44 C.L.R.] OF AUSTRALIA. (HIGH COURT OF AUSTRALIA.] MIDLANE BROS. (AUST.) LIMITED APPELLANT ; AND . ResponpEnts. REID AND OTHERS ON APPEAL FROM THE COURT OF BANKRUPTCY, DISTRICT OF SOUTH AUSTRALIA. Bankruptey—Money lent to debtor by wife—Partnership—Novation—Agreement H, C, or A. between partners for wife to receive share of profits—Statutory deed of assignment 1930, by firm—No postponement of wife's claim—Bankruptcy Act 1924-1928 (No. 37 = W~ of 1924—No. 39 of 1928), secs, 85-86.* ADELAIDE, Sept. 18, 22. A wife lent to her husband several sums of money for the purpose of his business, and it was agreed between them that the husband should pay six @4¥an Dufty, per cent interest. The husband subsequently took three of his sons into Pixon JJ. partnership in the business. The circumstances showed that the father and sons intended that they should be responsible to the wife for the amount of her debt, and the wife realized, and consented to, the fact that the firm had taken over this responsibility. 'The articles of partnership, to which the wife was not a party, provided that she should receive a share of the net profits of the business but only during the time of and in consideration of her leaving her fixed deposit in the business. 'The partners executed a deed of assign- ment pursuant to Part XI, of the Bankruptcy Act 1924-1928, and the wife *The Bankruptcy Act 1924-1928 rupt, who was engaged or about to provides, by sec. 85 (1), that "any money of the wife of a bank- ruptient . . . by her to him shall be treated as assets of his estate, and the wife shall not be entitled to claim any dividend as a creditor in respect of any such money . . . until all claims of his other creditors for valu- able consideration in money or money's- worth have been satisfied." Sec. 86 provides that "where money has been advanced, by way of loan, to a bank- VOL. XLIV. engage in any business, on a contract, with the bankrupt that the lender i shall receive a share of the profits arising from carrying on the business, the lender of the loan shall not be entitled to claim any dividend as a creditor in respect of his loan. . . until the claims of theother creditors of the bankrupt (other than the wife or husband of the bankrupt) for valuable consideration in money or money's-worth have been satisfied." H.C. or A. 1930. 'MrpiaNe Bros. (Avst.) Lr. v. Rew. HIGH COURT (1990 claimed to be entitled to prove for the full amount of her claim and to share in any dividend pro rata with the other unsecured creditors. Held, that there was a novation by which the wife became a creditor of firm, and that sec. 85 did not operate to postpone the proof of debt of the wif against the joint estate of a partnership of which her husband was a member, Inre Tuff; Ex parte Nottingham, (1887) 19 Q.B.D. 88, followed. Held, also, that as there was no contract with the wife to give her a shar of the profits of the firm, her proof was not postponed by reason of sec, 86. Decision of the Court of Bankruptcy, District of South Australia (Jud Paine) affirmed. Appeal from the Court of Bankruptcy District of South Australi Clara Louise Reid lent to her husband, Thomas Burns Reid various sums of money for the purpose of his business as a dealer. It was agreed between them that the husband should pay six per cent interest. On 31st December 1921 the balance due to Mrs. Reid was £5,682 0s. 1d. During that year the husband took into partnership three of his sons, and this firm was registered Tom Reid & Sons. The new firm took over the old firm's busin as from 1st January 1922. The articles of partnership implied th the partners were to take over the existing liabilities of the busine and various other circumstances showed the intention of the men of the firm to assume the liability to Mrs. Reid. Mrs. Reid reali and consented to, the fact that the firm had taken over responsibility for the loan. The articles of partnership cont the following provision :—''6. The net profits of the said busin shall be divided as follows :—The said Thomas Burns Reid shi receive eight-fifteenths Clara Louise Reid the wife of the s Thomas Burns Reid shall receive four-fifteenths the said Wal Gliddon Reid shall receive one-fifteenth the said George Robbi Reid shall receive one-fifteenth and the said Clarence Cecil R 44 C.L.R.} OF AUSTRALIA. Louise Reid (or her executors administrators or assigns) withdrawing her fixed deposit the net profits of the said business shall be divided as follows: The said Thomas Burns Reid shall receive nine-fifteenths the said Walter Gliddon Reid shall receive two-fifteenths the said George Robbins Reid shall receive two-fifteenths and the said Clarence Cecil Reid shall receive two-fifteenths And in any event all losses if the partnership earnings are insufficient for the purpose shall be borne by the said Thomas Burns Reid." Mrs. Reid was not a party to the articles of partnership, and did not know of the provisions of such articles; nor did these provisions show any intention to contract with her to give her a share of the profits of the firm. The firm assigned its joint estate to trustees for the benefit of its creditors by a deed of assignment pursuant to Part XT. of the Bankruptcy Act 1924-1928. Mrs. Reid claimed to be entitled to prove against the joint estate for the full amount of her claim, and to share in any dividend pro rata with the other unsecured creditors, Other material facts sufficiently appear from the judgment hereunder. In the Court of Bankruptcy, District of South Australia, his Honor Judge Paine determined and ordered that the proof of debt of Mrs. Reid should be admitted against the joint estate for such amount as might be found to be due to her upon an account of all moneys on deposit with the firm at the date of the deed of assignment, with accrued interest thereon at the rate of six per cent per annum to that date, less any amounts then due by her to the firm but excluding thereout any amount or amounts credited to her in the books of the firm as representing a share in the profits of the firm and interest credited thereon; and that she was entitled to participate equally pro vata with the other unsecured creditors in any dividend payable by the joint estate. From this decision the appellant, representing the unsecured creditors of the firm, appealed to the High Court. The respondents were Stanley McGregor Reid and Frank Alick Thomas (the trustees of the deed of assignment), Clara Louise Reid and the Bank of Adelaide (an unsecured creditor of the joint estate which claimed to be an assignee of the claim of Mrs. Reid against the joint estate). H.C. or A. 1930. Ww MLane Bros, (Avsr.) Lap. . Rem. H.C. or A. 1930. Ww Mopiaxe Bros. (Avst.) Lrp. v. Rep. Sept. 22. HIGH COURT Travers, for the appellant. Mrs. Reid's claim is postponed eit under sec. 85 or under sec. 86. Her loan was to her husband, : to the firm. There was no novation, because the husband's liabili was never discharged and no fresh liability was incurred by firm (In re Tuff; Ex parte Nottingham (1) ). Any new liability on the part of the firm could arise by contract only. The wife mad no express contract with the firm. The only possible contrac would be by the husband as her agent, and, if he made a contract where only part of the consideration is a share of the profits (In n Stone (2) ). Judge Paine has misread Matthews v. Ruggles-B (3). If the husband remained the debtor, there was no novation If there were novation, she is bound by the agreement made o her behalf. If the husband entered into a contract without he authority, her remedy is to apply for rescission. Ligertwood K.C. (with him S. H. Lewis), for the respondents. The question whether or not there was novation is a question fact already determined by the lower Court. For the principle applicable with regard to novation, see British Homes Assuran Corporation Ltd. v. Paterson (4). But the new contract was simply that the firm would take over the liability with interest at si per cent. The wife was not a party to any agreement by which she was to receive payment out of the profits. The husband wa not an agent of the wife; the evidence does not warrant sul a finding, and actually the Judge has found to the contrary. Cur. adv. vult. Tue Court delivered the following written judgment :— This is an appeal from an order of Judge Paine, sitting Bankruptcy, by which it was determined and ordered that a pro of debt of the respondent Clara Louise Reid should be admit against the joint estate which a firm, styled Tom Reid & (1) (1887) 19 Q.B.D. 88. (3) (1911) 1 Ch, 194. (2) (1886) 33 Ch. D, 541, (4) (1902) 2 Ch. 404, per Farwell J. 44 C.L.R.] OF AUSTRALIA. 285 had assigned to trustees for the benefit of its creditors by a deed 4. ©. oF A. of assignment pursuant to Part XI. of the Bankruptcy Act 1924-1928. pe: The order appears to have been made as under sec. 206 of the Act. Mronane The firm of Tom Reid & Sons, which was formed as from Ist (avee) Lan. January 1922, consisted of the husband and three sons of the poy. respondent Clara Louise Reid. The claim which she sought to pe prove was for money lent and for interest thereon at six per cent. {ch J, But originally the principal had been lent to the husband by the wife before the husband took their sons into partnership and while he carried on business alone. The first question upon which the wife's claim depended therefore was whether the partnership had become indebted to her at all, or whether the debt remained that of the husband alone. "An agreement by an incoming partner to make himself liable to creditors for debts owing to them before he joined the firm may be, and in practice generally is, established by indirect evidence. The Courts, it has been said, lean in favour of such an agreement, and are ready to infer it from slight circumstances (Lx parte Jackson (1); Ex parte Peele (2). See, also, Rolfe v. Flower, Salting & Co. (3) ); and they seem formerly to have inferred it whenever the incoming partner agreed with the other partners to treat such 'debts as those of the new firm (see Cooke's Bankruptcy Law, (8th ed.), p. 534, citing Ex parte Bingham and Re Staples, Ex parte Clowes (4) ). But this certainly is not enough, for the agreement to be proved is an agreement with the creditor; and of such an agreement an arrangement between the partners is of itself no evidence (Ex parte Peele; Ex parte Parker (5). See, also, Ex parte Freeman (6); Ex parte Fry (7); Ex parte Williams (8) )" (Lindley on Partnership (9th ed.), p. 276). In Rolfe v. Flower, Salting & Co. (9) Lord Chelmsford, in delivering the judgment of the Privy Council, after saying that there seemed no reasonable doubt that the insolvent partnership in that case, at the time of its formation, assumed the debts and liabilities of the former firm (1) (1790) 1 Ves, Jun. 131; 1 RR. (5) (1842) 2 M. D. & DeG@. 511. 91; 30 E.R. 265, (6) (1819) Buck 471. (2) (1802) 6 Ves. 602 ; 31 E.R. 1216. (7) (1817) 1G. & J. 96. (3) (1865) LR. 1 (8) (1817) Buck 13. (4) (1789) 2 Bro. 0.0. 595; 29E.R. 327. (9) (1865) LR. 1 P.C,, at p. 44. H.C. or A. 1930. Ww Miprase Bros. (Ausz.) Lrp. v. Ru. Gavan Duffy J. Rich J. Dixon J. HIGH COURT ie from which it took over the business, including a debt due to proving creditor, went on to say :—" The only remaining qu to be considered is whether" the proving creditor, " being a of this arrangement, consented to accept the liability of the new firm, and to discharge their original debtors. Upon this question, as upon that of the agreement of the partners inter se, it was said by Lord Eldon, in Ex parte Williams (1), 'A very little will do to make out an assent by the creditors to the agreement.'" (See, too, Hart v. Alexander (2).) 7 In this case there are many circumstances to show that when the partnership was formed, and throughout its duration, the father and his sons intended that they should all be responsible to his wife for the amount in which the husband was indebted at the time the partnership was formed together with interest at six per cent, the rate which had been agreed upon between husband and wife. The articles of partnership were not very full, but they imply that the sons were to take over the liabilities of the business theretofore conducted by the father, and clause 6 contained the following stipulations :—'' The net profits of the said business shall be divided as follows :—The said Thomas Burns Reid shall receive eight-fifteenths Clara Louise Reid the wife of the said Thomas Burns Reid shall receive four-fifteenths the said Walter Gliddon Reid shall receive one-fifteenth the said George Robbins Reid shall receive one-fifteenth and the said Clarence Cecil Reid shall receive one-fifteenth Provided however that the said Clara Louise Reid shall receive her share of net profits as aforesaid only during the time of and in consideration of her leaving her fixed deposit in the said business But the receipt by the said Clara Louise Reid of a share of the profits shall not be deemed to constitute her @ partner of the said firm. And in the event of the said Clara Louise Reid (or her executors administrators or assigns) withdrawing her fixed deposit the net profits of the said business shall be divided" in another manner therein set out. The wife is not a party to these articles, and, according to the evidence and the findings of the learned Judge, she did not know and never learnt that she was o be credited with a share of the profits. In the firm's books of (1) (1817) Buck, at p. 16, (2) (1837)2 M&W. 484; 150 E.R. 848. 44 C.L.R.] OF AUSTRALIA. 287 account a deposit account was opened in which the wife was H. ©. or A. credited with the balance of her husband's indebtedness to her as bet at Ist January 1922, and to this account interest was regularly Monks credited throughout the partnership, as also was a share of the (aves) es profits. In July 1925 one of the members of the firm, a son, in prin, negotiating with a bank for an overdraft for the firm, produced ovens to the chief clerk of the bank a balance-sheet which upon the #/chJ5, liability side showed an item described as " family interests." In answer to the chief clerk's question what this item represented, he said it was a debt to his mother. The chief clerk in his presence noted opposite the item "Mrs. C. L. Reid deposit at 6 per cent." The bank asked for a guarantee from the wife, and this she gave. This evidence can leave no doubt of the intention of the members of the firm to assume a liability to the wife, and of their belief that such a liability to her had been incurred by them as partners. But the question whether this intention was communicated to the wife and assented to by her is by no means so clear. She was not a business woman, and plainly she dealt with her husband and sons more on a footing of relationship than of ordinary business. She had inherited the money which she lent to her husband. When she lent it she appears to have understood clearly enough that it was a loan to him for the purpose of his business, bearing six per cent interest. Actual payments of interest were not made to her, but her husband told her that it was accumulating. Later she was told that her sons had been taken into partnership in the business, and for five years afterwards the business was conducted without any material incident. No accounts were furnished to her. One of the sons made up her income tax returns and usually signed it on her behalf. On one occasion she signed it herself, but on no occasion did she read or understand the contents of the return. Tn July 1925 she signed a guarantee of the firm's account with its bank. In December 1927 the bank requested the firm to obtain from her a letter to it undertaking not to withdraw or accept payment of the firm's debt to her. A letter was typed, the material part of which expressed an undertaking by her not "' to withdraw or accept payment of any debt or portion of any debt due or becoming due to her by the firm without" the bank's consent. H.C. or A. 1930. Ww Morane Bros. (Ausr.) Lr. v. Rep. Gavan Duffy J. Rich J. Dixon J. HIGH COURT None of the debtors was called as a witness. The wife herse however, gave evidence and was cross-examined. In evidence chief she was allowed to say :—' I knew afterwards that my husb did take two. or three of his sons into partnership. I agreed r allow my money to remain in the business on the same terms Tn cross-examination she assented to questions directed to sho that she was passive and left the whole matter in her husband hands. The learned Judge thought she was willing and endeavoure to give the Court all the information she possibly could, but th her mind at the time she gave her evidence was not by any meat clear, and he did not accept in their entirety the literal answer she gave to counsel's questions, and he concluded that "she realized and consented to the fact that the firm had taken ove the responsibility for the loan." In our opinion, this infe1 was open to the learned Judge upon the circumstances pro and we ought not to disturb it. In substance it means that sh understood that her husband and her sons intended to becom her debtors in substitution for the husband alone, and that intended to accept them. This amounts to a novation by w she became a creditor of the firm. Sec. 85 of the Bankruptcy Act does not operate to postpone proof of debt of the wife against the joint estate of a partner of which her husband is a member (In re Tuff; Ex parte Notting) (1) ). But the question remains whether the proof of the wife i to be postponed to the unsecured creditors by reason of provisions of sec. 86 of the Bankruptcy Act. If the contract 0 Joan with her husband and sons resulting from the novatio contained a term by which she became entitled to a share of side of the firm, no intention appears from those provisions t contract with her to give her such a share. The provisions expressed in a form which suggests rather that the partners, fa and sons, agreed between themselves that they should allocate her a share of profit with a proviso that they should cease to do when, and if, she withdrew her deposit. In any case, on the fa (1) (1887) 19 QB.D. 88. 44 C.L.R.] OF AUSTRALIA. 289 found by the learned Judge, they did not communicate to her any 4H: ©: oF A. intention of conferring upon her a right to the profits, nor of ne admitting her to participate in profits in consideration of the loan. Miran Bros. There was no suggestion that the deposit should not remain payable (avsr.) Lav. on demand and, if for any reason it became desirable for her to pen, eall it up, it would have been immediately payable. In these ,. = mene circumstances, we think the learned Judge was entitled to infer, RichJ, as he did, that she did not contract for a share in the profits. The appeal must be dismissed with costs. Appeal dismissed with costs. Solicitors for the appellant, Villenewve Smith, Kelly, Hague & Travers. Solicitors for the respondents, Joyner, Phillips & Joyner ; Varley, Evan & Thomson; Baker, McEwin, Ligertwood & Millhouse. C.C.B. (HIGH COURT OF AUSTRALIA.] HOWEY . : 4 Z 4 ' - ' . APPELLANT ; AND THE FEDERAL COMMISSIONER OF ) ene TAXATION rf i " EIS Income Tax (Cth.)—Trustee—Separate assessments—Direclion to trustee to remit H.C. or A. proportion of income to settlor to be expended on maintenance and education 1930. of children — Assessment on total amount so received by settlor —Claim for = ~~ ; MELBOURNE, separate assessment on amount expended on each child and on amount remaining : fenemnenlith-Ineome: 'loc: Asseatmeht, Ack 1989-1928 (No, 91 of 1922—No.48 O° 29. 30- 'of 1928), secs. 4, 31 (2), 89. SyDNEY, Dec. 8. The appellant, being entitled to an equitable life estate in certain land and buildings in Melbourne, executed a settlement vesting his interest in a Smt trustee in trust for the settlor's two children, and the settlor directed that and Dixon JJ