Re Capel, E.J. v Ex parte Marac Finance Australia Ltd
[1994] FCA 42
•08 FEBRUARY 1994
ELWYN JOHN CAPEL; EX PARTE: MARAC FINANCE AUSTRALIA LIMITED v. ELWYN JOHN
CAPEL and OFFICIAL TRUSTEE IN BANKRUPTCY
No. E1256 of 1988
FED No. 42/94
Number of pages - 15
Bankruptcy
(1994) 120 ALR 480
(1994) 48 FCR 195
COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND
GENERAL DIVISION
DRUMMOND J
CATCHWORDS
Bankruptcy - Prior to bankrupt's discharge, trustee assigns a right of action against creditor back to the bankrupt - the bankrupt's right of action and the creditor's debt arose out of mutual dealings within the meaning of the Bankruptcy Act s. 86 - at the time of the assignment the Trustee had not taken the account required by s. 86 - section 86 does not operate to extinguish claims by and against the bankrupt and convert the mutual claims into a cause of action for the balance of the account - the Trustee may assign a claim against a person who has a cross-claim against the bankrupt before the account required by s. 86 has been taken but such assignment will be subject to the right of set-off.
Bankruptcy Act 1966 (Cth) - s. 86
Day and Dent Constructions Pty. Ltd. (in liq.) v North Australian Properties Pty. Ltd. (1982) 150 CLR 85
Farley v Housing and Commercial Developments (1984) 26 BLR 66
Genman Pty. Ltd. v Beneficial Finance Corp. Ltd. (Davies J, unreported, 2 July, 1991)
Gye v McIntyre (1990) 171 CLR 609
Hiley v Peoples Prudential Assurance Co. Ltd. (1938) 60 CLR 468
Martin v Lewis (Full Court, Queensland Supreme Court, unreported, 7 June, 1985)
McIntyre v Gye and Perks (1990) 22 FCR 260
M.S. Fashions Ltd. v Bank of Credit and Commerce International SA (1993) BCLC 280
M.S. Fashions Ltd. v Bank of Credit and Commerce International SA (1993) 3 WLR 220
Re Nguyen (1992) 107 ALR 442
Ramsey v Hartley (1977) 1 WLR 686
Stein v Blake (1993) 3 WLR 718
HEARING
BRISBANE, 28 August 1992
#DATE 8:2:1994
Counsel for the Applicant: Mr. M.R. Bland
Solicitors for the Applicant: Clayton Utz
The respondent appeared in person.
Counsel for the Trustee: Mr. P.E. Hack
Solicitor for the Trustee: Australian Government Solicitor
ORDER
The Court Declares That:
1. The Deed of Assignment between the Official Trustee in
Bankruptcy and Elwyn John Capel dated 3 April, 1991 is void ab initio insofar as it purports to assign a claim against Marac Finance Australia Ltd. ("Marac") for "incorrect proceedings instituted by (Marac) against the bankrupt in that the judgement against the bankrupt was incorrectly calculated".
The Court Orders That:
Save as above, the motion is dismissed.
The applicant pay the respondent's costs of and incidental
to the motion to be taxed.
Note: Settlement and entry of orders is dealt with in Rule 124 of
the Bankruptcy Rules.
JUDGE1
DRUMMOND J This is an application under s. 178 of the Bankruptcy Act 1966 by Marac Finance Australia Limited ("Marac") for a review of the decision of the Official Trustee to assign to Mr. Capel certain causes of action which Mr. Capel maintained prior to his bankruptcy against Marac and to set aside the Deed of Assignment.
The question for decision is whether the set-off provided for by s. 86 of the Bankruptcy Act 1966 operates automatically, so that only the balance of the claims between a bankrupt and his debtor can be assigned by the trustee in bankruptcy or whether the trustee's right of action against the bankrupt's debtor, who has a s. 86 set-off against the bankrupt, can be assigned (along with the right of set-off) before the account is taken and without regard to the result of the account. It is common ground that if such assignment can be made, it is made only subject to the right of set-off.
The Facts
3. On 3 May, 1985 Marac and Mr. Capel entered into an agreement whereby Marac lent Mr. Capel $40,000.00 secured by a second mortgage over the latter's home and by a guarantee from Gapmont Pty. Ltd., a company with which Mr. Capel was then associated. The principal was to be repaid by 10 July, 1985 with monthly instalments of interest being paid in the meantime. Marac acknowledged that the time for repayment was extended to 10 September, 1985. Certain interest instalments were not paid. So, on 11 October, 1985, Marac sued Mr. Capel in the Supreme Court of Queensland on the covenants in the mortgage for the principal moneys and unpaid interest; it also sued Gapmont Pty. Ltd. on its guarantee.
de Jersey J said that the only question for him "was whether the facts sworn to by (Mr. Capel) gave rise to triable issues warranting the granting of leave to defend"; he gave summary judgment against Mr. Capel and Gapmont Pty. Ltd. on the following grounds:
(a) Even if Marac in August 1985 did extend the time for repayment of the principal money to 7 November, 1985, as Mr. Capel alleged, it was a term of that agreement that Mr. Capel would continue regular monthly interest payments. Since Mr. Capel defaulted in interest payments twice during the extended period, it was therefore open to Marac to call in the loan, even if there was an agreement to extend time for repayment. Marac thus had an accrued cause of action sufficient to entitle it to issue its writ in October.
(b) There was no evidence that any of the equipment repossessed by Marac under a bill of sale given by Gapmont Pty. Ltd. as a security collateral to Mr. Capel's mortgage had been sold. Therefore, Marac was entitled to judgment for the amount claimed in the writ and could not be required at that time to reduce the amount claimed as due by Mr. Capel on the mortgage by any sum referable to the value of the goods, as Mr. Capel had contended.
(c) The bare assertion by Mr. Capel of an allegedly fraudulent promise said to be made by Marac when Mr. Capel entered into the loan transaction in May 1985 on which he was sued to provide long term finance was insufficient to justify leave to defend and there was, in any event, no evidence that he had suffered any loss by not being provided with such finance.
(d) Even if Marac converted certain property belonging to Gapmont Pty. Ltd. there was no evidence as to its value, nor was there any evidence to show that Mr. Capel may have an equitable set-off in respect of any such conversion against Marac's claim against him on the mortgage.
The Full Court dismissed Mr. Capel's appeal against this judgment, which was confined solely to the alleged agreement to extend time for repayment, as incompetent, no leave having been obtained as was required by the Supreme Court Rules, although it did examine the substantive aspects of the case and considered them unmeritorious.
Marac issued a bankruptcy notice against Mr. Capel on 2 April, 1986, based on this judgment debt. A sequestration order was made on 11 November, 1988. The Official Trustee became trustee of Mr. Capel's estate.
On 11 February, 1991 Mr. Capel made application for a discharge from his bankruptcy; this was granted on 9 May, 1991. In the meantime, on 12 March, 1991 Mr. Capel proposed that the Official Trustee should commence proceedings on behalf of his estate against Marac in respect of the matters he raised by way of defence to Marac's summary judgment application. On 21 March, 1991, Mr. Capel was advised that the Official Trustee was not in a position to litigate these claims for lack of funds but offered to sell to him these rights of action "in consideration of the Trustee's fees and costs", which were anticipated to total about $2,500.00. Mr. Capel accepted this offer by letter dated 26 March, 1991. The Deed of Assignment was executed on 3 April.
In his affidavit Mr. Eleftheriou, the Official Receiver, who was authorised to act on behalf of the Official Trustee, states:
"9. At the time of execution of that Deed it was my view that,
(a) there was no money in the administration of the first respondent's estate which would enable me to take action of the kind proposed by the first respondent; nor even to take steps to investigate the merits of those proposed actions, had I been of the provisional view that there was merit in the proposed action.
(b) any action as proposed by the first respondent had no merit and sought merely to reagitate questions already determined in proceedings in the Supreme Court, and
(c) any expenditure of public moneys on such litigation could not be justified. Accordingly I was of the view that what was being sold to the first respondent pursuant to the Deed was objectively worthless. However I took the view, as trustee, that if the first respondent was prepared to pay $2,500.00 then I should execute the Deed and accept the sum for the benefit of the estate of the first respondent.
10. At the time of executing the Deed I considered that it was within my power pursuant to s. 134 of the Act, as I did not consider the value of what was being assigned to exceed the prescribed sum of $50,000.00 referred to in that section. I still am of that view. Accordingly I did not consider it necessary to seek the approval of creditors pursuant to s. 135 of the Act.
11. ... No proof of debt has been lodged by the applicant in these proceedings, Marac Finance Australia Limited. Given the state of the estate I have not called for the lodgment of proofs of debt, since in my view it is highly unlikely that any distribution will be made to creditors."
On 4 April, 1991 Mr. Capel sued Marac in the Supreme Court of Queensland on the claims assigned to him, which were substantially the same as those raised in his defence to the summary judgment application and which I have already described.
It appears that Mr. Eleftheriou gave quite full consideration to the issue of whether he had power to make the assignment. However, in doing so, he does not appear to have considered whether it was incumbent upon him to carry out the exercise required by s. 86 and set-off the value of Mr. Capel's claims against the judgment debt owed by Mr. Capel's estate to Marac. It is understandable that he did not do this, once he assessed Mr. Capel's claims against Marac as being "objectively worthless". Mr. Eleftheriou did not conduct any investigation to determine what evidence was available to support these claims or what money value they might have: he took the view that they were valueless on the ground that they sought to relitigate matters that had already been determined against Mr. Capel in the Supreme Court. If he had conducted the accounting exercise required by s. 86 and had concluded that Mr. Capel's claims against Marac were worthless, there would be no "property" capable of assignment pursuant to s. 134(1)(a). Mr. Capel himself could then have challenged such a decision on application under s. 178. But Mr. Eleftheriou did not take the account required by s. 86, as Marac says he should have done, and it is his failure to do that which raises the question for decision here.
Although it never proved in Mr. Capel's bankruptcy before he was discharged, Marac was "a party claiming to prove a debt in bankruptcy" for the purposes of s. 86: it was a person who, subject only to the set-off provided for by s. 86 producing a balance in its favour, would have been entitled to prove in Mr. Capel's bankruptcy for the debt in question. See Gye v McIntyre at 620-25. It was conceded on behalf of Mr. Capel, correctly in my view, that his claims and Marac's debt arose out of "mutual dealings" between them sufficient for the purposes of s. 86. Marac conceded, also correctly in my opinion, that the Official Trustee had power under s. 134(1)(a) to make an assignment of the kind here in question: see Ramsey v Hartley (1977) 1 WLR 686 and cf. Stein v Blake (1993) 3 WLR 718 at 721. The sole question for determination is that which relates to the effect of s. 86.
Section 86(1) of the Bankruptcy Act provides:
"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 one party to the other in respect of those mutual dealings;
(b) the sum due from 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 bankruptcy, as the case may be."
The leading case on s. 86 is Gye v McIntyre (1990) 171 CLR 609. There, the High Court said at 622:
"Section 86 is a statutory directive ('shall be set off') which operates at the time the bankruptcy takes effect. It produces a balance upon the basis of which the bankruptcy administration can proceed. Only that balance can be claimed in the bankruptcy or recovered by the trustee. If its operation is to produce a nil balance, its effect will be that there is nothing at all which can be claimed in the bankruptcy or recovered in proceedings by the trustee."
The purpose of this section is to prevent the injustice which would arise if the trustee in bankruptcy could insist upon having a hundred cents in the dollar upon the whole of the debt owed to the bankrupt while at the same time leaving the bankrupt's debtor to be satisfied with a dividend of some few cents in the dollar on the whole of the debt owed by the bankrupt to him: see Gye v McIntyre at 618-9.
Applicant's case
15. Counsel for Marac submitted that the trustee was required by s. 86 to assess the value of each of Mr. Capel's and Marac's claims and set them off against each other, so that only if there was a balance in favour of the estate could there be an assignment to Mr. Capel and then only of that balance. It was then said that, given Mr. Eleftheriou's assessment in paragraph 9 of his affidavit that the claims were "objectively worthless", the result of the set-off would have been that Mr. Capel's claims were extinguished and the full judgment debt provable in bankruptcy. But Mr. Eleftheriou reached this conclusion as to the worthlessness of the claims solely on the ground that they were an attempt to relitigate matters decided against Mr. Capel. A difficulty with this argument is that, unless he was right in thinking that the claims assigned were doomed to fail because they were, in effect, res judicata or the subject of issue estoppels against Mr. Capel, Mr. Eleftheriou had no other information about the claims available to him upon which he could make a judgment as to their worth and no such evidence is before me. However, if s. 86 operates to convert a claim by the bankrupt's estate and a cross-claim against the estate into a claim for the balance (if any), then it would necessarily follow that the Official Trustee was not entitled to make the assignment here in question, since it is plain that s. 86 does apply to the claims the subject of the assignment and to Marac's judgment debt against Mr. Capel.
Marac relies on the decision of Davies J in Genman Pty. Ltd. v Beneficial Finance Corp. Ltd. (unreported, Federal Court, 2 July, 1991). There the applicant and a Mrs. Newington borrowed moneys from the respondent to finance a development project. Mrs. Newington alleged that the respondent had breached its obligations to provide further finance, breached its fiduciary duty and had negligently managed the project. The loan moneys were not repaid and the respondent successfully petitioned for Mrs. Newington's bankruptcy. After her discharge from bankruptcy, the trustee purported to assign to Mrs. Newington the rights of action she had against the respondent which had vested, on her becoming bankrupt, in her trustee and Mrs. Newington sought to be joined in proceedings commenced by the applicant against the respondent to pursue those claims.
After referring to Gye v McIntyre, Davies J said:
"It follows the Official Trustee was not entitled to act as he did, namely to treat Beneficial's claim against Mrs. Newington as an amount payable in the bankruptcy but to assign the whole of any claim which Mrs. Newington had against Beneficial to Mrs. Newington for the purpose of its being recovered outside the bankruptcy. Insofar as there were mutual dealings, these, if in favour of Beneficial, could have been claimed in the bankruptcy. If there were a balance in favour of Mrs. Newington, the balance could have been claimed by the Trustee against Beneficial. Insofar as an accounting was required to establish the balance this accounting should have taken place in the course of the bankruptcy administration. ... In any event, the Official Trustee was not entitled to ignore s. 86 and to process Beneficial's claims in the bankruptcy yet assign Mrs. Newington's claim against Beneficial back to Mrs. Newington to be claimed outside the bankruptcy."
His Honour therefore refused to act on the assignment and refused Mrs. Newington's application.
But there, Beneficial had lodged a proof of debt for nearly $1,000,000.00 and Davies J considered that the evidence showed that the Official Trustee had accepted the amount of this claim as the balance in favour of Beneficial. It is therefore clear that the Trustee could not ignore the s. 86 account which Davies J considered the Trustee had taken and which had produced a balance in favour of Beneficial and then assign to Mrs. Newington claims extinguished by that account. The decision is, however, of little relevance to the question here where the s. 86 account has never been taken. Here, Marac has never lodged any proof of debt and the Official Trustee, unlike what he did in Genman, has not dealt with any claim by Marac as a claim in the bankruptcy.
Of more assistance to Marac is the English decision of Farley v Housing and Commercial Developments Limited (1984) 26 BLR 66; the question there was whether, by reason of s. 31 of the Bankruptcy Act 1914 (which is similar in wording and effect to s. 86), debts due by the building owner to an insolvent contractor ceased, upon the contractor going into liquidation, to have separate existence as choses in action and so could not thereafter be assigned, but were replaced by a balance of account under s. 31 in respect of the mutual dealings between the contractor and the building owner. Neill J said at 78:
"The purpose of the rule as to set-off in insolvency is to do substantial justice between the bankrupt (or insolvent company) and the creditors. Where the facts are appropriate the rule applies automatically and irrespective of the wishes of the parties. In the present case it is plain from the without prejudice correspondence in January 1975 that there were claims and cross-claims relating to the two contracts and that the respondents were putting forward cross-claims which were capable of proof within the terms of s. 30 of the Bankruptcy Act 1914 ...
Accordingly, on 5 February, 1975 (when the contractor went into liquidation) the rights of the contractor and the respondents inter se became subject immediately to the provisions of s. 31. In accordance with s. 31 an account had then to be taken and the balance of the account and no more became the sum thereafter owing to or from the respective parties."
His Honour continued at 79:
"... I see no answer to the argument put forward by Mr. Chadwick that after the contractors went into insolvent liquidation the only relevant chose in action which the contractors owned was the right to enforce a claim for the amount, if any, which was due to the contractors after taking the account required in accordance with s. 31."
His Honour therefore held that the liquidator was not entitled, in 1979, to execute the Deeds of Assignment which purported to assign moneys due to the contractors by the building owner to a third party. The building owner had not attempted to prove in the liquidation in respect of its claims against the contractor. But Neill J held that that did not prevent s. 31 operating to convert the rights that each had against the other at the date of liquidation into a right in the liquidator or in the owner to the balance, depending upon who that balance favoured.
This decision is authority for the proposition that the effect of s. 86 is to extinguish, upon a person becoming bankrupt, claims by and against him and to create a new chose in action for the balance owing (if any) after the original choses have been set-off against each other.
Farley has, however, recently been overruled in Stein v Blake (1993) 3 WLR 718. There, the Court of Appeal held that the current English equivalent of s. 86 does not operate to extinguish the separate causes of action between a bankrupt and his creditor, that these claims remain in existence until such time as a balance of account has in fact been ascertained and that, prior to the account being taken, a trustee in bankruptcy can assign to another the bankrupt's claims against a person who is entitled to avail himself of the statutory right of set-off. The assignment there was to the bankrupt himself. As Balcombe LJ observed at 723, Farley, M.S. Fashions Ltd. v Bank of Credit and Commerce International SA (1993) BCLC 280 (a Court of Appeal decision in an interlocutory matter) and M.S. Fashions Ltd. v Bank of Credit and Commerce International SA (1993) 3 WLR 220, a decision at first instance, support the argument that, from the commencement of the bankruptcy, the claims between the bankrupt and the creditor cease to have any independent existence and are replaced by a claim for the balance. However, the Court of Appeal refused to follow these authorities. In coming to his decision, Balcombe LJ at 727-728 recognised that anomalies result whichever view is the correct one. If the Farley view is correct, he noted that, among other things, whenever there is a claim by a bankrupt and a cross-claim against the bankrupt's estate, the bankrupt's claim is unassignable: only the balance after the taking of the account is assignable and this may not be possible for some time; he also noted that, on the Farley view, the rights of the claimant against the bankrupt are affected without his consent, and possibly even without his knowledge, since his debt, having ceased to exist, is also non-assignable. His Lordship considered that, if the other view were correct, the anomalies were less obvious: if the trustee can assign the bankrupt's claim before the account is taken, he cannot thereafter set that claim off against a claim that may be made in the bankruptcy by a creditor. But his Lordship considered that the trustee really has no ground for complaint in that event, because he has elected to assign away the bankrupt's claim against the creditor, presumably for what he considers to be valuable consideration and the creditor is in no worse position, since he retains the right of set-off against the assignee or the right to prove his claim in the bankruptcy, whichever he prefers. Apart from the balance of anomalies favouring the view he came to, Balcombe LJ also favoured that view because it avoided having to introduce into the section the requirement that the account can only be taken by the trustee in bankruptcy, when the section does not so provide, and it also avoids having to imply a prohibition against assignment until the account has been taken: see p. 728. It should also be noted that at 723 his Lordship accepted that, if it could properly be made, any assignment by a trustee in bankruptcy would be subject to all equities, so that the assignee would take subject to the wide right of set-off created by s. 323, a view that appears to be plainly right. Staughton LJ generally agreed with Balcombe LJ but at 729 emphasised that the section did not require the account to be taken by the trustee and no well else: it was open to the trustee or to the Bankruptcy Court or to any other court exercising lawful jurisdiction to take the account, if that should be appropriate in the circumstances of the case. He noted the possible difficulty that could arise if a claim by the bankrupt's estate could be assigned where the creditor's cross-claim turns out to exceed the assigned claim: inconvenience and multiplicity of proceedings might arise. (Moreover, it is theoretically possible, in that event, that inconsistent decisions might be made as to the balance: this would occur if, for example, the judge in proceedings outside the bankruptcy held that the creditor's claim overtopped the bankrupt's assigned claim by $X but the bankruptcy court, in reviewing a decision of the trustee concerning the account after the creditor had proved in the bankruptcy for the $X surplus, were to hold that there was a nil balance or a balance in favour of the bankrupt.) Staughton LJ did not consider that theoretical difficulties should stand in the way of accepting Balcombe LJ's view that debts due to and from a bankrupt do not disappear on the making of a bankruptcy order and that the section is concerned only with the remedy that is available and not with the existence of debts. Waite LJ agreed with both Balcombe and Staughton LJJ.
Respondent's case
25. Counsel for Mr. Capel contended that the effect of the set-off required by s. 86 is not to extinguish the cause of action; rather, it requires only that the amount of the debt owed by Mr. Capel to Marac be set-off against any damages otherwise recoverable by him in respect of the cause of action in order to ascertain the amount (if anything) of the judgment to which Mr. Capel is entitled. Counsel accepted that the right to set-off is attached to the cause of action and therefore any assignment of the cause of action is an assignment subject to the right of set-off. Alternatively, it was argued on behalf of Mr. Capel that Marac will suffer no prejudice, as the amount of the loan moneys will be necessarily considered in assessing any damages awarded to Mr. Capel in the Supreme Court action.
These submissions were based on Re Nguyen (1992) 107 ALR 424. This was a case in which the Official Trustee sought the leave of the court to assign to two bankrupts, after the discharge from bankruptcy of one of them, the bankrupts' right of action against a creditor; the creditor opposed the grant of leave on the ground, among others, that it would be prejudiced by the proposed assignment. French J said at 431:
"(T)he bank says it will be prejudiced by the proposed assignment. Its claims against Mr. Nguyen and Ms. Luu are blocked by virtue of s. 58(3) of the Bankruptcy Act. It has only a right to lodge a proof of debt. If the proposed action were brought by the Official Trustee, it would have a right of set-off under s. 86 in relation to its claim. If the rights of action are assigned, says the bank, it will lose its right to set-off. I do not accept that submission."
After quoting from the passage in Gye v McIntyre at 622 which I have set out above, his Honour, in granting leave, continued:
"A chose in action subject to set-off by virtue of the section if assigned is assigned, in my opinion, with the right of set-off intact. The trustee cannot sell more than he has. What he has in this case at best is a chose in action subject to the right of set-off. Even if that view were incorrect, the bank would have available to it the argument that any damages recoverable by Mr. Nguyen and Ms. Luu must take into account the moneys they received from the bank. That is not a matter of proving a debt, but rather of assessing damages."
I understand his Honour, in advancing the second of these propositions, to be saying only that that is a ground upon which it would be proper to refuse to exercise the discretion to grant relief under s. 178.
The submission on behalf of Mr. Capel, based on Re Nguyen, is supported by Martin v Lewis (Full Court, Queensland Supreme Court, unreported, 7 June, 1985). The appellants in that case sold a motor vessel to the respondent, taking a bill of sale over it to secure the unpaid purchase moneys. The respondent defaulted and the appellants exercised their power of sale. In doing this, the appellants, so the respondent alleged, breached their duty to take reasonable care to ensure that the vessel was sold at its market value. The proceeds of the sale were less than the amount of the moneys due under the security to the appellants. The respondent was made bankrupt on his own petition at about the time of the sale of the vessel. The appellants did not prove in the bankruptcy. After the respondent's early discharge from bankruptcy, his trustee in bankruptcy assigned the cause of action against the appellants for breach of their duty as mortgagees on sale back to the respondent for a nominal sum plus a percentage of the proceeds of the action. The respondent commenced proceedings in the Supreme Court in which he obtained an award of damages against the appellants. On appeal, the Full Court unanimously held that s. 86 applied so that the appellants were entitled to set-off the amount of the outstanding debt owed to them under their security against their liability in damages to the respondent. Andrews SPJ, with whom Kelly J agreed, held, in reliance on Peat v Jones and Co. (1881) 8 QBD 147; In Re Daintrey; Ex parte Mant (1900) 1 QB 546; Ellis and Co.'s Trustee v Dixon-Johnson (1925) AC 489; and Mitchell v Pernoll Motors Pty. Ltd. (1960) 20 ABC 200 that the fact that the appellants had not proved in the respondent's bankruptcy for the amount owing to them after having realised their security did not exclude their entitlement to rely upon s. 86; he said: "had the Official Trustee taken action against the appellants, they would have been entitled, in my view, to claim a set-off of the amounts owing under the mortgage, after deducting the amount received in the sale of the (vessel) and any costs etc., associated with that sale". His Honour did not, however, explain why the same result should follow where it was the bankrupt himself who sued on a cause of action assigned to him only after his discharge. This problem was dealt with by Shepherdson J who disagreed with the majority approach, although he reached the same conclusion that s. 86 operated to require the amount due under the mortgage to the appellants, less the sale recovery, to be set-off against the respondent's damages claim. He said:
"One has to ignore s. 153 (which provides that the discharge of a bankrupt operates to release him from all debts including secured debts provable in the bankruptcy) if one is to permit the set-off claimed. I respectfully disagree with reliance upon a hypothetical case to justify the set-off, i.e., the hypothetical case of the Official Trustee having sued the appellants for the alleged breach ... That did not occur and of course s. 153 has come into operation because of the respondent's discharge from bankruptcy. Once the set-off is permitted in this case it may appear that the released debt is resurrected and that s. 153 is negated; furthermore, the appellants appear to be placed in a preferred position vis-a-vis other unsecured creditors ... It would be harsh and unjust if the fact of discharge were to result in set-off being barred by the effect of s. 153(1). Such a result is avoided once one realises exactly what the Official Trustee assigned to the respondent. The Deed of Assignment shows that the Official Trustee assigned transferred and set over to the respondent 'its right and interest in the right of action' by the respondent against the appellants. ...
Effectively therefore the Official Trustee assigned the right to bring the action now before this Court but that right was itself subject to the appellants' right to claim set-off under s. 86 of the Bankruptcy Act. The Official Trustee could not assign to the respondent a better title to the right of action than he had and so the respondent took subject to the appellants' right to claim set-off."
Shepherdson J does not appear to be speaking of the bankrupt's claim on a balance in his favour; rather does he seem to me to regard the assigned claim as something separate from the appellants' set-off. But the cause of action was only assigned to the respondent after his discharge from bankruptcy and it is difficult to see how the appellants could retain the right to set-off against the respondent's claim for damages the outstanding amount owing under the mortgage after the respondent was released by s. 153 from all debts provable in his bankruptcy, i.e., after the respondent was released from this very liability to the appellants. This decision is, however, inconsistent with s. 86 operating to extinguish mutual claims and to convert them into a claim for the balance.
Conclusion
31. Section 86(1)(c) provides that only the balance may "be claimed in the bankruptcy, or is payable to the trustee in the bankruptcy". However, this sub-section loses its force as an indication that there can be no assignment of the bankrupt's claim against a debtor where there is a cross-claim by that debtor against the bankrupt, but only an assignment of the balance of a bankrupt's claim (if any) when it is recognised that it is well established that the account provided for by s. 86 can be taken outside the bankruptcy, e.g., where the bankrupt's debtor is sued by the assignee in bankruptcy and even though the trustee has not attempted to take the account. See McIntyre v Gye and Perkes (1990) 22 FCR 260 at 270-271 and Gye v McIntyre (1991) 171 CLR 609 at 621. This well established rule is consistent with the fact that s. 86 does not in terms require the account to be taken by the trustee and by no one else.
Stein v Blake, supra, is I think strong authority that the section does not prevent the assignment by a trustee in bankruptcy to another of a claim vested in the trustee against a person who has a cross-claim against the bankrupt before the account provided for by the section has been taken. Although the question of the proper construction of s. 86 is not an easy one, I think that the balance of policy considerations discussed in Stein v Blake, which are just as relevant to this section as they are to the English provision there considered, clearly favours interpreting s. 86 so as to permit of an assignment by the trustee of a claim by the bankrupt either to the bankrupt himself or to a third person prior to the account referred to in s. 86 having been taken, given that such an assignee will take the bankrupt's claim subject to all equities, including the right of set-off provided for by the section.
In McIntyre v Gye and Perkes (1990) 22 FCR 260 at 270, Gummow and von Doussa JJ accepted the view of Derham on Set-Off that, under s. 86, the cross-obligations subsist until the account is actually taken.
Even if s. 86 is not regarded as operating automatically to extinguish cross-claims and to convert them into a claim in respect of the balance, it can still be relied on whenever a claim is made, either in the bankruptcy or in proceedings outside the bankruptcy, to payment of a debt owing to the bankrupt by a person who has a cross-claim against the bankrupt in a way which gives full effect to the legislative purpose of "substantial justice" to the parties: cf. Gye v McIntyre, supra, at 619.
In Gye v McIntyre, supra, at 622, the High Court said of s. 86:
"Section 86 is a statutory directive ('shall be set off') which operates as at the time the bankruptcy takes effect. It produces a balance upon the basis of which the bankruptcy administration can proceed. Only that balance can be claimed in the bankruptcy or recovered by the trustee. If its operation is to produce a nil balance, its effect will be that there is nothing at all which can be claimed in the bankruptcy or recovered in proceedings by the trustee. The section is self-executing in the sense that its operation is automatic and not dependent upon 'the option of either party' ... Indeed, the traditional and better view would appear to be that the statutory rule of set-off contained in s. 86 will, where the requirements of the section are satisfied, prevail over a contrary agreement of the parties ... It is, however, unnecessary to pursue that particular question. Even if one were to accept the dissenting view of Lord Cross of Chelsea in the National Westminster Bank Case to the effect that the otherwise automatic operation of a provision such as s. 86 may be excluded by an antecedent agreement, it would be wrong to attribute to the legislature the illogical intent that a directive which was intended to be otherwise automatic in its operation and to apply in circumstances where set-off produced a nil balance should not operate at all unless and until either the bankrupt's creditor saw fit to exercise the option of lodging a formal proof of debt or the trustee in bankruptcy instituted proceedings for recovery of a debt due to the bankrupt."
I do not understand the High Court here to be saying that s. 86 operates on the date of the bankruptcy to extinguish a claim by the bankrupt against a debtor and a cross-claim by that debtor against the bankrupt and to convert those mutual claims into a claim in respect of the balance (if any) due by the one to the other. It is a basic principle of insolvency law that the liquidation and distribution of an insolvent's assets are treated as notionally taking place on the date of the insolvency decree: In re Dynamics Corporation of America (1976) 1 WLR 757 at 761-3. In saying that s. 86 operates as at the date of the sequestration order, all the Court was I think saying was that the account, whenever taken, is to be taken by reference to the position obtaining at that date. I understand the High Court here to be saying that s. 86 has this operation: independently of whether the account has been completed or even undertaken at the time the question arises in the bankruptcy the rights of the parties with respect to a claim by the bankrupt and a claim against the bankrupt (being claims arising out of mutual dealings between them) are to be taken to be the right to recover or to prove for the balance (if any) that would exist if the two claims were set-off against each other at the date of the sequestration order. That is not at all the same thing as saying that the various claims are extinguished by the operation of the section on the day the sequestration order is made and then converted into a claim in respect of the balance (if any). The section is concerned, as Staughton LJ indicated in Stein v Blake, with how rights are to be adjusted, not with the extent to which they exist. Mutual dealings must exist at the date of the bankruptcy if s. 86 is to apply: Hiley v Peoples Prudential Assurance Co. Ltd. (1938) 60 CLR 468 at 480, 487, 490 and 495-6. "But this statement does not mean that at the time when the winding up commences there must exist claims which then and there can be made the subject of account and set-off ..." It is enough that rights are then "vested in the creditor and in the company which, without any new transaction, grow in a natural course of events into money claims capable of forming items in an account or capable of settlement by set-off." Ibid, per Rich J at 487. "(T)he general rule does not require that at the moment when the winding up commences there shall be two enforceable debts, a debt provable in the liquidation and a debt enforceable by the liquidator against the creditor claiming to prove. It is enough that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set-off." Ibid, per Dixon J at 496-7.
If a question arises under s. 86 outside the bankruptcy administration, the rights with respect to the mutual claims are similarly to be adjusted by identifying what would have been the result if one was set-off against the other on the date of the bankruptcy.
The trustee is not charged with the sole responsibility for taking the account referred to in s. 86; it remains open to Marac to raise in the proceedings Mr. Capel has now brought against Marac, any claim it may have against Mr. Capel based upon the judgment it obtained against him. There was no evidence before the Official Trustee's representative and there is none before this Court that enables an assessment to be made that the evidentiary foundation for the assigned claims is such that they are likely to result in Mr. Capel failing to obtain any award of damages. Although the matter was only briefly argued, I am not prepared to hold that de Jersey J's judgment gives rise to any form of estoppel that would prevent Mr. Capel pursuing any of these claims (save that in paragraph 2 of Schedule A to the Deed of Assignment) against Marac now: all that was determined in the Supreme Court proceedings was that Marac had an entitlement on the mortgage to payment by Mr. Capel of the sum for which judgment was given and that the material which Mr. Capel put before de Jersey J in an attempt to resist summary judgment was insufficient to raise any triable issue in respect of the claims Mr. Capel is now pursuing against Marac. I do not therefore consider that there is any justification for overturning the trustee's action in assigning the claims to Mr. Capel.
It was submitted that Marac delayed for so long in attacking the assignment that that was sufficient reason to refuse its application. The Deed of Assignment was executed on 3 April, 1991. Mr. Capel swears that on that same day he sent by ordinary post to the registered office of the applicant shown in the records of the Australian Securities Commission a letter advising Marac of the assignment and that that letter has never been returned to him. This is the same address which Mr. Beer, a director of Marac, gives as his address in the affidavit he has sworn in this application. Mr. Capel also says that on the same day he sent to the person shown in the Australian Securities Commission's records as the receiver of Marac at that gentlemen's address shown in those same records a similar notice and that that letter was returned to him marked "unknown at address". Mr. Capel was not cross-examined. Marac's application was not filed until 21 July, 1992, i.e., until nearly 16 months after Mr. Capel said he gave Marac notice of the assignment. The writ was not served on Marac until 2 April, 1992. Marac's solicitors wrote to the solicitors for Mr. Capel on 14 April, 1992 noting that Mr. Capel had no standing to issue the writ as the cause of action was still vested in the Official Trustee. In response, Mr. Capel's solicitors replied that the cause of action had been assigned to Mr. Capel by the Official Trustee. On Marac's version of events, the receipt of this letter on 30 April, 1992 was the first time that Marac had any notice of the assignment. If I could be satisfied that Marac received Mr. Capel's letter of 3 April, 1991, the unexplained delay on Marac's part in attacking the assignment would probably be sufficient of itself to justify rejection of Marac's application. However, Marac's deponents swear to being unaware of the existence of the assignment until it was drawn to the attention of Marac's solicitor by Mr. Capel's solicitor at the end of April 1992. This material was served on Mr. Capel well before the hearing, but it was only late on the afternoon before the hearing that Mr. Capel served his own affidavit deposing to his having given Marac notice of the assignment back in early 1991. Although Marac did not put any material before me in relation to this assertion by Mr. Capel, given the very limited time available to it to deal with the matter and the fact that it is a Sydney-based organisation, I am not prepared to make any finding whether or not it received notification of the assignment as Mr. Capel swears back in April 1991.
Marac also contends that, in three particular respects, the Deed of Assignment should not be allowed to operate.
By paragraph 2 of Schedule A of the Deed, the Official Trustee assigned to Mr. Capel a "claim against (Marac) for incorrect proceedings instituted by (Marac) against the bankrupt in that the judgment against the bankrupt was incorrectly calculated". It was not disputed that this claim seeks to call in question the amount for which judgment was entered for Marac in the Supreme Court proceedings in 1988, a judgment obtained in proceedings inter parties and affirmed on appeal. It is not open to Mr. Capel in his own Supreme Court action to challenge the correctness of that judgment. That matter is res judicata. Marac is entitled to the relief it seeks in respect of this particular claim. There was nothing that the Official Trustee could have assigned to Mr. Capel in this regard and I will declare that the Deed is void ab initio insofar as it would otherwise operate as an assignment to Mr. Capel of this particular claim.
By paragraph 3 of Schedule A to the Deed, the Official Assignee also assigned to Mr. Capel a "claim for damages for breach of contract in respect of the termination of a short term loan already decided by the Full Court Supreme Court (sic)". I take this confusingly worded claim to refer to the first matter on which Mr. Capel relied to defeat Marac's claim for summary judgment. It was said that this claim was rejected by de Jersey J on its merits and Mr. Capel cannot relitigate it. Counsel for Marac made reference to a passage at page 3 of de Jersey J's reasons in which his Honour referred to a letter dated 30 September, 1985 by Marac to Mr. Capel in which Marac withdrew from an arrangement for the extension of the term of the loan, in the course of explaining why Mr. Capel had failed to raise a triable issue that, even if there was no binding agreement for an extension of the term of the loan, Marac was bound by the doctrine of promissory estoppel not to call up the loan prior to expiry of what I will call the period of the extension. But in giving this explanation, his Honour was not making a finding on an issue that was essential to his decision against Mr. Capel. The matter was only very briefly argued but what was relied on by counsel for Marac here does not show that this claim was in fact disposed of in such a way as to raise an estoppel against Mr. Capel pursuing it now. All I think the judgement decided against Mr. Capel, apart from the extent of his liability to Marac on the mortgage, was that the material he put before de Jersey J was not sufficient to show he had grounds warranting him being allowed to defend Marac's claim on the mortgage. I reject Marac's application for relief in respect of this particular claim.
Finally, Marac attacked paragraph 4 of Schedule A of the Deed whereby the Official Trustee assigned to Mr. Capel a "claim for damages resulting from fraudulent misrepresentation by (Marac)". It was said that this claim was not described with sufficient certainty to constitute a valid assignment of any particular cause of action. Again, the matter was argued only very briefly. I am not prepared to hold that it would not be open to Mr. Capel, if his entitlement to sue Marac on this particular claim were put in issue in the Supreme Court proceedings, to lead evidence sufficient to identify clearly the subject matter of this particular claim, if that were necessary. In this regard, I note that de Jersey J's judgment deals with what he refers to as "the third ground of defence" by Mr. Capel to Marac's claim for summary judgment, which concerned a claim by Mr. Capel that he was in effect fraudulently induced by Marac to enter into the mortgage upon which Marac obtained judgment against him by representation that Marac would provide Mr. Capel and Gapmont Pty. Ltd. with "long term finance". I am not prepared to grant Marac's application in relation to this particular claim.
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