FEDERAL COURT OF AUSTRALIA Handberg v Smarter Way (Aust) Pty Ltd [2002] FCA 469 BANKRUPTCY - order for costs – joint and several debtors – where judgment debt set off in full as between insolvent co-debtor and creditor by operation of Corporations Act s 553C – applications by remaining debtors to set aside bankruptcy notices issued against them – whether statutory set off operates to extinguish creditor's claims against remaining debtors – whether there was a debt existing to support the issue of bankruptcy notices against remaining debtors – proof of debts – double satisfaction INSOLVENCY – where one joint and several debtor executes deed of company arrangement – Corporations Act s 553C – whether required mutuality – where debt set off in full by operation of law – whether creditor can seek to recover debt against remaining solvent co-debtors – scope and operation of s 553C Bankruptcy Act 1966 (Cth), s 41(2) Corporations Act 2001 (Cth), s 439C, s 444D(1), s 444H, s 444(4)(i), s 444A(5), s 553C, s 553E Bankruptcy Regulations, reg 4.02 Corporations Regulations, Sch 8A, reg 5.3A.06 GM & AM Pearce and Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888 followed Gye v McIntyre (1991) 171 CLR 609 applied Stein v Blake [1996] 1 AC 243 followed Owen v Wilkinson (1858) 5 CB(NS) 526 referred McDonald v Dennys Lascelles Limited (1933) 48 CLR 457 referred Goodwin v Duggan (1996) 41 NSWLR 158 referred Ex Parte Wyldman (1750) 2 Ves Sen 113; 28 ER 74 cited In Re Houlder [1929] 1 Ch 205 cited Edwards v Hood-Barrs [1905] 1 Ch 20 cited Midland Montagu Australia Ltd v Harkness (1994) 35 NSWLR 150 cited Hill v Anderson Meat Industries Ltd [1971] 1 NSWLR 868 considered Re Kolb, Ex parte England v Federal Commissioner of Taxation (1994) 51 FCR 31 cited Re Last, Ex parte Butterell (1994) 124 ALR 219 cited In Re Garner's Motors, Ltd [1937] Ch 594 considered Deanplan Ltd v Mahmoud [1993] Ch 151 cited Johnson v Davies [1999] Ch 117 considered Trocko v Renlita Products Pty Ltd [1973] 5 SASR 207 cited Caratti v Hillman [1974] WAR 92 cited Re Terri Co Pty Ltd (1987) 12 ACLR 457 cited Re Applications of NRMA Ltd (2000) 156 FLR 349 cited Kempe (as joint liquidator of Mentor Insurance Ltd) v Ambassador Insurance Co (in liq) [1998] 1 WLR 271 cited Day and Dent Constructions Pty Ltd (in liquidation) v North Australian Properties Pty Ltd (1982) 150 CLR 85 referred M S Fashions Ltd v Bank of Credit and Commerce International SA (in liquidation) [1993] Ch 425 considered In Re Bank of Credit and Commerce International SA (No 8) [1998] AC 214 referred Rory Derham, Set-off (Oxford, 2nd ed, 1996) Glanville Williams, Joint Obligations (London, 1949) GEOFFREY NEILS HANDBERG v SMARTER WAY (AUST) PTY LTD (ACN 087 747 359) V 7074 of 2001 ANTHONY D'ALOIA v SMARTER WAY (AUST) PTY LTD (ACN 087 747 359) V 7075 of 2001 KENNY J 15 APRIL 2002 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 7074 OF 2001 BETWEEN: GEOFFREY NEILS HANDBERG Applicant AND: SMARTER WAY (AUST) PTY LTD (ACN 087 747 359) Respondent JUDGE: KENNY J DATE OF ORDER: 15 APRIL 2002 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. In proceeding V 7074 of 2001, the bankruptcy notice dated 20 August 2001 and numbered VN 1399/01 be set aside. 2. The respondent pay the applicant's costs of and incidental to the application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 7075 OF 2001 BETWEEN: ANTHONY D'ALOIA Applicant AND: SMARTER WAY (AUST) PTY LTD (ACN 087 747 359) Respondent JUDGE: KENNY J DATE OF ORDER: 15 APRIL 2002 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. In proceeding V 7075 of 2001, the bankruptcy notice dated 20 August 2001 and numbered VN 1398/01 be set aside. 2. The respondent pay the applicant's costs of and incidental to the application. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 7074 OF 2001 V 7075 OF 2001 V 7074 OF 2001 BETWEEN: GEOFFREY NEILS HANDBERG Applicant AND: SMARTER WAY (AUST) PTY LTD (ACN 087 747 359) Respondent V 7075 OF 2001 BETWEEN: ANTHONY D'ALOIA Applicant AND: SMARTER WAY (AUST) PTY LTD (ACN 087 747 359) Respondent JUDGE: KENNY J DATE: 15 APRIL 2002 PLACE: MELBOURNE REASONS FOR JUDGMENT the application 1 The applicants, Messrs D'Aloia and Handberg ("the applicants"), are the two members of the firm, D'Aloia Handberg, Chartered Accountants. They are liquidators and members of the Insolvency Practitioners' Association of Australia. 2 These two proceedings arise out of the same circumstances, and give rise to the same questions of law. What follows applies to both of them. 3 On 28 August 2001, the applicant in each proceeding made application under the Bankruptcy Act 1966 (Cth) ("the Act") to set aside a bankruptcy notice served by Smarter Way (Aust) Pty Ltd ("the respondent") on each of them. The bankruptcy notices that were served on the applicants were, in all relevant respects, identical. 4 The applications were supported by the affidavits of Anthony D'Aloia sworn on 28 August 2001 and 16 October 2001 and of Geoffrey Neils Handberg sworn on 28 August 2001 and 29 August 2001. The application in proceeding No. V 7075 was also supported by the affidavit of Nicholas Brooke sworn on 16 October 2001, although at the hearing of the applications the respondent objected to part of par 5, commencing with the words "I am further informed … ". The objection was properly made, although the parties do not dispute that Waiviata (a non-party important in these proceedings) has never physically paid the sum of $132,525.70 (discussed below) to the respondent. In opposing the applications, the respondent relied on an affidavit of Phillip Jarvie sworn on 5 September 2001 and filed in both matters. 5 The applications were made on the ground that the respondent is not a creditor of the applicants in relation to the debt alleged in the bankruptcy notices that was served on them. Each application raises the same question, namely, whether the applicant owed a debt to the respondent in the sum of $43,426.10 sufficient to found the bankruptcy notice that issued against him under s 41(2) of the Act and reg 4.02 of the Bankruptcy Regulations ("the Regulations"). background facts 6 On 6 January 2000, the respondent, an internet service provider, entered into a written agreement ("the January 2000 agreement") with Waiviata International Limited ("Waiviata") and Phillip Jarvie, sole director and shareholder of the respondent, pursuant to which Waiviata lent $132,525.70 to the respondent. Clause 4 of the agreement provided that, if the respondent failed to meet the obligation to repay as set out in cl 3, then "by force of this document Waiviata will immediately become the full and beneficial owner of the [respondent's] Business and the Assets and, to the extent possible without further act or documentation, the legal owner of the Business and the Assets". Clause 5 of the agreement provided in effect that the respondent and Jarvie were to take steps to complete the transfer of the respondent's business and assets to Waiviata "upon the change in beneficial ownership of the Business and the Assets" referred to in cl 4. Pursuant to cl 7, upon compliance by the respondent and Jarvie with obligations in cl 5, the respondent was to be "discharged from any obligation to repay or pay moneys to Waiviata under clause 3". 7 The respondent did not repay the loan as required by cl 3. There is no evidence (and the respondent does not assert) that it took the steps required by cl 5 of the January 2000 agreement. The administrators of Waiviata have not, however, demanded payment of the sum of $132,525.70 8 On 28 January 2000, Waiviata (later known as Waivcom Worldwide Ltd ("Waivcom")) purported to appoint the applicants as voluntary administrators of the respondent pursuant to the January 2000 agreement and s 436C of the Corporations Law ("the Law"). Waiviata did so on the basis that it was a chargee of the respondent's property, the charge having been created, it said, by the January 2000 agreement. On 31 January 2000, after accepting appointment as administrators of the respondent, the applicants commenced a proceeding in the Supreme Court of Victoria (No 4183 of 2000). In this proceeding, they made application, by notice of motion, for an order that Jarvie deliver up the respondent's assets and books. 9 Mandie J heard this application in the Supreme Court on 1 February 2000. Jarvie successfully opposed the application on the ground that the January 2000 agreement did not confer a charge over the respondent's property on Waiviata and that Waiviata was not entitled to place the respondent into administration. Jarvie did not challenge the existence of the debt and, in reasons delivered on 2 February 2000, Mandie J found that "[t]he evidence shows that … the money [$132,525.70] was advanced": [2000] VSC 16 at [6]. His Honour also held that "the applicants have failed to establish the existence of a charge within the meaning of the Law … [and] I conclude that, therefore, they have not demonstrated they were validly appointed as administrators": [2000] VSC 16 at [17]. The motion, pursuant to which application was made, was dismissed with costs in favour of Jarvie, the question of non-party costs being reserved. On 4 February 2000, Mandie J ordered that Waiviata (a non-party) pay the present applicants' costs of proceeding No 4183, including the order for costs of 2 February 2000. 10 The applicants subsequently sought to appeal, including against Mandie J's orders of 2 and 4 February 2000. There were further applications in the Court of Appeal but they are not relevant for present purposes. The appeal did not proceed. 11 On 2 February 2000, the respondent and Jarvie instituted a new proceeding in the Supreme Court (being proceeding No 4199 of 2000) seeking a declaration pursuant to s 447C of the Law that the appointment of the administrators was invalid and certain other relief. Waiviata was subsequently joined as a defendant. In this proceeding, on 11 February 2000, Mandie J made orders (1) restraining the applicants from taking any step in the administration of the respondent other than prosecuting the appeal; (2) restraining Waiviata from enforcing the January 2000 agreement except as an unsecured creditor; and (3) restraining the respondent from selling or disposing of its assets and business except in the ordinary course of business. His Honour ordered that Waiviata pay the costs of the day of the parties in this proceeding. There were cross-undertakings as to damages, including an undertaking by Waiviata as to damages if the Court was of the opinion that the present respondent had suffered damage by reason of the restraining order. 12 The trial of the proceeding took place before Byrne J on 21, 25 and 26 September 2000. His Honour gave judgment on 11 October 2000, holding, just as Mandie J had done, that the January 2000 agreement did not create a charge and that the appointment of the administrators was, therefore, invalid. (His Honour's reasons for judgment are reported in (2000) 35 ACSR 595.) Byrne J ordered that the respondent's costs of the proceeding be paid by the applicants and Waiviata, that there be an inquiry as to damages, and that the respondent file a statement as to the damages it claimed to have suffered. The statement of damages, which was filed in November 2000, claimed that the respondent had suffered damages in the order of $800,000 to $1 million. The statement alleged that, in March 2000, there had been an offer to purchase the respondent's business for the sum of $1,300,000 and that, by reason of the orders made on 11 February 2000 by Mandie J, the respondent had been restrained from selling the business and had not done so. The respondent sought damages pursuant to the undertakings given by Waiviata on 11 February 2000. The amount claimed as damages represented "the difference between the offer made to purchase the business in the sum of $1,300,000 on the one hand, and the value of [the respondent's] business as at 11 October 2000 in the sum of $300,000 to $500,000, on the other". 13 I interpolate here that there was a third proceeding instituted by the respondent against Waivcom (formerly Waiviata) in October 2000 (being proceeding No 6831 of 2000). The proceeding was ultimately dismissed upon the basis that Waivcom pay the costs of the respondent. 14 On 16 March 2001, the directors of Waiviata (by now known as Waivcom) acted under s 436A of the Law to appoint voluntary administrators to Waiviata. Waiviata executed a deed of company arrangement pursuant to s 444A(3) of the Law on 25 June 2001. 15 On 23 July 2001, the respondent lodged two proofs of debt with the deed administrators of Waiviata. One proof of debt ("the first proof of debt") was for the sum of $88,519.30, comprising: (1) the costs order made against the applicants in favour of Jarvie on 2 February 2000; (2) the costs order made against Waiviata in favour of the applicants on 4 February 2000 (which included the costs in (1)); (3) the costs order made against Waiviata in favour of the respondent (and Jarvie) and the applicants on 11 February 2000; (4) the costs order made against Waiviata (by then Waivcom) in favour of the respondent on 4 October 2000; (5) the costs order made against the applicants and Waiviata (Waivcom) in favour of the respondent (and Jarvie) on 11 October 2000. The sum of $88,519.30 was the amount of the total bill of costs in taxable form filed in the Supreme Court. None of the costs orders had been taxed when the respondent lodged the proof of debt. 16 The second proof of debt was for the sum of $800,000 to $1 million claimed in the respondent's statement of damages in proceeding No 4199 of 2000 (referred to in [12] above). 17 On 3 August 2001, Master Bruce, of the Supreme Court, made an interim order for costs in proceeding No 4199 of 2000 in which he ordered that the respondent's costs taxed and allowed were $43,426.10. By letters dated 9 August 2001, the respondent's solicitors demanded that the applicants pay the respondent the sum of $43,426.10. The applicants have made no payment pursuant to this demand. 18 On 13 August 2001, the deed administrators of Waiviata (Waivcom) gave a Notice of Rejection of Formal Proof of Debt or Claim to the respondent. This notice stated, amongst other things, that: 1. Your claim against the company set out in the formal proof of debt or claim of Smarterway (Aust) Pty Ltd made on 23 July 2001 has been disallowed in the sum of $43,426, being the amount of the order made by the Taxing Master on 3 August 2001 for proceeding No 4199 of 2000. 2. My grounds for disallowance of the amount of the claim represented by proceeding No 4199 of 2000 are as follows: · Smarterway (Aust) Pty Ltd remains indebted to the company in the amount of $132,525.70 plus interest. · The amount of the claim is offset in full against the debt owed to the company. 3. If you are dissatisfied with my determination as set out above, you may appeal against it, no later than 14 days after the service of this notice or if the Court allows, within any further period, to the Supreme Court of Victoria. If you do not do so, you claim will be assessed in accordance with this determination. 19 Four days later, on 17 August 2001, the deed administrators of Waiviata (Waivcom) issued another Notice of Rejection of Formal Proof of Debt or Claim to the respondent, this time stating, amongst other things, that the residual claim in the further sum of $45,093.30 had been disallowed. (The sum of $45,093.30 was the sum of the additional costs anticipated to be taxed by Master Bruce on 18 September 2001.) The notice stated that the administrators' grounds for disallowance were: · Smarterway (Aust) Pty Ltd remains indebted to the company in the amount of $132,525.70 plus interest. · The sum of $43,426 was rejected in my Notice of Rejection of Formal Proof of Debt or Claim dated 13 August 2001. · The amount of your claim relating to proceeding number 4199 of 2000 that was disallowed by the Taxing Master on 3 August 2001 is rejected as an invalid claim. · The amount of the balance of your claim is offset in full against the debt owed to the company. 20 By letter dated 17 August 2001, the respondent's solicitors purported to withdraw the respondent's proof of debt lodged on 23 July 2001 in the sum of $88,519.30, but continued to maintain the proof of debt lodged in respect of the damages claim. This latter proof of debt was rejected on 4 October 2001. 21 On 20 August 2001, the respondent served a bankruptcy notice numbered VN 1398/01 on Mr D'Aloia and a bankruptcy notice numbered VN 1399/01 on Mr Handberg, claiming a debt, in both cases, of $43,426.10, being the amount of taxed costs allowed pursuant to the order of Master Bruce made on 3 August 2001. 22 Each of the bankruptcy notices relied on Byrne J's order of 11 October 2000 that the applicants and Waiviata (Waivcom) pay the costs of the proceeding No 4199 of 2000 to the respondent, and on Master Bruce's order of 3 August 2001 that these costs, on taxation, included the sum of $43,426.10. The effect of these orders was that the applicants and Waiviata (Waivcom) owed a joint and several debt to the respondent in the sum of $43,426.10. The applicants' case is that this debt has been satisfied by Waiviata (Waivcom) by operation of s 553C of the Corporations Act 2001 (Cth) ("Corporations Act"). That is to say, they contend that, pursuant to s 553C, the joint and several debt of $43,426.10 has been set off against the sum of $132,525.70 owed by the respondent to Waiviata (Waivcom), and that this set off operated not only to satisfy the debt of $43,426.10 owed by Waiviata (Waivcom) to the respondent, but also the joint and several liability of the applicants to the respondent. 23 In opposing the application, the respondent contended, first, assuming that s 553C operated to extinguish the debt owed by Waiviata (Waivcom) to the respondent, nonetheless the debt remained as between the respondent and the applicants. Secondly, and in the alternative, the respondent contested that it in fact owed any debt in the sum of $132,525.70 to Waiviata. Thirdly, the respondent contended that an account could not be taken under s 553C because its claim against the applicants and Waiviata (Waivcom) for damages was unresolved. legislative framework 24 This case turns very largely on the deed of company arrangement executed by Waiviata (Waivcom) on 25 June 2001, pursuant to a resolution of its creditors under s 439C of the Corporations Act, since, if s 553C is applicable, it is applicable under this deed. 25 By virtue of s 444D(1) of the Corporations Act, a deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed under s 444(4)(i). Pursuant to s 444H, a deed of company arrangement releases the company from a debt only in so far as the deed provides for the release and the creditor concerned is bound. By virtue of s 444A(5) a deed of company arrangement is taken to include a number of provisions of the Corporations Act, including s 553C, "except so far as [the deed] provides otherwise". By virtue of cl 8 of Sch 8A and reg 5.3A.06 of the Corporations Regulations (Cth), s 553C (which is found in subdiv A of Div 6 of Pt 5.6) is taken to be applicable to the administration under a deed of company arrangement unless the deed provides to the contrary. As Batt JA observed in GM & AM Pearce and Co Pty Ltd v RGM Australia Pty Ltd [1998] 4 VR 888 ("GM & AM Pearce") at 901: It is cl 8 of Sch 8A which alone of the legislative and subordinate legislative provisions makes s 553C applicable to deeds of company arrangement. It may be thought strange that such an important provision is not directly made applicable by a section of the Law itself. Clause 8 makes the section (and other sections) applicable with a modification of the references to the liquidator. When s 553C is applied to deeds of company arrangement at least two further, though similar, modifications have necessarily to be made. They are that the references to being wound up (in s 553C(1)) and to the relevant date (in s 553(1)) have respectively to be understood as references to being administered under a deed of company arrangement and to the date referred to in s 444D(1): Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24 at 34. In the case of Waiviata (Waivcom), the application of s 553C is confirmed by cl 11.5 of the deed. 26 In conformity with s 444A(4)(i) of the Corporations Act, "the day … on or before which claims must have arisen if they are to be admissible under the deed" is nominated as 16 March 2001, referred to in the deed as the "Relevant Date": see cl 11.1. 27 Section 553C forms part of Div 6 in Pt 5.6 of Ch 5 of the Corporations Act. Chapter 5 concerns "External Administration" and Pt 5.6, "Winding Up Generally". Division 6 deals with "Proof and Ranking of Claims". Section 553C provides as follows: (1) Subject to subsection (2), where there have been mutual credits, mutual debts or other mutual dealings between an insolvent company that is being wound up, and a person who wants to have a debt or claim admitted against the company: (a) an account is to be taken of what is due from the one party to the other in respect of those mutual dealings; and (b) the sum due from the one party is to be set off against any sum due from the other party; and (c) only the balance of the account is admissible to proof against the company, or is payable to the company, as the case may be. (2) A person is not entitled under this section to claim the benefit of a set-off if, at the time of giving credit to the company, or at the time of receiving credit from the company, the person had notice of the fact that the company was insolvent. 28 Section 553E of the Corporations Act provides: Subject to this Division and to section 279, in the winding up of an insolvent company the same rules are to prevail and be observed with regard to debts provable as are in force for the time being under the Bankruptcy Act 1966 in relation to the estates of bankrupt persons (except the rules in sections 82 to 94 (inclusive) and 96 of that Act), and all persons who in any such case would be entitled to prove for and receive dividends out of the property of the company may come in under the winding up and make such claims against the company as they respectively are entitled to because of this section. 29 The provisions of Div 6 of Pt 5.6 were inserted in the Corporations Law by the Corporate Law Reform Act 1992 (Cth) with effect on and from 23 June 1993. Before that date, the former s 553(2) of the Law provided, in substance, that in the winding up of an insolvent company the same rule should prevail and be observed with regard to (amongst other things) debts provable as were in force under the Bankruptcy Act in relation to the estates of bankrupt persons. That is to say, until 23 June 1993, by virtue of s 553(2), s 86 of the Bankruptcy Act applied in the winding up of an insolvent company. The Law did not, of course, provide for the administration of a company's affairs with a view to executing a deed of company arrangement until 23 June 1993. 30 By virtue of s 553C, a set-off is taken to occur "once and for all" at the beginning of the administration: see GM & AM Pearce at 888-9 per Ormiston JA, 891 per Callaway JA and 900 per Batt JA; cf Gye v McIntyre (1991) 171 CLR 609 ("Gye v McIntyre") at 622 and Stein v Blake [1996] 1 AC 243 ("Stein v Blake") at 249-250 and 253. The provision is taken to operate automatically and, in consequence, to produce a balance of account upon the basis of which a deed administrator can proceed. In this as in other regards, s 553C of the Corporations Act operates in much the same way as s 86 of the Bankruptcy Act 1966 (Cth). 31 As already noted, the deed administrator of Waiviata (Waivcom) purported to reject the respondent's first proof of debt upon the ground that the amount of $88,519.30 (the untaxed costs of the litigation) was set off in full against the debt of $132,525.70 owed by the respondent to Waiviata (Waivcom). The applicants now contend that, by virtue of s 553C of the Corporations Act, the amount of $43,426.10 (part of the taxed costs of the litigation) was set off in full against the debt of $132,525.70 owed by the respondent to Waiviata (Waivcom). They contend that, in consequence, they too are discharged from liability to the respondent. 32 Was there, as the applicants contend, the requisite mutuality to support a set-off under s 553C? In Gye v McIntyre, the High Court observed at 623: In the context of s 86 [of the Bankruptcy Act 1966 (Cth)], the word 'mutual' conveys the notion of reciprocity rather than that of correspondence. It does not mean 'identical' or 'the same'. So understood, there are three aspects of the section's requirement of mutuality. The first is that the credits, the debts, or the claims arising from other dealings be between the same persons. The second is that the benefit or burden of them lie in the same interests. In determining whether credits, debts or claims arising from other dealings are between the same persons and in the same interests, it is the equitable or beneficial interests of the parties which must be considered … . The third requirement of mutuality is that the credits, debts, or claims arising from other dealings must be commensurable for the purposes of set-off under the section. That means that they must ultimately sound in money. Bearing in mind that the operation of s 553C of the Corporations Act resembles that of s 86 of the Bankruptcy Act 1966 (Cth), it may be accepted that the notion of reciprocity also inheres in the word "mutual" in s 553C. 33 Were the debts in this case between the same persons? Put another way, can a joint and several debt owed by a company in administration (and other parties) to one of the company's creditors be set off against a debt owed solely by the creditor to the company? If so, what is the effect upon the liability of the other co-debtors? 34 The position at law is described by Rory Derham in his book Set-off (Oxford, 2nd ed, 1996) at p 349 in the following terms: In the case of a joint and several liability, each party is severally as well as jointly liable. The indebtedness of a truly joint and several debtor, together with an obligation owing by the creditor to that debtor, constitute dealings between the same people, and may be set off. The occurrence of the set-off would bring about a pro tanto reduction in the joint and several debt, and would release the other debtors as well. [references omitted] In connection with the last proposition, the learned author referred to the decision of Willes J in Owen v Wilkinson (1858) 5 CB(NS) 526 at 527. Owen v Wilkinson establishes that a set-off found for one co-debtor should operate for the benefit of another co-debtor who is jointly and severally liable for the same debt. Owen v Wilkinson was not, however, a bankruptcy case. 35 The rules governing proof of debts in bankruptcy (and insolvency) may attract special rules: see McDonald v Dennys Lascelles Limited (1933) 48 CLR 457 at 479-80 per Dixon J and Goodwin v Duggan (1996) 41 NSWLR 158 ("Goodwin v Duggan") at 168 per Powell JA. In this context, it seems that a creditor may, in an appropriate case, seek to prove in a debtor's bankruptcy for the full amount of a joint and several debt and, at the same time, seek to recover the full amount of the debt from a co-debtor or co-debtors, until the creditor receives the full amount of the debt: see Goodwin v Duggan at 167 per Handley and Beazley JJA and 168 per Powell JA; and Glanville Williams, Joint Obligations (London, 1949) at 155-6. Once the creditor receives the full amount of the debt, the creditor cannot retain any surplus as, if the creditor were to do so, this would amount to double satisfaction: see, e.g., Ex Parte Wyldman (1750) 2 Ves Sen 113; 28 ER 74; In Re Houlder [1929] 1 Ch 205 at 211-2 per Astbury J; Edwards v Hood-Barrs [1905] 1 Ch 20 at 23 per Kekewich J; Goodwin v Duggan at 167 and 168; Midland Montagu Australia Ltd v Harkness (1994) 35 NSWLR 150 ("Midland Montagu") per McLelland CJ at 159 and 165. In Midland Montagu, McLelland CJ in Eq stated at 159 that: The essence of the rule [against double satisfaction] is that [a creditor] is precluded from receiving in aggregate more than the full value of the common amount. (The rule does not apply to collateral payments, for example, from an insurer or volunteer … ). [Citations omitted] 36 Thus, in Hill v Anderson Meat Industries Ltd [1971] 1 NSWLR 868, Street J held, at 875-6, that (1) there was no effective distinction between a composition within the bankruptcy legislation or a scheme within a winding up on the one hand, and a scheme outside a winding up on the other; (2) in the latter case, a guarantor's liability "subsists in exactly the same manner as if the scheme had been formally approved within a current winding up"; and (3) the guarantor was bound to pay to the creditor moneys due under the guarantee "to the extent that the said moneys have not been or may not be paid" to the creditor by or on account of the principal debtor. 37 These authorities establish that it was open to the respondent to prove for the full amount of the debt of $43,426.10 and that, at the same time, it was open to it to seek to recover the debt from the applicants. If, however, it recovered the full amount of the debt from any co-debtor (including Waiviata), it was not entitled to proceed to recover from another co-debtor because that would be a double satisfaction. 38 I am satisfied that there was mutuality in the relevant dealings for the purposes of s 553C. In this case, dealings in which Waiviata (Waivcom) and the respondent were involved before 16 March 2001 gave rise to a claim by Waiviata against the respondent that the respondent was indebted to Waiviata in the sum of $132,525.70 and a claim by the respondent against Waiviata (and the applicants) that Waiviata (and the applicants) was indebted to the respondent in the sum of $43,426.10. That is, there was reciprocity between the same parties, notwithstanding that the debt incurred by Waiviata was joint and several with the applicants. As the High Court said in Gye v McIntyre at 625-6: As has been seen, it is established by authority that the words of s 86 of the [Bankruptcy] Act should be generously construed. On that approach, dealings in which a creditor and a bankrupt have been involved before the making of a sequestration order and which give rise to mutual claims between them – that is to say, commensurable claims between them in their own interests – are mutual dealings for the purposes of s 86 notwithstanding that other parties may have been involved in the dealings, that either the creditor or the bankrupt may have been involved in the dealings in more than one capacity or that those dealings also give rise to different claims between other parties or between the same parties in different beneficial interests. The critical matters for the purposes of s 86 are that there had been dealings in which the creditor and the bankrupt were both involved and that those dealings gave rise to mutual claims between them in the relevant sense. Although the Court was concerned with s 86 of the Bankruptcy Act, these comments apply equally to s 553C of the Corporations Act. See also Re Kolb, Ex parte England v Federal Commissioner of Taxation (1994) 51 FCR 31 at 34-35 and Re Last, Ex parte Butterell (1994) 124 ALR 219 at 222-3. 39 Subject to matters mentioned below, I am satisfied that s 553C operated of its own force at the commencement of Waiviata's administration to set off the sum of $43,426.10 owed by Waiviata and the applicants against the sum of $132,525.70 owed by the respondent to Waiviata. In relation to Waiviata at least, the debt of $43,426.10 was satisfied by set-off upon the commencement of the administration. The respondent contends that, notwithstanding this, it was open to it to seek to recover the debt from the applicants. 40 In relation to this submission, the respondent relied on In Re Garner's Motors, Ltd [1937] Ch 594 ("Garner's Motors"). The respondent accepted that, where a joint and several debtor is released by accord and satisfaction, the other co-debtors are released too: see, e.g., Deanplan Ltd v Mahmoud [1993] Ch 151 at 170 and Johnson v Davies [1999] Ch 117 ("Johnson v Davies") at 128. But, said the respondent, a discharge of a joint and several debt in relation to one debtor by operation of law does not discharge the other co-debtors; and this was a case in which Waiviata was discharged by operation of law. 41 In Garner's Motors, Temple Press Ltd, which was a creditor of a company, Garner's Motors Ltd, in voluntary liquidation, made application to reverse the decision of joint liquidators rejecting its proof of debt. The debt was joint and several with Garner's Motors and Sentinel Waggon Works Ltd. The liquidators contended that Garner's Motors was discharged from liability due to the operation of a scheme of arrangement which Sentinel had earlier entered into with its creditors. Clause 15 of the scheme of arrangement provided that the unsecured creditors were to receive the sum of five shillings in cash for every pound of their debt and a further sum equal to one-twelfth of the debt to be satisfied by an income note of corresponding nominal amount; and that this would be in full satisfaction and discharge of their claims against Sentinel. The Court subsequently sanctioned the scheme under s 153 of the English Companies Act 1929. See also English Companies Act 1929, s 262 and the English Bankruptcy Act 1914, s 31. In delivering a short judgment, Crossman J stated at 598-9: It is settled law that accord and satisfaction between a creditor and one of several debtors, who are jointly and severally liable to the creditor, discharges the other debtors unless it appears from the terms of the agreement or the surrounding circumstances that the creditor intended to reserve his rights against them. The law is in my opinion correctly stated in Halsbury's Laws of England (second edition), vol 7, p 237, para 324. But in my judgment a discharge of one of several joint debtors by operation of law does not discharge the other debtors. In my judgment the effect of s 153 of the Companies Act, 1929, is to give to a scheme when sanctioned by the Court under this section a statutory operation. The scheme when sanctioned by the Court becomes something quite different from a mere agreement signed by the parties. It becomes a statutory scheme. In my judgment, therefore, the discharge of Sentinel Waggon Works Ld, from the debt to Temple Press Ld, which was effected under clause 15 of the scheme sanctioned by the Court on March 23, 1936, did not have the effect of discharging Garner's Motors, Ld, from its liability in respect of the debt. It is settled law that a discharge of one of several judgment-debtors by operation of law does not release the other debtors. By in my judgment the effect of s 153 of the Companies Act, 1929, is to give a scheme when sanctioned by the Court a statutory operation. I think that the law is correctly stated in Buckley, 12th ed, p 322, as in Halsbury, vol 5, p 797, para 1366. Accordingly, Crossman J held that Garner's Motors was not released from its debt to Temple Press. 42 The authorities accept that the effect of provisions like s 153 of the English Companies Act 1929 is to give statutory operation to a scheme of arrangement when sanctioned by the Court: see, e.g., Trocko v Renlita Products Pty Ltd [1973] 5 SASR 207 at 209; Caratti v Hillman [1974] WAR 92 at 95; Re Terri Co Pty Ltd (1987) 12 ACLR 457 at 462; Re Applications of NRMA Ltd (2000) 156 FLR 349 at 404; Midland Montagu at 165; and Kempe (as joint liquidator of Mentor Insurance Ltd) v Ambassador Insurance Co (in liq) [1998] 1 WLR 271 at 276. Further, having regard to the authorities mentioned in [35] and [36] above, and to Garner's Motors (and Johnson v Davies at 137 per Chadwick LJ), it may be accepted that the discharge of one co-debtor under such a scheme does not of itself operate to discharge another co-debtor, against whom a creditor may proceed to recover beneficially up to the full amount of the debt. 43 Further, let it be assumed (without deciding) that, in the case of a deed of company arrangement executed pursuant to a resolution of creditors under s 439C of the Corporations Act, the company can be said to be released from the relevant debts by operation of law (but see GM & AM Pearce at 891 per Callaway JA and 900 per Batt JA). The authorities, including Garner's Motors, would support the proposition that the release of the company in respect of a joint and several debt would not of itself discharge a co-debtor, against whom the creditor might proceed to recover the full amount of the debt. Nonetheless, acceptance of this proposition does not answer the question that arises in these applications. 44 The applicants do not assert that they are released from liability on account of any release from debt afforded to Waiviata pursuant to the deed of company arrangement: see, e.g., cls 11.2 and 15.1. The applicants rely, instead, on the operation of s 553C of the Corporations Act. Garner's Motors was not concerned with the effect of a set-off in insolvency on co-debtors. The decision is not relevant to this issue. 45 The respondent submitted that in terms s 553C(1) was "limited in its operation to the obligations" as between the respondent and Waiviata. It followed, so the respondent submitted, that the applicants could not take advantage of its operation. In considering this submission, I assume that the respondent in fact owed the sum of $132,525.70 to Waiviata. (I deal below with a submission that the asserted debt did not exist.) 46 In the absence of a set-off, a creditor such as the respondent would be obliged to pay in full the amount of its debt to Waiviata: cf Day and Dent Constructions Pty Ltd (in liquidation) v North Australian Properties Pty Ltd (1982) 150 CLR 85 ("Day and Dent Constructions") at 107-8. If the requirements of s 553C(1) of the Corporations Act are satisfied, however, the respondent is only obliged to pay the balance remaining after an account is taken. In this case, since Waiviata's claim exceeded in value that of the respondent, the respondent obtained, in effect, payment in full for its claim of $43,426.10 in the form of deduction from its liability to pay Waiviata the whole sum of $132,525.70. The respondent is, in consequence, only obliged to pay the balance of $89,099.60. Had the respondent's claim been greater than that of Waiviata, then it would have received payment in full to the extent of its liability to Waiviata and might have proved for the balance. In this circumstance, if the respondent is permitted to proceed against the applicants for the recovery in full of the joint and several debt of $43,426.10, then the respondent would, in effect, be permitted a double satisfaction. The set-off which automatically took place under s 553C had the effect of satisfying Waiviata's liability to the respondent and, since the liability was joint and several, by means of this set-off the applicants could no longer be sued, the respondent having received the full value of the debt due to it. 47 The English Court of Appeal reached a similar conclusion in M S Fashions Ltd v Bank of Credit and Commerce International SA (in liquidation) [1993] Ch 425 ("M S Fashions"). M S Fashions concerned a bank (referred to as BCCI) that had provided advances to customers secured by both guarantees and cash deposits by the guarantors. The bank went into liquidation. The liquidator made a demand on the debtors, upon the basis that the guarantors should be confined to proofs in the liquidation in respect of the deposits. The Court of Appeal held that there was a statutory right of set-off as between the guarantor and the bank which had the effect of automatically satisfying the guarantors' liability to the bank and, since the guarantors had paid the debt by means of set-off, the customers could no longer be sued. Dillon LJ (with whom Nolan and Steyn LJJ agreed) held, at 448: The banking relationship between BCCI and the various companies [the bank's customers] of course ceased when BCCI went into liquidation. Therefore we have a situation in which, though the situation is tripartite rather than bipartite as in the cases referred to earlier, all the rights are immediately enforceable so far as relevant to the question of set-off. There is a debt presently due from each of the companies to BCCI and equally due from Mr Amir or Mr Ahmed [the guarantors] as the case may be as a principal debtor to BCCI and there is the liability from BCCI to Mr Amir or Mr Ahmed for the deposit. That satisfies entirely, in my judgment, the requirements for statutory set-off as explained by Dixon J [in Hiley v Peoples Prudential Assurance Co Ltd (1938) 60 CLR 468 at 496-497] … . If there is set-off between Mr Amir and Mr Ahmed and BCCI that must automatically reduce or extinguish the indebtedness to BCCI of the company. The statutory set-off is not something which BCCI can, as it were, place in a suspense account. It operates to reduce or extinguish the liability of the guarantor and necessarily therefore operates as in effect a payment by him to be set against the liability of the principal debtor. A creditor cannot sue the principal debtor for an amount of the debt which the creditor has already received from a guarantor. 48 In Re Bank of Credit and Commerce International SA (No 8) [1998] AC 214 at 224, Lord Hoffman (with whom Lord Hope and Lord Hutton agreed) observed that the arrangement in M S Fashions was "held to result in a set-off between depositor and BCCI which, since depositor and principal debtor were jointly and severally and unconditionally liable for the same debt, discharged the principal debtor". 49 As already noted, the respondent submitted, in the alternative, that it did not in fact owe the sum of $132,525.70 to Waiviata under the January 2000 agreement. (If raised in the respondent's written submissions filed before the hearing, the point is not immediately apparent, and was not clearly raised until the hearing.) The respondent submitted, first, as the existence of the debt had not been challenged before Mandie J in February 2000, the applicants gained little from his Honour's observation that Waiviata had advanced the sum of $132,525.70 to the respondent. The respondent also relied on the fact that there was evidence that no demand had been made by, or on behalf of, Waiviata for repayment of the sum of $132,525.70. Finally, the respondent relied on the reasons for judgment of Byrne J delivered 11 October 2000, which may be read as supporting the respondent's contention in this regard. 50 In the course of his reasons for judgment, his Honour observed at 35 ACSR 595 [21]-[23]: It was submitted on behalf of Waiviata that the whole purpose of the transfer was to provide security for the loan, in the sense that Waiviata obtained something more than a naked promise to repay it. This seems to be correct but it does not resolve the present issue. The question here is whether the transaction should be understood as conferring upon Waiviata and the company the obligation and the right, respectively, to return the business or so much of it as remains after the debt has been repaid from these assets or otherwise by the company … as Waiviata would have it; or whether the transfer of the business was absolute and was taken in discharge of the loan. …. As was observed in argument, there is in this analysis a risk of circularity of reasoning. … . What I must look for is some indication of an intent that the assets of the business are transferred to Waiviata for the purpose of satisfying the loan debt and not for the sole purpose of its enjoying them for its own benefit. Notwithstanding that the surrounding circumstances here show that the underlying transaction was a loan and that cl 5 of the agreement provided a powerful incentive for the company to repay that loan, they do not dispel the clear intention disclosed in the document that the transfer was not in the nature of a security in the sense of a charge or a mortgage. This appears to be one of those cases where the company, perhaps out of desperation or out of misplaced confidence in its own ability to repay, assumed the risk that its business would be lost if it did not make repayment. 51 It must be borne in mind that, in these passages, his Honour was concerned only with the question whether the January 2000 agreement in terms created a charge, it being assumed that the amount of $132,525.70 had been provided to and not given back by the respondent. Immediately after making the above observations, his Honour found (as had Mandie J) that the instrument under which the administrators were appointed was not a charge. His Honour was not specifically concerned with the question whether the respondent was indebted to Waiviata in the sum of $132,525.70, or otherwise. In particular, his Honour did not consider the effect of cls 5 and 7 in the circumstances of the case. 52 As already noted, cl 7 of the January 2000 agreement provided that the respondent was "discharged from any obligation to repay or pay moneys to Waiviata" upon "full compliance by [the respondent] … with clause 5(a) to (c) and (e)". There is, however, no evidence that the respondent (and/or Jarvie) complied with cl 5 (relating to the transfer of the business). The applicants said that the respondent had not done so complied, and the respondent did not contest the applicants' statement in this regard. In this circumstance, it would not be appropriate to infer from passages in Byrne J's judgment that his Honour was making a finding concerning the existence of the debt of $132,525.70. 53 The deed administrators of Waiviata have twice rejected the respondent's proof of debt upon the ground that the debt is set off against the sum of $132,525.70 owed by the respondent to Waiviata. The respondent has not apparently challenged the administrators' decisions by asserting that the alleged debt of $132,525.70 does not exist; and the time for appeal has, it seems, passed (cf cl 17(b) of the deed of company arrangement). In this circumstance, I am not persuaded to accept the respondent's submission that there was no debt owed by it to Waiviata. 54 The respondent also submitted, in the alternative, that no account could yet be taken under s 553C(1)(a) of the Corporations Act because the respondent's damages claim remained unresolved. Let it be assumed for present purposes that, notwithstanding the rejection of the proof regarding the damages claim, the respondent has a maintainable claim for damages which has not yet been quantified. This would not prevent an account being taken under s 553C. 55 As already noted, pursuant to s 553C, a set-off is taken to occur at the beginning of the administration. In connection with s 86 of the Bankruptcy Act 1966 (Cth), the High Court said in Gye v McIntyre at 622 that: The section is self-executing in the sense that its operation is automatic and not dependent upon 'the option of either party': see, per Lord Selborne LC, In re Deveze; Ex parte Barnett (1874) 9 Ch App 293 at p 295. The Court added at 623-624: The requirement that the credits, the debts or the claims arising from other dealings be commensurable does not mean they must be vested, liquidated or enforceable at the decisive date, that is to say, at the time of the sequestration order or special resolution accepting the composition. Provided they exist as contingent at that date and are of a kind which will ultimately mature into pecuniary demands susceptible of set-off, the requirement of the section may be satisfied in relation to them. 56 The fact that a damages claim is unquantified at the time at which the account is to be taken does not prevent the taking of the account. Lord Hoffman considered the apparent conundrum to which s 323 of the English Insolvency Act 1986 (the English equivalent to s 86 of the Bankruptcy Act) gives rise in Stein v Blake at 252. His Lordship said at 252-3: Bankruptcy set-off therefore requires an account to be taken of liabilities which, at the time of bankruptcy, may be due but not yet payable or may be unascertained in amount or subject to contingency. Nevertheless, the law says that the account shall be deemed to have been taken and the sums due from one party set off against the other as at the date of the bankruptcy. … . How does the law deal with the conundrum of having to set off, as of the bankruptcy date, 'sums due' which may not yet be due or which may become owing upon contingencies which have not yet occurred? It employs two techniques. The first is to take into account everything which has actually happened between the bankruptcy date and the moment when it becomes necessary to ascertain what, on that date, was the state of account between the creditor and the bankrupt. If by that time the contingency has occurred and the claim has been quantified, then that is the amount which is treated as having been due at the bankruptcy date. … . But the winding up of the estate of a bankrupt or an insolvent company cannot always wait until all possible contingencies have happened and all the actual or potential liabilities which existed at the bankruptcy date have been quantified. Therefore the law adopts a second technique, which is to make an estimation of the value of the claim. … . This enables the trustee to quantify a creditor's contingent or unascertained claim, for the purposes of set off or proof, in a way which will enable the trustee safely to distribute the estate, even if subsequent events show that the claim was worth more. … . In what circumstances must the account be taken? The language of section 323(2) suggests an image of the trustee and creditor sitting down together, perhaps before a judge, and debating how the balance between them should be calculated. But the taking of the account really means no more than the calculation of the balance due in accordance with the principles of insolvency law. … Citing Gye v McIntyre, his Lordship went on to hold (at 253) that "the 'account' … must be taken whenever it is necessary for any purpose to ascertain the effect which the section had". This also conforms to the decision in Day and Dent Constructions. 57 In the present case, the deed administrator rejected the respondent's proof of debt for damages in the sum of $800,000 to $1 million on 4 October 2001, stating "[m]y grounds for disallowance … are that you failed to provide sufficient evidence to support the claim". There was no evidence (and it was not suggested) that the respondent had sought to appeal against this decision within the time allowed. In this circumstance, I can discern no error in the account that has apparently been taken under s 553C(1), pursuant to which the taxed costs payable by Waiviata have been set off against a debt of $132,525.70 said to be owing from the respondent to Waiviata. 58 At the hearing neither party sought to rely on the respondent's purported withdrawal of its proof of debt. Had it been open to the respondent to withdraw its proof of debt after the deed administrators had notified the respondent of the rejection (which may be doubted), then, in any event, the authorities make it plain that a set-off under s 553C(1) takes places irrespective of proof of debt: see GM & AM Pearce at 890-891 and 898-9; Gye v McIntyre at 621;and Stein v Blake at 253. 59 For the reasons stated, I would set aside the bankruptcy notices that are the subject of these applications. The respondent should pay the applicants' costs of and incidental to the applications. 60 I note, lest it be thought that I had overlooked it, that the respondent protested that submissions filed by the applicant subsequent to the hearing went further than a mere reply to submissions filed by the respondent after the hearing. Perhaps so, but if these reasons touch on a point raised in these submissions of the applicant, it is because one or other party raised the relevant matter at the hearing, where it was the subject of argument. I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny. Associate: Dated: 15 April 2002 V 7074 of 2001 V 7075 of 2001 Counsel for the Applicant: Mr J Moore Solicitor for the Applicant: Madgwicks Counsel for the Respondent: Mr N Lucarelli QC with Mr P Bravender-Coyle Solicitor for the Respondent: Law Partners Date of Hearing: 22 October 2001 Date of Judgment: 15 April 2002