Re Last; Ex parte Butterell
[1994] FCA 540
•12 AUGUST 1994
RE: ROSS CUMMING LAST AND MARY ELIZABETH LAST
EX PARTE: ARTHUR WILLIAM BUTTERELL v. RAWILLA PTY LIMITED, ROSS CUMMING LAST
AND MARY ELIZABETH LAST, ANNA DEIDRE CUMMING LAST, SARAH RUTH CUMMING LAST,
JOSEPHINE RAE CUMMING LAST and DAVID ROSS CUMMING LAST
No. NB2306 of 1992
FED No. 540/94
Number of pages - 6
Bankruptcy
(1994) 124 ALR 219
COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
GENERAL DIVISION
DAVIES J
CATCHWORDS
Bankruptcy - mutual set-off - whether a debt due by the bankrupt can be set-off against a debt due to the bankrupt, the assignment of which is avoided as a settlement.
Bankruptcy Act 1966 (Cth) - s.86A
In re a Debtor (1937) 1 Ch 156
Jones v. Fleeming (1827) 7 B and C 217; 113 ER 285
Watts v. Christie (1849) 11 Beav 546; 50 ER 928
Day and Dent Construction Pty Ltd v. North Australian Properties Pty Ltd (1982) 150 CLR 85
Gye v. McIntyre (1991) 171 CLR 609
In Re Carter and Kenderdine's Contract (1987) 1 Ch D 776
In Re Hart; Ex parte Green (1912) 1 WLR 956
In re Farnham (1895) 2 Ch D 799
N.A. Kratzmann Pty Ltd (In Liq.) v. Tucker (No. 2) (1968) 123 CLR 295
HEARING
SYDNEY, 27 July 1994
#DATE 12:8:1994
Counsel for the applicant: B. Skinner with J. Johnson
Solicitors for the applicant: Sally Nash and Co.
Counsel for the 1st respondent: M.R. Aldridge
Solicitors for the 1st respondent: Kemp, Strang and Chippindall
Counsel for the 2nd to 6th F. Gleeson
respondents:
Solicitors for the 2nd to 6th Phillips Fox
respondents:
ORDER
THE COURT DECLARES THAT:
1. The assignment of the loan account in the name of Ross Cumming Last recorded in the books of the first respondent to the third, fourth, fifth and sixth respondents in January 1991 is void as against the applicant as trustee of the bankrupt estate of Ross Cumming Last.
THE COURT ORDERS THAT:
2. The first respondent make all necessary entries in its books of account to give effect to Declaration 1.
3. Subject to there being net assets available and subject to any mutual set-off under s.86A of the Bankruptcy Act 1966 (Cth), the first respondent pay to the applicant as trustee of the bankrupt estate of Ross Cumming Last out of the net assets of the RC Last Family Trust calculated apart from this debt the balance of the loan account formerly recorded in the name of the bankrupt Ross Cumming Last.
4. The issue as to the existence of a mutual set-off under s.86A and the amount thereof be set aside for determination apart from any other issue in these proceedings.
THE COURT DECLARES THAT:
5. The first respondent is entitled to a set-off as against the balance of the loan account formerly recorded in the name of Ross Cumming Last.
THE COURT ORDERS THAT:
6. The taking of accounts in respect of the set-off be reserved.
7. The costs of the proceedings be reserved.
NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.
JUDGE1
DAVIES J The estates of Ross Cumming Last and his wife, Mary Elizabeth Last, were sequestrated on 28 August 1992. This present proceeding raises the issue as to whether the first respondent, Rawilla Pty Limited ("Rawilla") is entitled to set off against a sum of $180,721, which was a debt due by Rawilla to Mr Last and which his trustee in bankruptcy now claims, a sum of $343,686 which is claimed by Rawilla as against Mr and Mrs Last, both jointly and severally.
Rawilla was trustee of the R.C. Last Family Trust, a family discretionary trust. Mr and Mrs Last, their children and others were discretionary income beneficiaries. Under clause 8 of the provisions in the Schedule to the trust deed, the trustee has the power to guarantee the performance of the obligations, including the repayment of debts, and to secure the property of the trust estate in support thereof.
It is not in dispute that, on 7 January 1991, there was shown in the books of account of Rawilla a debt of $180,721 as due to Mr Last or that, on that day, Mr Last gave written notice to Rawilla that he had assigned the debt to his four children. Nor is it in dispute that that assignment was a voluntary assignment made without consideration and that a declaration should be made declaring it to be void as against the trustee in bankruptcy.
Rawilla claims that it is entitled under s.86 of the Bankruptcy Act 1966 (Cth) ("the Act") to set off against that debt moneys totalling $343,686 which it has been called upon to pay on behalf of Mr and Mrs Last.
On 10 November 1982, CDF Finance Pty Limited offered to lend $330,000 to Mr and Mrs Last. The following were some of the terms of the letter of offer:-
"We confirm that we are prepared to raise it for you on the following terms and conditions.
BORROWERS: Ross Cumming Last and Mary Elizabeth Last both of 'Rawilla' Muttama farmers and graziers. MORTGAGEE: CDF Finance Pty Limited as trustee for the contributors which will retain 1/4% interest to cover the costs of administering the loan. LOAN AMOUNT: $330,000.
TERM: Three years from the end of the quarter during which the loan is expected to be finalised. ...
SECURITY: (A) Registered first mortgage from Rawilla Pty Ltd of the farming and grazing property known as 'Rawilla' Muttama in the county of Harden parish of Cooney having an area of about 722.37 hectares (approximately 1,785 acres) being the whole of the land in Certificates of Title volume 11015 folios 1, 2 and 3 and volume 13002 folio 68 and volume 10211 folio 149.
(B) Personal guarantee by borrowers Ross Cumming Last and his wife Mary Elizabeth Last both of 'Rawilla' Muttama farmers and graziers."
On 14 January 1983, Rawilla, acting under the power conferred upon it by the Trust Deed, mortgaged certain of its property in support of that loan. In the mortgage, Rawilla was described as the mortgagor. In the first and second conditions set out in the Schedule, the mortgagor agreed to pay the principal sum and the agreed interest thereon. The fourth condition provided:-
"Fourthly - The parties acknowledge that the loan secured by this mortgage was made at the request of Ross Cumming Last and his wife Mary Elizabeth Last both of 'Rawilla' Muttama farmers and graziers (herein called the guarantors) who hereby jointly and severally covenant that they shall be jointly and severally liable with the mortgagor with respect to the covenants and conditions of the mortgage."
The mortgage was executed by Rawilla and also separately by both Mr and Mrs Last.
The mortgage was extended on two occasions. Ultimately, Mr and Mrs Last were unable to repay the capital of the loan. Rawilla was called upon to pay that sum and did so in December 1993.
On 13 May 1992, there was an act of bankruptcy by both Mr and Mrs Last and on 28 August 1992, their estates were sequestrated.
It was first put by counsel for the trustee, that no set-off was available as the $343,686 was a debt due by Mr and Mrs Last jointly to Rawilla. Necessarily, to be set off, debts must be mutual. Therefore they must be owed in the same right. A debt owed to one person separately cannot be set off against a debt due by that person and another jointly: Jones v. Fleeming (1827) 7 B and C 217; 113 ER 285, Watts v. Christie (1849) 11 Beav 546; 50 ER 928.
Counsel relied upon the letter of offer from CDF Finance Pty Limited of 10 November 1982 which recorded the borrowers as Ross Cumming Last and Mary Elizabeth Last, both of "Rawilla", Muttama, farmers and graziers, without distinguishing whether the moneys would be due by them jointly or jointly and severally.
However, one would expect a finance company to require the borrowers to agree in writing to the obligations which the finance company stipulates. In this case, the agreement in writing is the mortgage, dated 14 January 1993, which sets out the obligations with respect to principal and interest and the other obligations which CDF Finance Pty Limited required. The fourth condition in the Schedule to the mortgage provided that Mr and Mrs Last "jointly and severally covenant that they shall be jointly and severally liable with the mortgagor with respect to the covenants and conditions of the mortgage."
Rawilla, having been required to pay out the moneys which had been loaned to Mr and Mrs Last, was entitled to recover that sum from them as money paid to their use. The law implies an understanding on their part as principals to indemnify the surety should the surety be called upon to meet their obligations. The giving of the security at the request of the principal debtor is regarded as bringing into existence a contractual arrangement which includes the implied obligation to reimburse the surety for moneys which the surety pays in pursuance of the surety's obligations to the creditor. Thus in In re a Debtor (1937) 1 Ch 156 Slesser LJ said at 160:-
"There is no doubt that a surety paying a debt is entitled to recover against the principal, as for money paid to his use: Morrice v. Redwyn (1731) 2 Barnard. 26; Woffington v. Sparks 2 Ves Sen 569; in the words of Cozens-Hardy, MR, in In re Richardson (1911) 2 KB 705, 709, 'It is settled at common law that, given a contract of indemnity, no action could be maintained, until actual loss had been incurred. The common law view was first pay and then come to the Court under your agreement to indemnify.' This is the basis of an implied promise to pay."
At 165, Greene LJ referred to "the contractual basis of the relationship". Romer LJ expressed his agreement with both judgments.
As was established in In re a Debtor, the implied undertaking arises at the time when the security is given, although no action can be maintained until actual loss has been incurred: see 161, 163.
In the present case, the implied undertaking arose on and by reason of the execution of the mortgage, notwithstanding that Rawilla was a trustee and Mr and Mrs Last were beneficiaries. This is not a case where an advancement of capital should be implied. Cf. Anson v. Anson (1953) 1 QB 636.
As Mr and Mrs Last covenanted jointly and severally with CDF Finance Pty Ltd, it should be implied that they undertook jointly and severally to reimburse Rawilla in the event that Rawilla should be called upon to meet their obligations. The implied obligation must take its character from the principal obligation, there being nothing in the facts to indicate that the agreement was otherwise.
It follows that, when called upon to pay the sum then due, $343,686, Rawilla became entitled to sue Mr Last severally to recover the sum.
The assignment of the loan account, made in 1991, being void as against the trustee in bankruptcy, the question arises whether Rawilla is entitled to set-off against its obligation to pay the $180,721 to Mr Last Mr Last's several indebtedness to it in respect of the $343,686. I am satisfied that the transactions between the parties were such as to fall within the principle of mutuality.
Counsel for the trustee submitted that the debts were not mutual because s.86 of the Act operates as at the day on which the bankruptcy takes effect: Day and Dent Construction Pty Ltd v. North Australian Properties Pty Ltd (1982) 150 CLR 85 at 90; Gye v. McIntyre (1991) 171 CLR 609 at 622. Mr Skinner submitted that, prior to the date, of sequestration, the debt of $180,721 due by Rawilla had been assigned to the four children. Mr Skinner submitted that s.120 of the Act does not operate to avoid that assignment in its totality but merely renders the assignment voidable with the result that, when declared void as against the trustee, the debt will vest in the trustee, not in Mr Last.
However, the effect of avoidance of the assignment is that the debt reverts back to Mr Last and the trustee obtains title as trustee in bankruptcy of Mr Last's estate. The date as at which the avoidance operates is the date on which the bankruptcy commences, the date of sequestration. Thus, in In Re Carter and Kenderdine's Contract (1897) 1 ChD 776 at 780-1, Lindley LJ said:-
"Looking at the language only, it seems to me that when an enactment says a settlement 'shall be void against the trustee in bankruptcy,' it does not mean that it shall be void before there is a trustee in bankruptcy."
The approach of Lindley LJ has subsequently been followed and applied, including in In re Hart; Ex parte Green (1912) 3 KB 6 where it was held that, where there had been a bona fide purchase for value without notice from the donee prior to the date of sequestration, the title of the purchaser was not affected. This approach was recently applied in In re Dent (1994) 1 WLR 956 at 961.
The position is therefore as stated by Lindley LJ in In re Farnham (1895) 2 ChD 799 at 808:-
"The settlement being void, the property reverts to the donor, and it is as the donor's property that it vests in the trustee and must be distributed correctly."
On the revesting of the assigned debt in Mr Last, he took entitlement subject to the right of set off to which Rawilla was entitled. See, eg., N.A. Kratzmann Pty Ltd (In Liq.) v. Tucker (No. 2) (1968) 123 CLR 295 at 302. The trustee's entitlement was also so limited.
Counsel for the trustee relied upon some authorities and upon para. 7.2.1 of Derham on Set-Off (1987), which discussed set-off in the context of the recovery of preferential payments. But this is a context different from the present. On the avoidance of a disposition by reason of s.120 or s.121 of the Act, the trustee takes the entitlement which the bankrupt had as at the commencement of the bankruptcy.
It follows that the assignment of the loan account in the name of Ross Cumming Last recorded in the books of Rawilla to the third, fourth, fifth and sixth respondents in January 1991 is void as against the applicant as trustee of the bankrupt estate of Ross Cumming Last and that Rawilla is entitled to a set off as against that sum by reason of the payment by it of $343,686 to CDF Finance Pty Limited in December 1993.
The following will be the orders:-
THE COURT DECLARES THAT:
1. The assignment of the loan account in the name of Ross Cumming Last recorded in the books of the first respondent to the third, fourth, fifth and sixth respondents in January 1991 is void as against the applicant as trustee of the bankrupt estate of Ross Cumming Last.
THE COURT ORDERS THAT:
2. The first respondent make all necessary entries in its books of account to give effect to Declaration 1.
3. Subject to there being net assets available and subject to any mutual set-off under s.86 of the Bankruptcy Act 1966 (Cth), the first respondent pay to the applicant as trustee of the bankrupt estate of Ross Cumming Last out of the net assets of the RC Last Family Trust calculated apart from this debt the balance of the loan account formerly recorded in the name of the bankrupt Ross Cumming Last.
4. The issue as to the existence of a mutual set-off under s.86 and the amount thereof be set aside for determination apart from any other issue in these proceedings.
THE COURT DECLARES THAT:
5. The first respondent is entitled to a set-off as against the balance of the loan account formerly recorded in the name of Ross Cumming Last.
THE COURT ORDERS THAT:
6. The taking of accounts in respect of the set-off be reserved.
7. The costs of the proceedings be reserved.
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