PROUD v BRIMS DISTRIBUTORS PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MAHONEY P, COLE JA and WADDELL AJA 10 April 1996, 26 November 1996 [1996] NSWCA 439 BANKRUPTCY dicharging contingent liability — assessment of value of contingent liability — s82 Bankruptcy Act. Mahoney P I agree with the judgment of Cole JA. Cole JA In a judgment delivered 24 August 1993 Bell DCJ held that Christopher James Proud, a guarantor of certain indebtedness of Ilesower Pty Ltd (lesower) was liable upon his guarantee executed on 2 May 1983 in circumstances where Mr Proud had been made bankrupt on 28 June 1983, was discharged from bankruptcy on 29 June 1986, and where the goods giving rise to the claim on the guarantee were delivered by Brims Distributors Pty Ltd, the unpaid creditor, to Ilesower between February 1987 and April 1987. Mr Proud has appealed that judgment contending that the effect of his bankruptcy, and discharge from bankruptcy, was to negate any liability under the guarantee. The facts were not in dispute and were as I have stated them above. The material terms of the guarantee are as follows: "TO: BRIMS DISTRIBUTORS PTY LTD IN CONSIDERATION of you having at our request agreed to supply and/or continue to supply to Ilesower Pty Ltd of Unit 6/108 Percival Rd, Smithfield 2164. (hereinafter called "the debtor") with goods and/or services from time to time we Mr C Proud director of 5 Chadwick Cres, FAIRFIELD WEST 2165 HEREBY JOINTLY AND SEVERALLY agree with you as follows:- 1. To guarantee to you the payment by the debtor for all goods and/or services as you may have hitherto supplied or as you may hereafter supply from time to time at his request and notwithstanding that we shall not have notice of any neglect or omission on the debtor's part to pay for such goods and/or services according to the terms agreed on between you and him. 2. This guarantee shall be a continuing guarantee to you for the whole of the debtor's indebtedness or liability to you in respect of goods and/or services supplied or to be supplied to the debtor as aforesaid or upon any other account howsoever or whenever arising. 6. This guarantee shall be revocable at anytime as to further transactions by one month's notice in writing given to you by us or in case of death by our respective personal representatives. DATED this 2nd Day of May 1983"! S153 Bankrupcy Act 1966 provides that: "Where a bankrupt is discharged from a bankruptcy, the discharge operates to release him from all debts (including secured debts) provable in the bankrupcy..." 1. Appeal Book, p13. 2 UNREPORTED JUDGMENTS Accordingly, if the debt, the subject of the claim under the guarantee, was provable in bankrupcy, it was discharged on 29 June 1986 and is irrecoverable. S82 Bankrupcy Act 1996 defines those debts which are provable in bankrupcy. The relevant provisions are as follows: "(1) Subject to this Division, all debts and liabilities, present or future, certain of contingent, to which a bankrupt was subject at the date of the bankruptcy or to which he may become subject before his discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his bankruptcy. (4) the trustee shall make an estimate of the value of a debt or liability provable on the bankruptcy which, by reason of its being subject to a contingency, or for any other reason, does not bear a certain value. (5) A person aggrieved by an estimate so made may appeal to the Court. (6) If the Court finds that the value of the debt or liability can be fairly estimated, the Court shall assess the value in such manner as it thinks proper. (8) In this section, "liability" includes: (a) compensation for work or labour done; (b) an obligation or possible obligation to pay money or money's worth on the breach of an express or implied covenant, contract, agreement or undertaking, whether or not the breach occurs, is likely to occur or is capable of occurring, before the discharge of the bankrupt; and (c) an express or implied engagement, agreement or undertaking to pay, or capable of resulting in the payment of, money or money's worth, whether the payment is: (i) in respect of amount - fixed or unliquidated. (ii) in respect of time - present or future, or certain or dependent on a contingency; or (iii) in respect of the manner of valuation - capable of being ascertained by fixed rules or only as matter of opinion." By s5, debt is defined to include liability. The guarantee existed at the date of bankruptcy which is the date for ascertaining debts provable against the bankrupt's estate.? At that time cll and cl2 of the guarantee constituted a guarantee by Mr Proud of payment by Ilesower for goods which Brims "may here after supply from time to time", and a guarantee of Ilesower's "indebtedness or liability to" Brims "on any other account howsoever or whensoever arising". The guarantee thus, in terms of s83(8) constituted at least "a possible obligation to pay money... on the breach of an express or implied... contract...". The contract was the contract by Ilesower to pay for goods delivered to it by Brims at any time in the future. Unless the guarantee was terminated by operation of or on the instant of bankruptcy, breach of the contract being failure by Ilesower to pay Brims for goods delivered, was capable of occurring before Mr Proud's discharge from bankruptcy. It follows, in my view, that the possible obligation to pay monies under the guarantee existing at the date of bankruptcy constituted a liability within the meaning of s82(8), and a contingent liability within the meaning of s82(1). It was a contingent liability to which the bankrupt was subject at the date of bankruptcy and, additionally, was a contingent liability to which he might have become subject before his discharge by reason of an obligation, being the guarantee, 2. Re Daintrey; Ex parte Mant [1990] 1 QB 546 at 572 URJ PROUD v BRIMS DISTRIBUTORS PTY LTD (Waddell AJA) 3 incurred by him before the date of bankruptcy. The contingency was the delivery of goods by Brims to Ilesower, and failure of Ilesower to pay Brims. It follows that there was a debt provable in bankruptcy arising from execution of the continuing guarantee on 2 May 1983.3 The provisions of s82(1) are, however, subject to the succeeding subsections. Subs4 obliges the trustee to estimate the value of the contingent debt. Depending upon relevant factual circumstances, the trustee might determine that the contingent debt had a value, was valued at nil, or that the debt or liability could not be fairly estimated (subs6). The single fact that, at the date of bankruptcy, there were no goods delivered by Brims but unpaid for by Ilesower, does not determine the answer to the question of value of the contingent liability. Other factual circumstances may impact upon that answer. If the trustee, or a court on appeal determined that the contingent liability had a value, or that the value of the contingent liability was nil,4 then the debt was provable in Mr Proud's bankruptcy and liability under the guarantee is discharged in consequence of s153. If, however, the trustee or a court on appeal determined that the value of the debt or liability could not be fairly estimated, the debt was not provable in bankruptcy, and thus liability under the guarantee was not discharged. There is no evidence of what, if any, determination the trustee made. Bell DCJ held that: "Until an advance was made to the principal debtor, there was no liability on the defendant whether contingent or otherwise, and that the guarantee therefore did not constitute a provable debt."5 The first aspect of that passage is in my view incorrect. Whether the second aspect is correct or incorrect depends upon a court in the bankruptcy determining whether the value of the contingent liability can or cannot be fairly estimated. Those matters were not addressed at the trial. For these reasons, in my opinion the appeal must be upheld, the orders of Bell DCJ dated 24 August 1993 set aside, and the matter referred back to the District Court to be dealt with in accordance with these reasons. The respondent should pay the appellant's cost, but should have, if qualified, a certificate under the Suitor's Fund Act. Waddell AJA I agree with Cole JA. Appeal upheld - matter remitted to District Court. The respondent to pay the appellant's costs. Counsel for the appellant: MS Wilmott Solicitors for the appellant: Needs Chan Monahan Counsel for the respondent: M Aldridge Solicitors for the Respondent: Roxburgh and Co 3. In relation the concept of a contingent creditor, as was Brims, see the discussion by Kitto J in Community Development Pty Ltd v Engwirda Construction Company (1996) 120 CLR 455 at 458-9 4. Re Trepca Mines Ltd (1961) WLR 1273 at 1280; Federal Commissioner of Taxation v Gosstray (1986) VR 876 at 879 5. Appeal Book, p16T