CATCHWORDS Bankruptcy - application to review decision of trustee - rejection of proof of debt of interest component of "personal loan" - whether total sum due, both principal and interest components, under a "personal loan" is a debt provable against estate of a bankrupt —- construction of terms and conditions of a "personal loan", Bankruptcy Act 1966 s. 104 RE: KENNETH FRANCIS BALL and DOREEN PATRICIA BALL EX PARTE: THE COMMERCIAL BANKING COMPANY OF SYDNEY LIMITED THE OFFICIAL RECEIVER — RESPONDENT NO. W. 81 OF 1979 LOCKHART J. AT SYDNEY WEDNESDAY 13 AUGUST 1980 IN THE FEDERAL COURT OF AUSTRALIA BANKRUPTCY DISTRICT OF THE STATE No. W 81 of 1979 OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY & KENNETH FRANCIS BALL and DOREEN PATRICIA BALL EX PARTE: THE COMMERCIAL BANKING COMPANY OF SYDNEY LIMITED THE OFFICIAL RECEIVER Respondent ORDER JUDGE MAKING ORDER: LOCKHART J. WHERE MADE: AT SYDNEY DATE OF ORDER: WEDNESDAY 13 AUGUST 1980 THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant pay the respondent's costs of and incidental to the application IN THE FEDERAL COURT OF AUSTRALIA BANKRUPTCY DISTRICT OF THE STATE No. W 81 of 1979 QF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY RE: KENNETH FRANCIS BALL and DOREEN PATRICIA BALL EX PARTE: THE COMMERCIAL BANKING COMPANY OF SYDNEY LIMITED THE OFFICIAL RECEIVER : Respondent REASONS FOR JUDGMENT 13 August 1980 LOCKHART J. This is an application pursuant to s. 104 of the Bankruptcy Act 1966 ("the Act") by The Commercial Banking Company of Sydney Limited ("the bank") to review the decision of the Trustee of the estates of Kenneth Francis Ball and Doreen Patricia Ball ("the bankrupts") rejecting in part the proof of debt of the bank. Sequestration orders were made by this Court against the estates of the bankrupts on 12 February 1979. The bank is an unsecured creditor of the bankrupts; but repayment of its debt is guaranteed. The bankrupts applied to the bank for a "personal loan". of $6,000.00 on 19 August 1977. The loan was approved by the bank on 29 August 1977. The terms and conditions on which the loan were made by the bank to the bankrupts are in writing and are as follows:- ..-/2 "TERMS AND CONDITIONS OF PERSONAL LOAN I/We understand that if my/our Application for Personal Loan appearing on the front hereof is approved by The Commercial Banking Company of Sydney Limited (hereinafter called "the Bank") the following terms and conditions will apply to the loan, viz:- (1) The amount of the loan applied for is $6,000 to which will be added interest amounting to $1,740 (calculated at 7.25% per annum) making a total sum of $7,740 (2) The total sum of $7,740 will be payable by me/us to the Bank by 48 equal consecutive monthly instalments of $161.25, the first of such instalments being payable one calendar month from the date on which the loan is made by the Bank. (3) The approval of the loan and the making thereof by the Bank shall be evidenced by the Bank paying the amount of the loan applied for to the credit of my/our account number 060-4506 at Camden Branch of thesooce00ecsocKKx (4) At the option of the Bank the whole of the total sum aforesaid less any instalments which may have been paid as herein provided shall become immediately due and payable to the Bank without the necessity of the Bank making or serving any demand for payment whatsoever BUT THIS OPTION SHALL NOT BE EXERCISED BY THE BANK UNLESS in the opinion of the Bank or any officer of the Bank - (a) default is made in payment to the Bank punctually on its due date cf any instalment aforesaid or (>) any information contained in the said Application for Personal Loan is considered or found to be misleading or inaccurate or ../3 -3- (c) default is made by me/us in complying with any of the within terms and conditions or (d) I/We or any of us commit(s) an act of bankruptcy or enter (s) into any composition or arrangement for the benefit of creditors. Any instalments referred to herein. shall only be deemed to be paid to the Bank provided payment is made to the Bank in the manner directed by it and accompanied by the instalment payment slip supplied by the Bank. (6) In the case of two or more persons being applicants for this personal loan liability for payment of all instalments and the total sum for the time being remaining unpaid shall be joint as well as several. (7) The Bank is to be advised within seven days of any change in my/our address or place of employment. (8) Any security now or hereafter held by the Bank from me/us or any of us shall be read and construed (so far as it relates to the total sum referred to above or so much thereof as shall for the time being remain unpaid) subject to these terms and conditions of Personal Loan. DATED at_CAMDEN N.S.W. this Nineteenth day of_August 1977 sgd.Kenneth F. Ball sgd.Doreen P Ball. " The sum of $6,000.00 was advanced by the bank to the bankrupts. Seventeen payments of $161.25 each were made by the bankrupts to the bank in reduction of the indebtedness, reducing the amount owing by $2,741.25 from $7,740.00 to $4,988.75. Two of the seventeen payments of $161.25 were made after the sequestration orders had been made. The bankrupts were indebted to the bank in the sum of $912.40 relating to a transaction not connected with the matters involved in these proceedings. I mention it because the 20/4 ~4- bank's proof of debt refers to the indebtedness of the barkrupts to the bank on two accounts, one the subject of these proceedings and the other the sum of $912.40; and the moneys owing on the two accounts are to some extent intermingled in the proof. Nothing turns on this lastmentioned indebtedness. The bank lodged a proof of debt with the Trustee on 12 July 1979 which it subsequently withdrew. The bank lodged an amended proof of debt on 20 August 1979. Nothing turns on the details of the proof of debt or the amended proof of debt. The Trustee rejected the bank's proof to the extent of $1,094.00 on the ground that it constituted "anterest accruing after the date of bankruptcy". The bank does not dispute the well established rule in the administration of insolvent estates that a creditor cannot prove in bankruptcy for interest accruing after the date of the bankruptcy unless there is a surplus: Re Savin (1872) L.R. 7 Ch. App. 760; Mackenzie v. Rees (1941) 55 C.L.R. 1. The primary submission of counsel for the bank was that no moneys payable by the bankrupts to the bank pursuant to the contract between them answered the description of interest. The agreement for loan refers to the "amount of the loan" as $6,000.00 and goes on to provide that there is added thereto "interest amounting to $1,740.00 (calculated at 7.25% per annum) making a total sum of $7,740.00", Counsel for the bank submitted that all this did was to make a convenient calculation, including an interest component, resulting in what is described in the document as "a total sum" of $7,740.00; but that nothing truly answered the description of interest. It was not contended that the agreement for loan or its terms and conditions were shams: see Boydell v. James (1936) 36 S.R. 620; Perpetual Trustee Co. v. Bligh (1940) 41 S.R. 33; Snook v. London and West Riding Investments Limited 1967 2 Q.B. 786 especially per Lord Diplock at p. 802; and Albion Hotel Pty. Limited v. F.C. of T. (1965) 115 C.L.R. 78 ; or that they were illusory or not designed or intended to operate or that they did not operate according to their tenor: see Allsop v. F. C. of T. (1964) 113 C.L.R. 341 especially at p. 351. The true characterisation of the moneys payable under the agreement between the bank and the bankrupts, in the absence of any suggestion as to sham or an illusory agreement, must be determined by reference to the proper construction of the agreement itself. That is not to say that, merely because the parties call something "interest", the monetary obligation thus described necessarily answers the description of "interest". This depends on the construction of the agreement as a whole. The legal character of a payment made under an agreement for consideration generally will be determined by reference to that consideration; that is to the character of the matter in respect of which the payment is made: see Europa Oil (N.Z.) v. I.R.C. 1976 1 W.L.R. 464 especially per Lord Diplock at pp. 471-472 and the Federal Coke Company Pty. Limited v. F. C. of T. (1977) 77 A.T.C.4, 255 per Brennan J. at p.4, 273. In the agreement here the parties have specifically referred to the amount of the loan applied for as $6,000.00 and to the fact that there is to be added to that sum "interest" of $1,740.00 calculated at the rate of 7.25% per annum, making a total sum over a period of the loan of four years of $7,740.00 .--/6 payable by forty-eight equal consecutive monthly instalments of $161.25. Clearly this must be a flat rate of interest of 7.25% and not a reducible rate. The parties have seen fit to call the moneys in question "interest"; and in my opinion it would be artificial to regard the expression in the terms and conditions of the loan "the total sum of $7,740.00" as being a figure which has no component properly characterised as interest. This is an agreement for loan between a banker and its customer. It is a commonplace in banking circles. A customer wants a loan of a sum of money, in this case $6,000.00. He knows he has to pay interest and he wants to know how much it is. He knows it is a flat rate and is told by his bank, and by the conditions of the loan in the document, that it is $1,740.00; and he is told that it is calculated at the rate of 7.25% per annum. He knows the total obligation is $7,740.00 and that it is payable by forty-eight equal consecutive monthly instalments of $161.25. It is basic to the relationship of banker and customer in the present case that each fully understands that what is referred to in the document itself as "interest" is in truth interest. It is true, as was pointed by counsel for the bank, that some difficulties may arise in calculating the precise amount of interest due at any particular point of time, such as the making of a sequestration order; but these difficulties do not, nor was it suggested by counsel for the bank that they did, mean that the figure is incapable of ascertainment. The terms and conditions of the loan refer on a number of occasions to the expression "the total sum aforesaid". The total sum is $7,740.00 (para. 2); but this in turn is arrived at ..-/7 by adding to the base figure of $6,000.00 (being the amount of the loan) the sum of $1,740.00, which the parties correctly describe as interest, calculated at the rate of 7.25% per annun, making a total sum of $7,740.00. The expression "the total sum aforesaid" is not merely $7,740.00. It is the expression in monetary terms of the sum calculated, as clause(1)of the terms and conditions of loan provides, by combining the amount of the loan applied for plus interest as agreed between the bank and its customer. , On the face of the agreement itself the monthly instalments are made up of principal and interest. For these reasons, in my opinion it is plain that what the parties called "interest" of $1,740.00 is correctly characterised by them. It is not a mere arithmetical calculation: see Ex parte Bath; In Re Phillips (1882) 22 Ch. Div. 450; and €1884) 27 Ch. Div 509. The second, and alternative, submission of counsel for the bank was that the "acceleration clause" (clause (4)) of the terms and onditions of loan operated before the making of the sequestration orders; so that, although there may have been an obligation to pay interest, once clause (4) operated the bankrupts owed the bank a total sum representing the full amount then outstanding less whatever instalments had been paid, interest having merged in the total sum due. I see a number of problems with this argument. It is plain that the bankrupts were in default in making payments to .../8 the bank punctually on due date of instalments (clause (4) (a) ); and that this default continued from the very inception of the loan. The first payment was due on 29 September 1977 and was not made until 26 October 1977. All subsequent payments were also late. Whether the receipt by the bank, from the inception of the loan (October 1977) to February 1979 of payments which were always in arrears,constitutes a waiver or acceptance, I need not pause to consider because there is nothing to suggest that the bank, or any officer of the bank, formed the requisite opinion that default had been made for the purposes of clause (4) (a). There is some evidence from a bank officer that, in his opinion, default was made in payment to the bank punctually on the due dates of all the instalments aforesaid; but the evidence does not disclose when that opinion was formed, and his affidavit was sworn on the morning of the hearing of this application. In any event, the formation of that opinion is a necessary pre-requisite, and that is all it is, for the bank, at its option,to require that the whole of the moneys outstanding shall become due and payable to the bank without the necessity of necessarily serving demand upon the bankrupts (clause (4) ). There is no evidence that the bank took any step to cause the moneys due to it to become immediately due and payable. Counsel for the bank submitted lastly that, after the making of the sequestration orders, the sending of its letter of 20 August 1979 to the Trustee together with the accompanying amended proof of debt, constituted the exercise by the bank of its .+-/9 -9- option that the whole of the moneys outstanding should become due and payable, on the basis either of default being made to the bank in repayment (clause (4) (a) ) or of the commission by the bankrupts of acts of bankruptcy (clause (4) (ad) ); and that it also constituted the formation by the bank of the requisite opinions referred to 1n chuse (4). I cannot construe the proof of debt or the letter accompanying it as constituting either the formation of the requisite opinion of the bank or an officer of the bank (clause (4) ) or the exercise by the bank of any option. Even if it were capable of that construction the argument fails for a more fundamental reason namely, that the rights of the bank as against the estates of the bankrupts crystalized once the bankrupts became bankrupt; and the rights of the bank against the bankrupts, as distinct from its rights against the guarantors, were converted into rights of proof: see Mackenzie v. Rees (supra) per Dixon J. at pp. 9 and 10; Re Standard Insurance Co. Limited and The Companies Act (1969) 91 W. N. (N.S.W.) 654 per Street J. at p. 657. The decision of the Trustee to reject the proof of debt of the bank, to the extent that it sought to include an interest component accruing due after the date of the sequestration orders, is correct. I make no finding as to the correctness of the particular figure relied by the Trustee, namely $1,094.00, as counsel for the bank suggested that the correct figure was slightly larger namely, $1,116.75. The parties can work out the correct figure. In the result I order that the application be dismissed, ..-/10 ~10- and that the applicant pay the respondent's costs of and incidental to the application. 1 ceriiy that this ard the aime (4) preced'ng parcs aro a to cor, ci {ha foastns for Cucgmeat hcre.n cf his Honour Mr. Justice Loci.art Lio) frien) Azsociaia pated, 13 Angus, 148°