FEDERAL COURT OF AUSTRALIA BANKRUPTCY - Application for order annulling bankruptcy - debt to bank arising from loan made to applicant and his wife - deed between applicant, his wife and bank whereby only applicant to continue making repayments - whether release of one joint debtor releases all - whether release should be construed as a covenant not to sue. Bankruptcy Act 1966 (Cth) s 153B Cluness v Commonwealth Bank of Australia (unreported, Foster J, 7 May 1996), refd Commonwealth Bank of Australia v Cluness (1997) 8 BPR 15,467, refd Dorgal Holdings Pty Ltd v Buckley (1996) 22 ACSR 164, cons E.W.A., In re; a Debtor [1901] 2 KB 642, appl Solly v Forbes (1820) 2 Brod. & B 38, 129 ER 871, refd SCOTT CLUNESS v OFFICIAL TRUSTEE IN BANKRUPTCY & ANOTHER NG 8257 of 1997 DAVIES J 17 APRIL 1998 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 8257 of 1997 BETWEEN: SCOTT CLUNESS Applicant AND: OFFICIAL TRUSTEE IN BANKRUPTCY Respondent COMMONWEALTH BANK OF AUSTRALIA CROSS APPLICANT JUDGE: DAVIES J DATE: 17 APRIL 1998 PLACE: SYDNEY MINUTES OF ORDER THE COURT ORDERS THAT: 1. The application be dismissed with costs. 2. The cross application be dismissed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 8257 of 1997 BETWEEN: SCOTT CLUNESS Applicant AND: OFFICIAL TRUSTEE IN BANKRUPTCY Respondent COMMONWEALTH BANK OF AUSTRALIA CROSS APPLICANT JUDGE: DAVIES J DATE: 17 APRIL 1998 PLACE: SYDNEY REASONS FOR JUDGMENT This application, brought under s 153B of the Bankruptcy Act 1966 (Cth), seeks an order annulling the bankruptcy of the applicant, Scott Cluness. Mr Cluness was made bankrupt on a debt due to the Commonwealth Bank of Australia, which had arisen in the first place from loans made by the Bank to Mr Cluness and his wife and which had merged on 28 November 1989 in a judgment of the Supreme Court of New South Wales in favour of the Bank against Mr & Mrs Cluness. Subsequently, Mr & Mrs Cluness commenced making payments of $416.66 per month to the Bank. There were negotiations between the parties with respect to the payment of the debt, resuling in a deed made on 13 February 1992 between Scott Cluness, Daphne Louise Cluness and the Commonwealth Bank of Australia. The deed read, inter alia: "WHEREAS A. The Bank has advanced to Mr and Mrs Cluness certain sums of money (`the loan'). B. On 28 November 1989, the Supreme Court of New South Wales entered judgment in favour of the Bank against Mr and Mrs Cluness (the `judgment'), in relation to certain proceedings commenced by the Bank following default in repayment of the loan. C. In or about September 1990, Mr and Mrs Cluness commenced monthly payments of $416-66 each in repayment of the judgment, and, as at the date of this Deed have paid a total of $5003.00 to the Bank. D. The Bank has now agreed to release Daphne Louise Cluness from her liability to the Bank under the judgment, provided that payments of $416-66 per month to the Bank in reduction of the judgment debt are maintained by Scott Cluness. NOW THIS DEED WITNESSES 1. That Mr and Mrs Cluness have paid to the Bank the sum of $5003.00 since September 1990. 2. That Scott Cluness agrees to continue to make monthly payments to the Bank of $416-66 in repayment of the sum due from time to time under the judgment. 3. That in consideration of the matters set out in Clauses 1 and 2, the Bank will forthwith discontinue and forever abandon and forgo all of its rights in respect of the judgment against Daphne Louise Cluness and her servants, agents and employees which it now has, or at any time hereafter may have or but for the execution of these presents might have had in any way arising out of the judgment. ..." Subsequently, when Mr Cluness ceased making the monthly payments, bankruptcy notices were served on both Mr & Mrs Cluness. Mrs Cluness applied to the Court for an order that the bankruptcy notice directed to her be set aside and, on 7 May 1996, Foster J so ordered, holding that the effect of cl 3 of the deed was to release Mrs Cluness from the time of the execution of the deed. Thereafter, the Bank took proceedings in the Equity Division of the Supreme Court of New South Wales seeking rectification of the deed so as to include a provision whereby the release of Mrs Cluness would be conditional upon the continued payment by Scott Cluness of the monthly sums which he had agreed to pay. Young J dismissed the application, holding amongst other things that that had not been the intention of the parties and, moreover, it would have been extremely difficult ever to have drafted a suitable condition. In the course of his judgment, his Honour said: "Various very interesting legal points could have arisen in this case had I been given the information. I merely mention these because I do not wish it to be thought that I have overlooked them. One of the problems appears to be that there was a joint judgment against Mr and Mrs Cluness, and a release of one joint debtor releases all because of the doctrine of circuity of action. As Bacon, CJ said in Ex parte Good; In re Armitage (1876) 5 Ch D 46, 55, "It is to prevent circuity of action, inasmuch as if the released debtor were still liable to an action for contribution by his co-debtor (who had been sued and had paid), he would not be in fact released." He referred to North v Wakefield (1849) 13 QB 536, 541; 116 ER 1368, 1370." In the light of his Honour's reference to the principle that the release of one joint debtor releases all, the view was then taken by those advising Mr Cluness that the deed of 13 February 1992 had had the effect of releasing not only Mrs Cluness but also Mr Cluness, for they had been joint debtors. Accordingly, this present application was instituted seeking the annulment of the bankruptcy on the ground that a debt did not exist at the time of the making of the bankruptcy order. The basis of the principle that the release of one joint debtor extinguishes the liability of the other joint debtor is that there is only one debt. It is a debt owed jointly by one or more persons. If the debt is released and thereby extinguished, the debt ceases to exist. Therefore anybody who was previously bound to pay the debt is also released, although the deed of release may have been expressed in favour of only one of the joint debtors. However, there is no reason why the parties to a joint debt, the joint debtors and the creditor, may not enter into a novation and re-arrange their affairs by agreement so that the joint debt becomes by their agreement the debt of one only. In other words, a single obligation may replace the joint obligation because the parties have agreed to re-arrange their affairs in that manner. It seems to me that that is what occurred by the deed of 13 February 1992. All relevant parties were parties to the deed, one of the previous joint debtors agreed to pay the debt by the instalments which were provided for and the liability of the other joint debtor was extinguished. I do not read that document as extinguishing the basic debt of over $200,000 which was owed to the Bank. The deed on its face provided for the payment of the debt by instalments. It is clear that the deed did not have in mind that the debt would be extinguished. The principle to be applied is that I think which was stated by Lord Justice Collins in In Re E.W.A.; a Debtor [1901] 2 KB 642 at 648-9 where his Lordship said: "It is clear that, although a document in terms purports to release one of two joint debtors, yet it may contain in terms a reservation of rights against the other joint debtor. Where you find those two provisions you construe the document, not as a release, but merely as an undertaking not to sue a particular individual; and the result is that the right to proceed against the co-debtor is reserved and can be put in force against him." That principle is referred to in Chitty on Contract, 25th ed., vol 1, para 1207, and it was discussed in considerable detail in Glanville Williams' monograph Joint Obligations. In para 53 commencing at p 111, Glanville Williams discusses the distinction between a release and a covenant not to sue. The learned author refers to earlier cases where a deed such as the present would have been construed as a release but goes on to refer to the case of Solly v Forbes (1820) 2 Brod &B 38, 129 ER 871, where the principle that I have already mentioned was applied. The learned author stated: "But an important step forward was taken in 1820, when it was held that if there is any indication of intention that the other debtors are not to be discharged the instrument will be construed as a covenant and not as a release, even though otherwise it is worded as a release. In effect this abrogates the rule as to releases in all cases where the promisee has been astute enough to reserve his rights against the other debtors in the instrument." Glanville Williams goes on to discuss this question over pages 111 to 113 and, at 113, states: "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." After discussing this principle under the heading of "Deeds", the learned author then further discusses the matter under the heading of "Accord and Satisfaction". I need not refer to these later remarks except to say that the principle I have mentioned applies also in the case of accord and satisfaction so that, if it can be inferred from the terms of the accord and satisfaction that there was an intention not to release the other joint debtor or debtors, then the arrangement is construed not as a release but as a covenant to sue. In the present case, there was a clear expression of intention that the one debtor was not to be discharged. Mr Murray Aldridge, counsel for the Commonwealth Bank, has referred me to Dorgal Holdings Pty Limited v Buckley (1996) 22 ACSR 164 in which McClelland CJ in Eq., stated the principle that I have mentioned in these terms at 167: "The rule is subject to a qualification, namely that if, on the true construction of the instrument in which it appears, that which purports to be a release of one of several joint (or joint and several) debtors was intended not to operate as a release of the whole obligation by reason that other debtors jointly (or jointly and severally) liable with the debtor purportedly released were intended to remain liable, then it will be treated not as a release in the strict sense, but as a covenant not to sue the debtor purportedly released: Solly vForbes (1820) 2 Brod & B 47, 129 ER 871. (The same qualification is applicable to a purported release of a guaranteed debt, so far as the liability of a surety is concerned - Bateson v Gosling (1871) LR 7 CP 9, Commercial Bank ofTasmania v Jones [1893] AC 313, and Hancock v Williams (1942) 42 SR 252 at 257; [1942] 59 WN (NSW) 215 at 217.)" The document which was expressed as a release in Dorgal Holdings was a transaction between the creditor and one of the joint debtors. The principle applies in such a case; but it has much clearer effect when the release is contained in a document to which all persons interested are parties and in which the document itself expressly reserves the liability of one of the debtors to pay the debt. It seems to me that, on those grounds, I must read this document of 13 February 1992 as not releasing the debt itself but merely as a covenant on the part of the Commonwealth Bank not to sue Mrs Cluness. I should perhaps add two other relevant references from Glanville Williams, the first at p 118 where the learned author states: "... where the accord expressly reserves rights against the other debtors, it seems clear that such express reservation is practically conclusive evidence that the satisfaction of the accord was not intended to be a complete substitution for the original promise, but was intended to discharge only the liability of the other party to the accord." At p 128, the learned author also refers to the point that: "... a debtor who agrees that his own liability shall continue notwithstanding that his co-debtor is released might well be estopped from setting up the release." Where in circumstances such as I have been discussing one debtor has expressly agreed to pay the debt, an equitable estoppel may arise precluding him from denying liability to pay. That will be so if the other party, the creditor, has acted upon the promise made and the promise was made with the anticipation that it would be so acted on. For those reasons, I am of the view that the application must fail. I do not need to discuss the other issues which were adverted to by counsel. The application will be dismissed with costs. The cross application will be dismissed. I certify that this and the preceding five (5) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies Associate: Date: 17 April 1998 Counsel for the Applicant: B.J. Skinner Solicitor for the Applicant: Brown & Partners Counsel for the Respondent: S.S. Nash, solicitor Solicitor for the Respondent: Sally Nash & Co Counsel for the Cross Applicant: M.R. Aldridge Solicitor for the Cross Applicant: Commonwealth Bank of Australia Legal Department Date of Hearing: 17 April 1998 Date of Judgment: 17 April 1998