proofs of debt of claims against the estate. Subsection (2) with admirable brevity says:

Demands in the nature of unliquidated damages

arising otherwise than by reason of a

contract, promise or breach of trust are not

provable in bankruptcy.

So a hazardous situation has been reversed. There

is a specific rule that the claim for damages for

tort cannot be proved in bankruptcy. That is a

rule which has been the subject of some criticism.

It produces some anomalous results. There is a

famous case in New South Wales in 1936 where,

before compulsory insurance, two buses collided and

when one bus company went into liquidation, the

passengers on that bus who were able to mount their

claims in contract succeeded in having proofs of

debt accepted, whereas the passengers in the other

bus, who were confined to claims in tort, failed,

and that is an example of the anomaly it creates. and respectable history and it remains, rightly or

wrongly, in the Bankruptcy Act.

What is important for ·present purposes is that

when one talks about mutuality and when one talks

about the possibility of the situation being

reversed, in the reverse situation there would be a

difficulty. Now the case which deals with the

reverse situation, in fact created a rather

anomalous result and I need to take Your Honours to

it a little carefully. It is a decision in

Jack v Kipping, (1882) 9 QBD 113. This was a case

where there was a fraud by the bankrupt, so it is

the reverse of the present case in that sense,

which induced the actual contract on which the

creditor sued. So it is as if Mawsons' Hotels had

been the other party and the fraud was a fraud by

the bankrupt on a purchaser. There was a claim by

the bankrupt against the purchaser for purchase

Gye(2) 12 29/8/90

price; a claim by the purchaser against the

bankrupt for damages for fraud. Stopping there, of course, that is a claim which under the modern rule

of equitable set-off, would probably fairly readily

be set off, but let me leave that aside for the

moment because there is some doubt about that.

Mr Justice Cave delivered the judgment of the

divisional court at page 116. It is useful, before

I take Your Honours to the judgment, just to show

Your Honours the competing propositions. On

page 115 counsel for the plaintiff, Mr Terrell, in

line 7 of his submissions, says:

That section deals merely with mutual debts

and credits arising from mutual dealings
between the parties, and not with claims for

damages for a personal tort, such as fraud or misrepresentation, from which the bankrupt is not released by his discharge:

Mr Collins, arguing the other side appropriately,

said at the top of page 116, the second sentence of

the long paragraph:

The tort relied on here is not an independent

personal tort so as to come within the rule

adverted to in Peat v Jones. It is a breach

of an obligation arising out of a contract of

sale.

Then Mr Justice Cave, having set out the question

and referred to Peat v Jones, at the bottom of

page 116, says:

It seems to us that it would be inequitable to

hold that, where a purchaser has had an

article which turns out to be worthless palmed
off on him by fraudulent misrepresentations,

and the vendor has become bankrupt, he should

be compelled to pay the agreed price to the

trustee, and be left to recover back as much

as he can in the shape of a dividend.

said that such a fraudulent misrepresentation It is

is a tort; but we think that it is not a

personal tort, but a breach of the obligation

arising out of the contract of sale.

It is a little hard to understand the logic of that

and Your Honours will see how it has been dealt

with in later cases, but it is certainly true that

the tort arises out of the contract of sale, but it

is a surprising way to describe an obligation in

deceit. So there seem to have been two features of

the case which defined the ratio. The first was, of course, that the claim was related to the same

contract. We do not have the problem here of the

Gye(2) 13 29/8/90

degree of connection which did not arise in that

case.

Secondly, the proposition seems to be that it

would be inequitable to require a person who has

been defrauded to be compelled to pay in full and

then be entitled to prove for damages the other

way.

Now, that logic, of course, does not apply in reverse because in the reverse situation where it

is the person who has committed the fraud who is

seeking the benefit of the set-off, the result to

that person, we say, is no more unjust than the

result to any person who suffers a loss as a result

of being a creditor in a bankruptcy.

Mr Justice Pincus, who delivered a concurring

judgment on different grounds to the majority

judgment, relied on this case as justifying the

set-off. Now, I have to take Your Honours - I will

try to do this reasonably briefly - to the way this

case has fared in later cases. If I can just

remind Your Honour of what Mr Justice Lush said

about it in Provident Finance v Hammond,

(1978) VR 312.	I hand Your Honours a copy of that
case.

This was not a bankruptcy case. This case

involved set-off under the general law and the

question was whether, in the same situation as

Jack v Kipping without bankruptcy, there could be a

set-off.	The relevant passage dealing with.
Jack v Kipping is at page 318.	In the long

paragraph in the middle of that page,

Mr Justice Lush said this:

I think I am precluded by authority from

holding that the claim for damages for fraud

constitutes an equity. The matter was dealt

with by the Court of Appeal in

Stoddart v Union Trust.	The judgments in that
case make it clear that a right to rescind the
assigned contract for fraud is an equity to
which the assignee is subject -

as do some other decisions -

Here however the contract of sale was not rescinded, and although it is likely that the fraud which induced the contract of sale can

also be regarded as inducing the making the

bill of sale, the bill of sale was not

rescinded -

that is the same as this case -

Gye(2) 14 29/8/90

and in the circumstances it could not have

been rescinded while the contract of sale

remained on foot. But in Stoddart's Case it

was held that a claim for damages for fraud

inducing the assigned contract could not

constitute an equity available against the

assignee. There are difficulties in the

judgments ..... but the decision has stood for

65 years and has not, as a decision, been so

much as criticized -

It is cited by Halsbury -

as ..... I have stated, Mr Merkel argued that it
was inconsistent with Jack v Kipping (a case

followed with perhaps some doubt by

Hamilton, J. in Tilley v Bowman. If there is

an inconsistency I must nevertheless follow

the later Court of Appeal decision rather than

the earlier Divisional Court decision.

So, that aspect of Jack v Kipping was not looked

upon kindly though, of course, Stoddart's case

involved very different considerations to those

involved here. That was a question of rescission

for fraud and the question whether that was in

equity, and so on. But, it is interesting that

Jack v Kipping is not treated as being something to

which enormous weight should be given.

Perhaps, more importantly, there is a very useful discussion of its status in re Mid-Kent

Fruit Factory, (1896) 1 Ch 567.

That was a decision under the mutual credit

provisions of the Bankruptcy Act and there was a

question there involving the winding up of a

company as to whether solicitors could set off

monies they held in trust for certain purposes for

the company against their fees. That part of the

decision is not, of course,·relevant for our

purposes but there is a discussion of Jack v

Kipping at page 571 by Mr Justice Vaughan Williams

as he then was, and His Lordship says this. Having

referred to Palmer v Day:

He -

that is, Lord Russell - this is two-thirds of the

way down page 571:

there clearly limits the operation of the

section by these few words.

And that was the words at the end of the previous paragraph, ttprovided they arise out of contract".

Gye(2) 15 29/8/90

Your Honours see:

"The section it its present shape, however,

has been held applicable to all demands

provable in bankruptcy, and so as to include

claims as well in respect of debts as of

damages liquidated or unliquidated provided

they arise out of contract."

He then says:

The present claim of these solicitors to

retain the moneys does not arise out of

contract at all. It is a claim to retain

moneys, which were paid into their hands for a

specific purpose, for another purpose which

was in nowise contemplated by the contract of

bailment. Then it was suggested that a claim

in respect of a tort also fell within the

section; but I pointed out that it was clear

from Jack v Kipping that a claim for damage

for misrepresentation, which was in one sense

a claim in respect of a tort, was only allowed

to come within the mutual credit clause on the

ground that the claim of the trustee, being

for the price of goods, the misrepresentation

which led to the purchase of the goods was a

mutual dealing as between the purchaser and

the bankrupt vendor. Having said that, I do not think it is necessary for me to say more

than that in my judgment there can be no

set-off in this case -

So, he limits Jack v Kipping because it was a

mutual dealing between them and the damage from misrepresentation is described as being "in one

sense" a claim in respect of a tort.

There is also a short discussion in another decision of the divisional court sitting in

bankruptcy in a case called Re Giles,

(1889) 61 LT 82. This was a case where there were

claims in relation to a fraudulent prospectus and

winding up of a company. It is convenient to go

first to Mr Justice Cave and he dismisses Jack v

Kipping this way, at the beginning of his judgment:

Counsel rested his case on Ex parte Adamson; Re Collie and Jack v Kipping. They are both

based on this principle: that if a man is

guilty of a fraud and by that means gets into

his own pocket the money of persons whom he

has defrauded, those persons are at liberty to

prove for the amount of the money which has

thus come into the hands of the man who has

defrauded them. That principle does not apply

here -

Gye(2) 16 29/8/90

because the money has gone to the - not to the

hands -

of the directors, but of the company -

and so on. So, it is distinguished there on the

basis that it is a special rule in favour of

victims of fraud and nothing more. Here, of

course, the rule is sought to be applied in favour
of the person guilty of the fraud.

Finally in this area, there is a decision of

Mr Justice Webb before he became a member of this

Court in Re Canada Cycle & Motor Agency (Qld) Ltd,

(1931) 4 ABC 27. That involved the same sort of

problem; a director sought to prove in the

liquidation of a company for money lent and the

company wanted to cross claim, in effect, for

moneys which he had wrongly expended out of the

company's money, a misfeasance claim. So, the

question was, could the liquidator set off his

misfeasance claim against the director?

At the bottom of page 32, His Honour deals with the question of set-off, and he says:

Then the next question is whether s. 82

of the Bankruptcy Act gives the right of

set-off claimed by the liquidators. Sec. 82

provides -

and he sets it out -

In Palmer v Day & Sons, Lord Russell held that the section applied to all demands proveable

in bankruptcy, and included claims both for

debts and for damages, liquidated or

unliquidated, provided they arose out of

contract.

And that, Your Honours recall, is the statement

which is referred to in all these cases.

is on the list if Your Honours need to go to it but The case

it is sufficiently stated here.

I can find nothing but confirmation of this

statement of the law in the many authorities

to which counsel referred me, and with which I

do not propose to deal at further length.

Indeed, Mr Graham does not contend that the

mutual dealings need not arise out of

contract, but that the liquidators'

claims ..... do -

et cetera. So it is limited to claims arising out

of contract and at page 34, he applies that to the

Gye(2) 17 29/8/90

facts before him, in the middle of the page, and

says:

I do not think that any of the

liquidators' claims can be said to arise out

of contract as I understand that expression to

be employed in the authorities.

So, when one puts that together what one has is a

limitation of the right of set-off under

section 82, to claims arising out of contract; an

anomalous decision in Jack v Kipping saying, "Well,

in the case of fraud it is so unjust if the

bankrupt has defrauded the creditor and caused him

to enter into the contract, for the creditor to

have to pay in full and not be able to set-off the

damages for fraud, we will allow an exception in

that case by treating the claim for fraud as

arising out of contract, where it is the same

contract and where it is the bankrupt who commits

the fraud" - - -

GAUDRON J: Is the relevant statutory provision in Jack

v Kipping much the same as section 86?

MR BENNETT:  Yes, Your Honour, it has been substantially the

same - - -

GAUDRON J: Because there is not a word about "arising out

of the contract" in the section, is there?

MR BENNETT: No, Your Honour, no, nor is there in our section

86. It is our part of the common law of bankruptcy,

I suppose.

GAUDRON J: The judicial gloss on the statute,is it?

MR BENNETT: Yes, Your Honour.

GAUDRON J:  Or an interpretation of the meaning of the word

"mutual"?

MR BENNETT: Yes, and Your Honours will see in a moment that

there has been a recent development in England

which extends it. Yes, that is so. The courts

have held consistently under statutes having

basically this wording, both under the old

Bankruptcy Act, under the former State
insolvency Acts and under the English legislation,

that it is restricted, substantially, to claims

arising out of contract. And that is why in Jack

v Kipping the court was so anxious to say, "Well,

this really arises out of contract" to stretch the

principle to meet the particular circumstances.

Gye(2) 18 29/8/90

GAUDRON J: Unless the proper meaning to be given to the

word "mutual" is: arising out of contract or

closely related to dealings in the contract, those

cases must be irrelevant.

MR BENNETT: 

Your Honour, perhaps I should go back to Palmer

v Day, (1895) 2 QB 618, because that is the case
which has been followed substantially in all these

cases over the years. That was a case involving an

auctioneer who was instructed to sell certain goods

and the question was the right to set off his fees

in relation to one set of goods from the surplus

left to him in relation to other goods. And the

court discussed whether it was one contract or two

contract and what the relationship between the
transactions was. But it seems to have been
treated as the basis of the section, and the

section is conveniently set out in the case so

Your Honour would be able to compare it.
Your Honour sees, at page 620, Lord Russell starts

by saying:

We are unable to concur in the view of the learned judge of the county court that there

was one entire and indivisible contract

between Langton and the defendants -

in the evidence -

does not warrant that conclusion. The case

appears to us the ordinary one of auctioneers

being instructed to sell, first, the

furniture, and, secondly, the house. The mere

fact ...•. given at or about the same time does

not -

make it -

a single and indivisible contract ..... the two

sales were different.

et cetera. He then sets out section 38 and

Your Honours could almost follow it word for

word

"Where there have been mutual credits, mutual

debts or other mutual dealings between a

debtor against whom a receiving order shall be

made under this Act, and any other person

proving or claiming to prove a debt under such

receiving order, an account shall be taken of

what is due from the one party to the other in

respect of such mutual dealings, and the sum

due .•... shall be set off ..... and the

balance ..... and no more -

Gye(2) 19 29/8/90

and this is the only substantive difference.

Instead of saying, "May be claimed in the

bankruptcy or is payable to the trustee as the case

may be", it says:

shall be claimed or paid on either side

respectively. "

So, in a sense, the argument I am putting on the

first part of the case is stronger under our Act

than it would have been under this Act.

But the substantive part of the section is the

same and those words have remained the same,

certainly in the 1924 Act and the earlier State

legislation - they are very similar in the United

State, if Your Honours want to see that section,

though they are quite different in Canada - and

this provision has been construed in bankruptcy

cases for many years. And Palmer v Day has always

been treated as the leading case showing how far it

goes.

So, in a sense, I am entitled to the benefit

of the presumption that the draftsman, both of the

1924 Act and of the 1966 Act, when he adopted the English section - an irrelevant alteration - was

prepared to accept this line of authority as

governing its construction.

DAWSON J:  Does the fact that you cannot prove unliquidated

damages in tort in bankruptcy have anything to do

with it?

MR BENNETT:  Your Honour, that, certainly, has, I think,

been the same also for many years - I say this

subject to correction and I will have it checked.

DAWSON J: But does it have a bearing on the interpretation

of section 86?

MR BENNETT:  It certainly is a factor going to the absence

of mutuality, yes, Your Honour. It is a factor. One is concerned with something where there is a

mutual transaction. If something cannot be proved,

certainly, we submit that is a reason why one would

not expect it to be set off the other way.

GAUDRON J: It cannot be the unliquidated damages that is

crucial because you can have unliquidated damages

for contract?

MR BENNETT: That is not crucial, no, Your Honour, and,

indeed, this Court has held that contingent claims

arising out of the same contract can be set off.

And I will take Your Honour to those cases when we

Gye(2) 20 29/8/90

come to the third part of the argument; that is

Hiley' s case and Day and Dent.

His Lordship then goes on at page 621 to set

out the effect of the section. From the middle of

the page, after setting it out, he says:

This is a re-enactment in substance of s 39 of

the Act of 1869, where, for the first time,

the words "mutual dealings" were added to the

words "mutual credits" and "mutual debts",

which are alone used in the earlier statutes - So the three phrases have been there since 1869.

The additional words undoubtedly have extended

the right conferred by the earlier statutes.

Under their provisions it has been considered

from the year 1818, when Rose v Hart was

decided, that although "mutual credits" is a

wider term than "mutual debts", the credits

must be such as either must terminate in debts

or have a natural tendency to terminate in

debts, and must not be such as terminate in claims differing in nature from debts. The

section in its present shape, however, has

been held applicable to all demands provable

in bankruptcy -

DAWSON J: That seems to bring in the section?

MR BENNETT:  Yes, that brings in what Your Honour

Mr Justice Dawson was putting to me.

and so to include claims as well in respect of

respect of debts as of damages liquidated or

unliquidated provided they arise out of

contract.

And those are the key words which are picked up in all the later cases although, as Your Honours see,

they have been departed from in one respect in

England in the 1980s and I will come to that.

Then he refers to various examples and says,

in the first full paragraph on the next page:

But whilst the right of set-off has been

thus widely extended, it is still subject to

the limitation that the "dealings" must be

such that in the result the account

contemplated in the section can be taken in

the way therein described. In other words,
the dealings must be such as will end on each

side in a money claim. Otherwise the claims

are incommensurable.

Gye(2) 21 29/8/90

And that, perhaps, is more related to the first

point.

So, Your Honours, it is my submission that the basic line of authority which has construed this

section would not permit a set-off against a claim

of this type. The only qualification is Jack v

Kipping and they have put why that is

distinguishable.

In 2.5 is something I have to disclose and

that is that there has been a recent English

development in three cases. Your Honours need not

go to them. They are referred to there. They are

re D.H. Curtis (Builders) Limited, (1978) Ch 162,

and two other cases which I have not put on the

list which follow that.

A:tl6aug29.cl Those three cases all dealt with

competing claims against the revenue. In each case

there was a claim for taxation of some kind by a

revenue authority and a cross claim of some kind

for a refund from a revenue authority with varying

degrees of connection of the taxation debts. The

courts extended the doctrines of the earlier cases

to apply to that, and in particular expressed the

view that one could not take the words arising out

of contract in Palmer v Day absolutely literally so

as to preclude that sort of set-off but, of course,

that involves very different considerations.

The cases have not been referred to in Australia at all, so far as we can ascertain,

except in this litigation, and they are all single

judge decisions and they are dealing, we would

submit, rather with taxation matters than

bankruptcy matters, but they do hold that the
proposition which I have put from Palmer v Day is

to be qualified in that respect.

Your Honours do not need to decide whether

those decisions are correct or incorrect. If they

are correct they are distinguishable, they relate

to a category of liability which bears a great many

resemblances to contract and one can understand the

court being willing to extend the section in that
direction. Certainly, we would submit they have

nothing to do with the situation here.

Then 2.6, we point out that the relationship

between the claims in the present case was not
particularly close. They do not arise out of the

same contract. At best the liability of the

debtors arose out of a borrowing entered into for

the purpose of completing a purchase from a third

party, which purchase was entered into as a result

of her fraud, and the relationship was conceded not

Gye(2) 22 29/8/90

general law. to be close enough to justify a set-off under the

We stress that there is no suggestion that the

borrowing from the respondent was contemplated at

the time the fraud was perpetrated or even at the

time of the original contract ofpurchase.

Finally, on this part of the argument we make

this submission, that if the decision of the

majority of the Full Court is correct, the policy

of section 82(2) is totally undermined because a

claim for unliquidated and damages in tort may be

set off against a claim by the trustee, although it

may not be proved in the bankruptcy. If one

assumes a reversal of the relationship and one
assumes an unliquidated claim in tort against the

bankrupt which could not be proved, it would be surprising if a claim which could not be proved

nevertheless could be the subject of a set-off, so

that in effect one obtains the benefit of, as if it

could be proved.

GAUDRON J:	Mr Bennett, what is wrong with importing the reverse notion of section 82(2) into section 86?
Where did the notion that section 86 is limited by
the reverse of section 82(2) come from?
MR BENNETT:	Well, Your Honour, I suppose there are the references to mutuality, the references in Palmer v
Day to the way section 86 should be construed and
the fact that the whole policy of section 82(2)
would be defeated where there is a set-off.
Wherever one finds that the person who has the unliquidated tort claim against the bankrupt
happens to be a person against whom the bankrupt
has a claim for, say, debt, suddenly one would
find, instead of the claim not being provable, was able to be satisfied out of that.
DAWSON J:	So that section 82(2) is really the key to your submissions.
MR BENNETT:	To this point of the submission, yes,

Your Honour. It is referred to in the judgment of

Mr Justice Hill at page 22, line 5, where

His Honour deals with the question that Your Honour

Justice Gaudron asks me. He says:

Throughout the history of the mutual credits clause that clause has always been closely associated with the provisions of legislation

relating to proofs of debt. Thus in the

English Bankruptcy Act of 1914 the mutual credits provision is s.31 and s.30 describes those debts which can be proved in the

bankruptcy. In the present Act the mutual

Gye(2) 23 29/8/90

credits provision, s.86, is contained in the

section of the Act dealing with proofs of

debts and the definition of what debts are

capable of proof is dealt with in s.82.

Logically, where a bankrupt owes A money and A owes a bankrupt money, the money which the

bankrupt owes A, if considered alone, must be

capable of falling within the description of

provable debts before it could be admitted to
proof. If there is to be a set-off against

that debt then a fortiori so too must the net

amount have resulted from a gross debt which

was capable of proof in the bankruptcy. But

since the emphasis of s.86 is on mutual debts,

credits and dealings it follows in my view

that the claim by A against the bankrupt must

be of the same character ..... that is to say,
it too must be a debt otherwise capable of

proof.

I think that puts that, with respect, better than I

could in dealing with the relationship.

Your Honours, those are the submissions on the

second argument.

The third argument is the shortest of the

three. It is that there is no set-off other than
in relation to a claim in contract where the claim

against the third party arises after the date of

the composition. Now, this really is what I was

submitting at the very beginning in answer to a

question I think Your Honour Justice Brennan asked

me about the date of ruling off.

Your Honours will see that Mr Justice Gummow

and Mr Justice Von Doussa in their judgment took as

the central feature the fact that the proceedings

were being heard after there were two judgments.

At page 94 the ratio of their decision is set out. In the middle paragraph of that page Their Honours say this:

But the present state of the law in Australia as to proof of unliquidated claims

in tort does not control the result in these

appeals. As Jordan C.J. pointed out in

Page's case with reference to In re Newman,

damages recovered in a tort action might be

proved in the bankruptcy or composition of the

defendant if judgment was signed before the

adjudication of bankruptcy or commencement of

the composition.

Well, that is clearly right. At that point it has

become a money claim.

Gye(2) 24 . 29/8/90

It is that circumstance together with the

construction given s.86 of the Bankruptcy Act by the High Court that produces the result in

the present appeal which we have indicated

earlier in these reasons.

Now, it is that passage I am concerned at this

stage to deal with.

The reference to this Court is a reference to

two decisions of this Court which are referred to

in paragraph 3.2 of my submissions - the

Day & Dent case in 1982 and Hiley's case in 1938.

If I could take Your Honours first to

Hiley's case, (1938) 60 CLR 468. That was a case

where a life insurance company became insolvent,
went into liquidation, and there were two claims.

One was a claim by the mortgagor against the insurance company for its failure to carry out

certain obligations to advance money and do certain

other things. The other was a claim by the

liquidator against the policy holder for money

lent. And it seems to be clear that the money lent

by the company pursuant to its obligation to do so

was something which arose out of the same contract

as was sued on by the policy holder.

But the problem was that at the date of

winding up the liquidator's claim against the
policy holder was a simple liquidated claim in

debt. But the policy holder's claim against the

liquidator was for unliquidated damages for breach

of contract, on one view a breach of contract which

had not yet occurred but which had been

anticipated. The Court in that situation, not

surprisingly, allowed a set-off. If I could just
show Your Honours the way it was put.

Mr Justice Stark at page 490 in the middle

paragraph on that page, line 4 says this:

The appellant bases his right to set-off .....

on section 82 ..... Under this clause 'the

characteristic of mutuality must always be

present'. And the dealings on each side must

be such as 'would end in a money

claim' ..... Further, all claims provable in

bankruptcy or in a winding up may be set off

provided there be mutuality .•.•. And the date

of the liquidation is the proper date for

ascertaining what mutual debts, credits or

dealings exist capable of being set off.

So it is the date of the liquidation.

Gye(2) 25 29/8/90

Mr Justice Dixon, as he then was, referred to that

at page 497 where, at the end of the sixth line of

the page, His Honour says:

If the end contemplated by the transaction is

a claim sounding in money so that, in the

phrase employed in the cases, it is

commensurable with the cross-demand, no more

is required than that at the commencement of

the winding up liabilities shall have been

contracted by the company and the other party

respectively from which cross money claims

accrue during the course of the winding up.

So it is at the commencement of the winding up.

And Mr Justice Rich, at page 487, cited with

approval a passage from re Daintrey;

Ex parte Mant (2) and in the fourth line of his judgment in inverted commas, His Honour cites this

passage:

'The line is drawn at the time of the

bankruptcy, and the rights of the parties are

not to be altered by subsequent transactions.

He then talks about the natural outcome of previous

transactions.

DEANE J: Is that not against your first submission? In

other words, what comes into the bankruptcy is the

result of the setting-off. The section says that

is what can be proved.

MR BENNETT:  Yes. The first submission, Your Honour, is not

concerned	with how one applies the section. It is
concerned	with whether it is applicable at all
and - - -

DEANE J: But your argument on the first case is based on

the assumption that the composition has taken
place, whereas these statements say that set-off is

to be determined at the commencement of the

composition.

MR BENNETT:	It is to be determined by reference to the facts at the commencement, but it is not physically
done then. It is -
DEANE J:	No, but it may be that there is an answer to it.

All I was suggesting to you was that these statements do not lie well with an argument which

is based on the existence of the composition to

prevent set-off, when what they say is that the
line is drawn before the composition the moment it

takes effect.

Gye(2)	26	29/8/90
MR BENNETT:	Yes.	What I would put in relation to that is

two things: first, the statements are simply not

considering the first question. I mean, in a

sense, no one has considered the first question.

DEANE J: Well, that may be so, but they do bear upon the

first question and they also bear upon the

relevance of section 82 to the construction of

section 86, in that if one is determining set-off

as the basis of working out what comes into

bankruptcy law, section 82 may not be quite as

relevant as if one, as it were, looks at it from

within bankruptcy law. I am not suggesting a view

against you, Mr Bennett, I am just trying to

highlight what seems to me to be a possible

problem.

MR BENNETT:  Yes. Your Honour, we answer that by saying

that the suggested ill sitting between the two

propositions only arises because one is not

comparing like and like. One is endeavouring to

compare how, if at all, one applies the set-off and between what parties, on the one hand, and the date

at which the transactions have to be notional for it to be done, on the other. One is dealing with

the application of the section; one is dealing

with a detail in relation to how it applies, and

obviously the dates for those two are different.

One precedurally applies it at the moment when the

trustee rejects the proof or the creditor files his

defence and it operates either as a defence

reduction by the trustee or as an answer to part of

a proof, but the moment one looks at it to see

whether the debts are mutual, is the date of

commencement of the bankruptcy.

So, Your Honour, those are the passages in

bankruptcy.

GAUDRON J:  I see, yes. Thank you.

MR BENNETT:  Suppose the bankrupt had a claim in tort for

assault or for damages for personal injury not

passing to the trustee.

GAUDRON J: Yes, thank you.

MR BENNETT:  It is likely to arise more frequently in a

composition, of course. My friend then put the

requirements of mutuality. Is it the same parties?

That is conceded. Same interests? That is

conceded and then he said there must be

commensurable - in other words, both be measurable

in monetary terms. We would submit that is, for

the reasons I have given, far too narrow a view of

it.

My friend then referred to section 82(2) and he made the submission that that section was put

there for reasons of humanity but the section,

Your Honour - it is not section 82(2) which

preserves to a debtor his right to damages for

personal injury. Section 82(2) is concerned with

claims against the estate. It is concerned with

damages against the estate for tort. Why is there

any humanity or any relevance of humanity in saying

that a creditor who has an unliquidated claim for

damages for tort against the bankrupt cannot prove

it in the estate? If anything, the section is a

classic illustration of the triumph of expediency

over humanity because it is a provision which says

that in that situation, because of the

inconvenience of it and for other reasons, such a

claim will not be allowed and they gave Your Honour

the example of the collision between the two buses
which caused the problem in 1936. I think it was

Re Southern Cross Coaches, (1936) SR, the name of

that case.

Section 82(2) is concerned only with proof of debts and so is section 86 and they are part of an

overall code, we would submit, which deals with

claims by and against the estate.

I conclude, as I began, by saying that the

issue in this case is ultimately not one so much of

whether there should be a regime of set-off

Gye(2) 89 29/8/90

applying to this situation but which regime should
apply and we submit that on the basis, for the
reasons I have given in relation to my first

submission, it is a case where the State laws

should apply.

Mr Justice Gurnrnow and Mr Justice Von Doussa in

their judgment suggested that it was undesirable

for State law to prevail because it might be

diverse and, of course, it is diverse today but it

was not diverse in 1924 or 1966. So far as we are

aware as at those dates there had been no State

legislation on the subject of set-off. The States

simply had the common law statutes of set-off in

the common law. Divergency began when States

started passing Imperial Acts Application Acts and repealing statutes of set-off and causing problems

that way but, we would submit, at the time this

legislation was passed that problem was not

uppermost in the draftsman's mind and that in the

present case the problem falls to be decided by

State law, as to which there is a concession as

well, of course, as the judgment of

Mr Justice Brownie. May it please the Court.

MASON CJ: Yes, thank you, Mr Bennett. The Court will

consider its decision in this matter.

AT 3.55 PM THE MATTER WAS ADJOURNED SINE DIE

Gye(2) 90 29/8/90