» Ue LYlt MS Ets Te JUDGMENT No.l 4+O7 8%. IN THE FEDERAL COURT OF AUSTRALIA ) ) QLD E3 of 1984 GENERAL DIVISTON BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) RE: BRUCE DAVID CORSTORPHAN EX PARTE: MARAC FINANCE AUSTRALTA LIMITED Parcel 'ey NN Dau Mbd yeLsay 99 Wwinass a vad . re SL a weet SPENDER J. ic, $239 24 - SY tee Lo a ~* "-\ = ote 5 Joy BRISBANE a a £} 4 pee uy ™ " as f 5 February 1988 a ey ee mae Og EXTEMPORE REASONS FOR JUDGMENT It is desirable that I give my reasons for my decision in this application today. Marac Finance Australia Limited ("Marac Finance") decision of Stephen Raymond Eleftheriou, the challenges the for and on behalf of the Official Trustee Official Receiver, who, in Bankruptcy, on 23 April 1987 rejected the proof of debt lodged of Bruce David Corstorphan, who on 5 January the by Marac Finance in the estate bankrupt on his own petition presented was made in Bankruptcy is the trustee of 1984. The Official Trustee estate of Mr. Corstorphan pursuant to his bankruptcy. Mr. Corstorphan, whom I shall refer to as the bankrupt, with one Gail Westhoff, borrowed moneys from Marac Finance and in consideration of those loans, the bankrupt and Miss Westhoff, jointly and severally agreed to repay the moneys advanced and also executed various loan and security documents to secure the moneys that had been advanced. Those documents included a deed of loan, a bill of mortgage, a bill of sale in respect of certain vending machines, and an equitable charge. On 27 February 1984, shortly after the bankruptcy of Mr. Corstorphan, a written agreement was entered into between Marac Finance and Miss Westhoff, and it is the effect of this document, whether modified by external circumstances or otherwise, with which this application is primarily concerned. The document is a short one and it probably is best if I set out its body in full: "THIS DEED OF RELEASE is made the 27th day of February 1984 BETWEEN MARAC FINANCE AUSTRALIA LIMITED a company duly incorporated and registered in the State of Queensland under the laws relating to Companies and having its registered office in that State at 308 Elizabeth Street, Brisbane in the State of Queensland (hereinafter called "the mortgagee") of the one part AND GAIL WESTHOFF 22/8 Paradise Parade, Paradise Point in the said State (hereinafter called "the mortgagor") of the other part WHEREAS A. The mortgagor together with Bruce David Corstorphan had borrowed from the mortgagee certain loans (without limiting the generality of the foregoing) but particularly the sum of TWENTY SEVEN THOUSAND FOUR HUNDRED AND FIFTY DOLLARS ($27,450.00) (hereinafter called "the principal sum"). B. In consideration of the advance the mortgagor and the said Bruce David Corstorphan jointly and severally agreed to repay the said principal monies and entered into various loan and security documents to secure the principal monies (without limiting the generality of the foregoing) but more particularly the following documents - 1. Deed of Loan 2. A second Bill of Mortgage 3. A Bill of Sale (vending machines) 4. An Equitable Charge (hereinafter called "the security documents"). C. The said Bruce David Corstorphan has filed a petition of bankruptcy and the mortgagor is unable to comply with the provisions of the security documents. D. The mortgagee at the request of the mortgagor has agreed to discharge the mortgagor from ail principal monies, interest and expenses which the mortgagor owes or will owe to the mortgagee but subject to the following terms and conditions - NOW THIS DEED WITNESSETH as follows - 1. The mortgagor shall pay the sum of TWO THOUSAND FOUR HUNDRED DOLLARS ($2,400.00) (free of interest) to the mortgagee by calendar monthly instalments of $200 each, the first instalment to be due on the 25th day of March, 1984 and subsequent payments to be paid on the same day of each month until the total sum of TWO THOUSAND FOUR HUNDRED DOLLARS (82,400.00) shall have been repaid. 2. The mortgagee doth hereby release and forever discharge the mortgagor of and from all the said principal monies and interest; costs and outlays intended to be secured by and from all claims and demands under the said security documents." Shortly put, the 1ssue between Marac Finance and the Official Receiver is that the deed of release granted by Marac Finance to Miss Westhoff on 27th February 1984 operates to relieve the estate of Mr. Corstorphan of any obligation in respect of the moneys advanced by Marac Finance. Marac Finance contends that the indebtedness of Mr. Corstorphan, and consequently the rights of Marac Finance to prove in his estate, were not extinguished by the deed of release. In the resolution of that difference, Marac Finance seeks to rely on evidence concerning the subjective state of mind of that company as well as, amongst other things, the internal records of Marac Finance concerning its dealings with both Miss Westhoff and Mr. Corstorphan. In particular, objection is taken on behalf of the Official Trustee in Bankruptcy - the Official Receiver - to evidence of the kind contained in paragraphs 2(a) and 2(c) of the affidavit of an employee of the solicitors for Marac Finance. That evidence is of this kind:- "Both prior to and subsequent to the execution of the said Deed of Release, the Applicant was pursuing and has continued to pursue its rights under the securities referred to in the said Affidavit of CRAIG GUTHRIE against BRUCE DAVID CORSTORPHAN by attempting to recover monies due and owing thereunder from the said BRUCE DAVID CORSTORPHAN. The Applicant not only continued to pursue its rights against the said BRUCE DAVID CORSTORPHAN under the securities, but its internal records continued to indicate that his obligations under the securities were still intact." In my opinion and for the reasons which I will shortly give, evidence of this kind is inadmissible in the present application. In my view, the authorities lead inexorably to the conclusion that the deed of release executed by Miss Westhoff had the effect of relieving Mr. Corstorphan of his obligations to Marac Finance, which obligations were joint and several with Miss Westhoff's. As a consequence, in my opinion, the Official Receiver was correct in his rejection of the proof of debt lodged by Marac Finance. The general principle concerning the release of one joint promisor is referred to by Glanville Williams in his book Joint Obligations, where in Chapter Six at paragraph 50, he said:- "In a joint contract, release of one promisor discharges the others. Undoubtedly, the original reason for this rule was one of legal logic: the joint promise was regarded as single, so that if discharged for one it was discharged for all. Thus originally it was impossible to contract out of the rule, and a clause in the release purporting to save the remedy against the other promisors was void." He continued in paragraph 51:- "The general rule proved so inconvenient in its working that it had to be modified. The first step was the drawing of a distinction between a release and a covenant not to sue. Whereas a release of one joint debtor discharges all, a covenant not to sue, it is held, does not." After dealing with various aspects of the difference, he said at paragraph 53:- "The upshot is that at the present day the courts will give effect to any expression of intention in a release that other debtors are not to be discharged. But if, although the creditor intended to preserve his rights against the others, there is no expression of this in the instrument, and the instrument is worded as a release and not as a covenant, the courts have, on the weight of authority, no option but to construe it as a release. Also, it has been held that the parol evidence rule excludes evidence of an oral agreement with the debtor who is released that the release should not release another debtor. The intention, to be operative, must be expressed in the instrument itself." Some of these propositions find their support in the decision of the Privy Council in Mercantile Bank of Sydney v. Taylor £18931 A.C. 317. That involved a suit against one of five joint and several sureties to recover the amount guaranteed, and the plaintiff had, without the defendant's knowledge and consent, released another of the co-sureties "from all debts due by you to the bank at this date..." It was held that the plaintiff could not recover from the defendant. Also, the legal effect of the release could not be modified by evidence of verbal negotiations prior to the release presented for the purpose of showing an agreement to reserve rights against the sureties. It appears at p.320 of the judgment of their Lordships, delivered by Lord Watson, that at first instance in the course of the examination of the released co-surety, Griffin, - ",..the appellants' counsel, without putting any question, moved the presiding judge for permission (1) to interrogate the witness for the purpose of proving by parol, 'that there was an agreement to reserve rights against the sureties'; and (2) to interrogate him as to conversations 'to explain the meaning of the word 'indebtedness''. The learned judge rejected the evidence tendered on both points." The Board then held, at p.321:- "It appears to their Lordships that no foundation was laid at the trial for the admission of any such evidence as the appellants proposed to adduce. It had been proved that the whole terms of the agreement under which Griffin became entitled to his release were embodied in the bank's letter of the 5th of April, 1889, which he accepted without reservation or qualification. On that assumption, it is plain that the previous verbal communications which had passed between him and the bank were completely superseded, and could not be legitimately referred to, either for the purpose of adding a term to their written agreement, or of altering its ordinary legal construction. But that igs what the appellants proposed to do, without attempting to impeach the testimony which established that their letter of the 5th of April, 1889, accepted by Griffin, constituted the sole contract between them." 7. __This judgment was followed —by-CHiftitn- Col. in South , oe Australian Land Mortgage and Agency Cov, Ltd." vi-McInnes--£18961.. Q.L.0.289. Griffith C.J. said, at 291:- "Tt is settled that a release of one of two joint debtors, without more, discharges his co-debtor (Mercantile Bank of Sydney v. Taylor, 1893, A.C. 317). It is also settled that an instrument which 1s in forma release of one of two joint debtors, but which contains a reservation of rights against the other co-debtor, does not operate as a release, but as What is called 'a covenant not to sue'. The principle is that the intention of the parties 1s to be collected from the whole instrument, and that if effect cannot be given to that intention by construing the instrument as a release, it will not be so construed (Price v. Barker, 24 L.J., Q.B. 130. The name by which the instrument is designated is of course unimportant. The effect, not the name, is material." In Kenworthy v. Avoth Holdings Pty.Ltd., Cannon & Bishop £1974] W.A.R. 135, the Full Court of the Supreme Court of Western Australia was concerned with the effect of evidence of surrounding circumstances and the subjective intention of the parties. The Court asked whether such evidence could be referred to for the purpose of determining the nature of an agreement between a vendor and a number of purchasers. In this case, one of several purchasers was discharged from his liability under the purchase agreements, 1n similar circumstances to this case, and the primary judge found that the discharge was intended by all parties to relate to the Bank alone. The appellant appealed from this decision contending that the contracts represented a joint obligation, that there was an accord and satisfaction, and that the discharge of one debtor discharged the others. The Court held that, where accord and satisfaction is reached with one joint promisor, the others are discharged, provided that the satisfaction is intended to be a complete substitution for the performance originally promised. The actual intention of the parties was decisive, and it was proper to adduce extrinsic evidence of surrounding circumstances to establish that words capable of more than one meaning are applicable to one only of such meanings. Evidence of the subjective mental intention of the parties was therefore held to be properly admitted. In the course of the judgment of Virtue 5S.P.d., reference was made at p.138 to the decision of Stirling J. in Wolmershausen v. Wolmershausen (1890) 62 L.T.(N.S.) 541 at p.545:- "In that case, one of joint and several debtors became bankrupt; the creditor withdrew his proof against the estate in consideration of certain of the bankrupt's chattels being handed over to him; it was held that this did not release the other debtors. Stirling J., states the law at p.545; 'Now it is undoubtedly true that where several persons are liable jointly or jointly and severally a release of one is a release of all .-.in each case however it has to be determined whether what has occurred amounts to a release and where as here no formal release is given, but what is relied on is an agreement not under seal, then, in determining the effect of that agreement the surrounding circumstances and intention of the parties must be regarded.'" In conclusion, Virtue 5.P.Jd. states that:- "In the circumstances I think the court is justified in concluding that the determination of the question whether the rule applies is not a question of construction of the document of release, if any, but (contrary to the case where there is a formal release under the seal) a question of whether this_conclusion is proper to be arrived at "upon "consideration "or arr "tie circumstances of the case." In the case before me, I am dealing with the situation where there is what purports to be a formal release under seal. In the Kenworthy Case, Wickham J., at p.144, had said, after referring to the dicta of Stirling J. in the Wolmershausen Case:- "This matter turns on agreement, and agreement depends on mutual consent to something. What that something is depends upon mutual intention. Mutual intention is generally a matter of inference from conduct - what the parties have said or written in the circumstances of the case, and these circumstances are admissible to prove that words susceptible of more than one meaning are applicable to only one of those meanings..." He then quoted from Bacchus Marsh Concentrated Milk Co.Ltd. (In Liq.) v. Joseph Nathan & Co.Ltd. (1919) 26 C.L.R. 410 at p.427, where Isaacs J. in his judgment said:- "But it 1s legitimate to adduce extrinsic evidence of the surrounding circumstances in order to prove that words susceptible of more than one meaning are applicable ta one only of those meanings - that 1s, not to alter the contract but to identify its subject. Further, for the purpose of identifying the subject of the contract, prior negotiations are available just as any other circumstance would be. But the prior negotiations cannot be used for the purpose of importing additional or different terms - that is, terms other than the words actually used express when the subject matter is fully identified." 10. In this context, useful reference may be made to the observations of Collins L.J. in In re E.W.A., A Debtor £19011' 2 K.B. 642, where he said at p.649:- "If this legal consequence had been pointed out to the bank at the time, they might have said that that was not what they intended, but that is a factor common probably to all cases in which a release is given to one of two joint debtors. The person giving it may not realize the full legal consequences of it as regards the release of the co-debtor; but that is not, in my opinion, a sufficient ground for reading into the document something that is not expressed in it; and unless you find in it something qualifying the general words, it appears to me that the legal consequences of the general words of discharge must follow, notwithstanding that those consequences may go beyond what the person giving the document would have intended if they had been pointed out to him at the time, and he had had an opportunity of addressing his mind to them." Iam of the view that this accurately summarizes the attitude of the financier involved in this case. I am equally of the view that the deed of release in its terms must be looked at. It permits no equivocation or ambiguity of interpretation, and it operates, in my view, as a release of the co-debtors of Miss Westhoff, to whom 1t is addressed, and who was a party to it, There are two further aspects of the application to which reference must be made. The first is the argument that s.82 of the Bankruptcy Act 1966 in its terms has the effect of making any release or any covenant not to sue irrelevant. The argument directs attention to s.82(1) of the Act which provides:- "Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject to the date of the bankruptcy, or to which he may become 11. subject before his discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his bankruptcy." It is argued that, after the date of the bankruptcy, 5 January 1984, the bankrupt was subject to the liability to Marac Finance. A deed entered into on 27 February 1984, subsequent to the debt in the bankruptcy, does not have the effect of rendering that liability other than provable in his bankruptcy. However, in my view, 8.82 is seeking to draw a distinction between those debts in respect of which dividends might be paid or which possess the quality of being able to he pursued in a bankruptcy, and those debts which do not have that capacity, and the section itself has no effect upon the existence or non-existence of a debt. Otherwise it would mean that debts to which a bankrupt was subject at the date of his bankruptcy, but which had been discharged either by payment or release or by any other circumstance, were, notwithstanding that extinguishment, st11l1 provable in his bankruptcy. It seems to me that to state that consequence 1s to refute the effect of the submission. The second matter relates to one of the security documents brought into existence to secure the advance made to Miss Westhoff and Mr. Corstorphan. Clause 13 of the equitable charge referred to in the deed of release of 27 September 1984 is in these terms:- 12. "The Mortgagee may at any time and from time to time grant to the Debtor or to any other person any time or other indulgence or consideration and may compound with or release the Debtor or any other person or may assent to any assignment to trustees for the benefit of creditors or to any scheme or deed of arrangement and either with or without sequestration of the estate or (in the case of a corporation or company) the winding up of the Debtor without discharging or affecting the liability of the Mortgagor under these presents." Clause 19 then refers to the mortgagor, Mr. Corstorphan, who, along with Gail Westhoff, has previously been identified as a party to the equitable charge by the recitals of the deed, which goes on to state, "(hereinafter called 'the Debtor')". Marac Finance Australia Limited is identified by the same recitals as being "the Mortgagee"". Clause 19, so far as is relevant, provides:- ",.-the words 'the Debtor' shall mean and include the Debtor and the executors and administrators of the Debtor and when two or more debtors are parties hereto shall mean and include the Debtors or any of them their or any of their executors or administrators and when the Debtor is a corporation or company shall mean the company and its successors..." It was argued on behalf of Marac Finance that clause 13 provided an alternative ground on which to claim that its proof of debt ought not to have been rejected by the Official Receiver. Notwithstanding the understandable desire of a financier to preserve his rights against others when he enters into a release, in my opinion, clause 13, in its terms, is facilitative and its effect is to empower Marac Finance to release one of several co-debtors without discharging or affecting the liability of others, but it is not expressed in such a way as to mean that, 13. where there has in fact been a release of one of co-debtors, that without more, without any express reservation, or without any reference to the question of liability of co-debtors, it has the effect of not discharging or affecting the liability-~of—the— mortgagor in respect of the equitable thargé "For these reasons then, I think that the application ought to be dismissed. I certify that this and the [2 prececing pages are a true copy of the reasons fer judgment herein of His Honour Mr. Justice Spender Associat@ Wk Dated (A FK. / Fedesuody (796