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ICLR: Chancery Division/1934/In re A BANKRUPTCY NOTICE. [No. 171 of 1934.] - [1934] Ch. 431 [1934] Ch. 431 [COURT OF APPEAL]

In re A BANKRUPTCY NOTICE. [No. 171 of 1934.]

1934 March 23. LORD HANWORTH M.R., ROMER and MAUGHAM L.JJ. Bankruptcy Notice - Counterclaim, set-off or cross-demand - Pending Chancery proceedings by Debtor against Creditor - Subsequent action in King's Bench Division by Creditor against Debtor in respect of different transaction - Judgment obtained - Claim by Debtor to set-off - Bankruptcy Act, 1914 (4 & 5 Geo. 5, c. 59), s. 1, sub-s. 1 (g) - Bankruptcy Rules, 1915, r. 140, sub-r. 2. In a pending action in the Chancery Division a debtor claimed a declaration that he was entitled to a charge on the proceeds of certain property in the hands of trustees in priority to the creditor. In a subsequent action in the King's Bench Division brought by the creditor against the debtor in respect of a different transaction the creditor obtained judgment in respect of which he issued a bankruptcy notice. On an application by the debtor under s. 1, sub-s. 1 (g), of the Bankruptcy Act, 1914, to have the bankruptcy notice set aside: Held, that the claim in the Chancery action was not a "counter-claim, [1934] Ch. 431 Page 432 set-off or cross-demand" within the meaning of the sub-section, and was not therefore a ground for setting aside the bankruptcy notice. APPEAL from Mr. Registrar Warmington setting aside a bankruptcy notice. In April, 1933, the debtor commenced proceedings in the Chancery Division against the creditor and two other persons who were trustees. In that action he claimed that he was entitled to two charges amounting together to 2750l. on certain properties for moneys advanced in respect of a transaction in which the debtor and the creditor were interested and asked for a declaration that on the sale of the properties the debtor and creditor were entitled to a half share each in any profits resulting from the transaction and to have an account taken. The creditor denied that the debtor had any such rights. Notice of the trial of this action had been given and it was expected that the action would shortly be heard. On September 15, 1933, the creditor commenced an action in the King's Bench Division against the debtor based on a covenant in a mortgage deed claiming a sum of 2057l. 2s. 11d. This mortgage had no connection with the properties or the transaction the subject of the action in the Chancery Division. The debtor admitted the liability but disputed the amount, and after a hearing before an Official Referee the creditor obtained judgment on January 16, 1934, for 1249l. 9s. 1d., and on January 23, 1934, issued the bankruptcy notice.

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The debtor thereupon applied under s. 1, sub-s. 1 (g), of the Bankruptcy Act, 1914, to have the bankruptcy notice set aside on the ground that he had a cross-demand against the creditor which exceeded the amount of the sum claimed by the debtor and which he could not have set up in the King's Bench action. On February 20, 1934, the Registrar delivered a considered judgment in the course of which he said that the claim in the Chancery action was in his opinion a cross-demand against the creditor. It was true that in form it did not ask for [1934] Ch. 431 Page 433 direct payment from him, but in substance the allegation was that the creditor retained under his control property of the debtor in the form of denying a charge for a sum of money and a half share of profits and by so doing was keeping the debtor's money. He further considered that this cross-demand could not have been set up in the action. The action already existed before the creditor issued his writ in the King's Bench Division. The writ dealt with a wholly unrelated cause of action and the creditor was not entitled to demand of the debtor that he should stop his action in the Chancery Division and attempt to get it reinstated as a counter-claim or a simple money demand in the King's Bench action. He therefore ordered that the bankruptcy notice should be set aside, the creditor being at liberty if the action should be decided in his favour to serve another bankruptcy notice. The creditor appealed. G. O. Slade for the creditor. H. B. L. Braund for the debtor. LORD HANWORTH M.R. This appeal raises an interesting point in bankruptcy law. The facts are these. The debtor had some complicated transactions which led him in April of last year to bring an action against three persons with whom he had been associated in dealing with certain property. The statement of claim starts by stating that there was an agreement made for the sale of certain properties between the London Midland and Scottish Railway Company and a company called Upton Park Estates, Ld. By that agreement there was to be conveyed to the Estates Company some property called "the Walworth Road premises," and it was duly conveyed. The terms of payment were that a certain sum, a portion of the sum to be paid, should remain on mortgage, and that mortgage should be paid off by instalments, to be paid over a period of years, of 1401l. 8s. 4d. on June 24 in each year. Now in respect of the property so obtained there was what might be called, I suppose, a development [1934] Ch. 431 Page 434 scheme, under which certain money was to be laid out upon that property, and I suppose the profit obtained as a consequence of that was to be spent upon the property. Then in para. 5 of the statement of claim it is alleged that the debtor by an oral agreement agreed to provide, and did provide, a sum of 1350l. which was to be laid out upon the property. Then there is a further claim that on one occasion one of these instalments due to the railway company was not forthcoming from the Upton Park Estates, Ld., and so by an oral agreement the money was provided at the oral request of the defendant, who is now the creditor, by the present debtor. It was claimed that the result of these transactions was this, that the plaintiff, that is the debtor, should be subrogated to the railway company's security for the said instalment; in other words, whereas the railway company was entitled to be paid as mortgagees this sum of 1401l. 8s. 4d., the debtor claims that by the oral request of persons interested he has been subrogated to the rights which belonged to the railway company for the enforcement of the payment of that sum. Then the prayer includes a claim for a number of declarations under which, if all goes well, it is hoped that when the matter has been carried to a proper conclusion there will be a sum which the debtor is entitled to be paid and that by means of

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subrogation to the security of the railway company it will ultimately emerge on the sale of the property that there is to be paid to him this 1401l. 8s. 4d. That action was commenced in April, 1933. The defences were delivered after some delay, a delay which I dare say is easily explained, the last one by the last defendant on December 7 of last year. The action has now been set down for trial, and we understand it is shortly to be heard in the course of next term before the learned judge who is taking long witness actions. In the meantime an action was brought by the present appellant, the creditor, in September, 1933, against the present debtor. The matter involved a question of amount only, and the result was that after a hearing before Mr. Pitman K.C., an Official Referee, judgment was obtained by the present appellant against the debtor for a sum of [1934] Ch. 431 Page 435 1240l. 9s. 7d. on, I think, January 9 of this year. The position, therefore, was this, that the present creditor was entitled to be paid the sum of 1240l. 9s. 7d. by a judgment obtained in the early part of January of this year. In the meantime, in the Chancery proceedings which were sauntering along, the plaintiff had certain rights in respect of land as to which he had contributed certain sums, which he hopes to be paid if and when that Chancery action is brought to a conclusion, and, if I understand it aright, if the property is sold the money can be raised to pay him. It must be noticed that in that Chancery action there is no claim against the present creditor in respect of any personal liability charged against him. A bankruptcy notice was issued by the present appellant on January 23 of this year, requiring payment in the ordinary course within seven days from the debtor, and that bankruptcy notice contained, as the rules demand that it shall contain, the statement: "You must either pay or compound the sum demanded, or you must satisfy the Court that you have a counter-claim, set-off or cross-demand against the creditor, which equals or exceeds the sum claimed by him, and which you could not set up in the action or other proceedings in which the judgment or order was obtained." Dealing with that last point first, I think it may fairly be said that it would have been difficult and probably inconvenient if any actual claim had been transferred from the Chancery proceedings to the King's Bench proceedings as an answer to the claim made against the debtor in that action, which was not commenced until September of last year, when the Chancery proceedings were well on their way and when the statement of claim had already been delivered, as it was in the previous July. At the same time the debtor has to show either that he has paid or secured or compounded the said sum, or he must satisfy the Court that he has a counter-claim, set-off or cross-demand against the creditor. The learned Registrar before whom the matter came took time to consider his judgment, and in a judgment which has been helpful to the Court he came to the conclusion that [1934] Ch. 431 Page 436 he would set aside the bankruptcy notice on the ground that the debtor has some claim which may sound in money against the creditor, with the result that the creditor's proceedings on the bankruptcy notice are not so conclusive against the debtor as to justify that bankruptcy notice being maintained. From that decision of the Registrar an appeal is now brought to this Court. It is necessary for the purpose of this judgment to remind ourselves of what is the proceeding which is allowed by a bankruptcy notice. Sect. 1, sub-s. 1 (g), of the Bankruptcy Act, 1914, provides: "If a creditor has obtained a final judgment or final order against him [that is the debtor] for any amount, and, execution thereon not having been stayed, has served on him .... a bankruptcy notice under this Act, and he does not, within seven days after service of the notice .... either comply with the requirements of the notice or satisfy the court that he has a counter-claim set off or cross-demand which equals or exceeds the amount of the judgment debt .... and which he could not set up in the action in which the judgment was obtained," then that non-compliance is an act of bankruptcy on which a petition can be founded. Turning to s. 2 it will be observed that there are certain conditions which are laid down in that section and the proviso which are closely to be attended to in relation to the bankruptcy notice which is issued under sub-s. 1 (g). Turning to

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the Bankruptcy Rules, 1915, r. 140, sub-r. 2, provides that certain details are to be contained in the bankruptcy notice, and it says: "There shall be indorsed on every bankruptcy notice an intimation to the debtor that if he has a counter-claim, set-off, or cross-demand which equals or exceeds the amount of the judgment debt, and which he could not have set up in the action" then he must within the time specified in the notice file an affidavit to that effect with the Registrar, and (r. 141) if he does so the filing of such an affidavit is to operate as an application to set aside the bankruptcy notice, and thereupon the Registrar has to fix a day for hearing the application. What the Registrar has to hear and determine upon such affidavit is: Was there a counter-claim, set-off or cross-demand [1934] Ch. 431 Page 437 which equals or exceeds the amount of the judgment debt? The learned Registrar has satisfied himself that the conditions have been sufficiently complied with by the debtor, and that the bankruptcy notice ought to be set aside. We have come to a different conclusion. The question really turns upon whether or not the proceedings, which are now taken and which are reaching an end in the Chancery Division, provide "a counter-claim set off or cross-demand which equals or exceeds the amount of the judgment debt." At the conclusion of them it may be that the plaintiff will have established that he is entitled to receive the money, 1350l. and 1401l. But, although that may be ultimately paid to him, is that such a counter-claim, set-off or cross-demand, with the concomitant condition that it equals or exceeds the amount of the judgment debt, that it overtops or cancels out the creditor's right to have the debt in respect of which he has a judgment paid by means of the execution provided under a bankruptcy notice? Now one can deal quite shortly with these three points. It is unnecessary at the present moment to define precisely what is meant by those words. What claims are included in the words "counter-claim, set-off or cross-demand"? With regard to the word "set-off," that is a word well known and established in its meaning; it is something which provides a defence because the nature and quality of the sum so relied upon are such that it is a sum which is proper to be dealt with as diminishing the claim which is made, and gainst which the sum so demanded can be set off. With regard to a counter-claim, that is a creature of the Supreme Court of Judicature Act, 1873. By s. 24, sub-s. 3, it was provided that the Courts should have the power to hear a counter-claim, a matter which could not until that time have been included in the same action. Under that sub-section the defendant is enabled to set up by way of counter-claim a claim which he might have had against the plaintiff, and that is to be heard in the action started by the plaintiff against him, and rules are provided for that purpose. That sub-section is now s. 39 of the Supreme Court of Judicature [1934] Ch. 431 Page 438 (Consolidation) Act, 1925, the Act which consolidates all the Supreme Court of Judicature Acts. The debtor's claim in the Chancery action does not appear to be in the nature of a counterclaim. It is certainly not a claim which can be at the moment so definitely quantified as to be described as necessarily equalling or exceeding the amount of the judgment debt. It is a claim which may inure to the benefit of the plaintiff, and he may be able ultimately to receive a sum, but, so far as the position can be taken at the present time, it is difficult to say that it equals or exceeds the amount of the judgment debt. I turn, therefore, to what to my mind is the wider word, "cross-demand." If a cross-demand is only to be interpreted as meaning something which could have been introduced into the action by way of counter-claim, it adds nothing to the word "counter-claim." "Cross-demand" seems to me to be a word introduced in order to give a wider ambit to the meaning of these claims, something that would not be described, certainly, as a set-off, something that could not have been brought in the action, something that still lies outside a counter-claim, but is of a nature which can be specified and which is of such a nature that it equals or exceeds the amount of the judgment debt. I do not desire to say what "cross-demand" may include, but it is not difficult to say that it does not include a claim of such uncertain nature as appears in these Chancery proceedings. That claim does not appear to be one which it would be proper to describe as a cross-demand; it is a claim of right which may inure ultimately for the benefit of the judgment debtor. Therefore, it appears that there is no sufficient ground for setting aside this bankruptcy notice; the bankruptcy notice stands good and must be complied with.

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It would not, however, be right to leave the creditor in the belief that he has surmounted all his difficulties, because when the bankruptcy notice has not been complied with and the act of bankruptcy is complete the creditor has a right to present a petition for bankruptcy. Then comes the duty of the Court to consider the effect of s. 5, sub-s. 3, of the Bankruptcy [1934] Ch. 431 Page 439 Act, 1914, under which a discretion is given to the Court to refuse to make an order upon a petition and to dismiss it. I do not wish it to be supposed that by this decision we have in any way determined or indicated what the decision ought to be if the powers of sub-s. 3 of s. 5 are hereinafter invoked; upon that I give no opinion and no indication at all. The result is that this appeal must be allowed with costs. ROMER L.J. I agree, and I have only a very few words to add. The words with which we are confronted in this case are the words in s. 1, sub-s. 1 (g), of the Bankruptcy Act, 1914, which are that the debtor has to "satisfy the court that he has a counter-claim set off or cross-demand which equals or exceeds the. amount of the judgment debt or sum ordered to be paid." Strictly, of course, a claim or a demand cannot exceed or be equal to or less than the amount of the judgment debt; it is obviously the thing which is claimed or demanded that has to be compared with the amount of the judgment debt. Some things that are claimed or demanded obviously cannot be compared with the amount of the judgment debt. It would be impossible to say that a declaration or an injunction could equal or exceed the amount of a judgment debt, and there are obviously other things which cannot be compared with the amount of a judgment debt. These words seem to me to refer to a case where the judgment debtor is claiming to receive from the judgment creditor something which can properly be said to equal or exceed the amount of the judgment debt. I cannot accede to the suggestion made by Mr. Braund that the words are satisfied if the judgment debtor is claiming to have an interest in something in the hands of and properly retained by a third party ranking in priority to the interest in that thing claimed by the judgment creditor. This case falls within that category. The judgment debtor is here saying that the proceeds of certain property which is at present in the hands of and properly retained by third parties, will, when the proceeds come to be distributed, be payable to him in priority to the judgment creditor. Such a [1934] Ch. 431 Page 440 claim as that, in my opinion, is not within the words of the sub-section. MAUGHAM L.J. I am of the same opinion. The question involved is really a question of the true construction of s. 1 of the Bankruptcy Act, 1914, which begins with the words: "A debtor commits an act of bankruptcy in each of the following cases," and then follow a number of cases which in the view of the Legislature involve the conclusion that the debtor ought to be made liable. In sub-s. 1 (g) we find the part material to the present case, which, reading it shortly, says: If a creditor has obtained a final judgment against a debtor for any amount, and execution thereon not having been stayed, has served on him a bankruptcy notice and the debtor does not within seven days comply with the requirements of the notice or satisfy the Court that he has a counter-claim, set-off, or cross-demand which equals or exceeds the amount of the judgment debt and which he could not set up in the action in which the judgment was obtained or the proceedings in which the order was obtained. Prima facie if there is any ambiguity about any part of that sub-section, it may perhaps be resolved by a consideration of the other sub-sections, that is to say, by a consideration of the context in which it is to be found. If a creditor has a final judgment against a debtor and the debtor can satisfy the Court that he has an answer to the claim of the creditor, it is quite clear that ought not to be treated as an act of bankruptcy. Now, the first question which arises I think or, at any rate, the first question I would like to deal with, is the question as to the context in which the word "has" is used. The debtor must satisfy the Court that he has a "counter-claim, set-off, or cross-demand which equals or exceeds the amount of the judgment debt." There this Court has no difficulty, because the Court of Appeal in In re G. E. B. (1), with considerable regret in the

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peculiar circumstances of that case, came to the conclusion that the section means a counter-claim, set-off, or cross-demand which is effective at the time

(1)

[1903] 2 K. B. 340.

[1934] Ch. 431 Page 441 of the hearing of the application to set aside the bankruptcy notice. It was decided by Vaughan Williams L.J., who was a great authority on this branch of the law, and his view was agreed with by Romer L.J. and Stirling L.J. Another thing which, in my opinion, is clear is, that the words "counter-claim, set-off, or cross-demand which equals or exceeds the amount of the judgment debt" are words which refer to a counter-claim, set-off, or cross-demand against the creditor; the statute does not use those precise words, but it is perfectly obvious that that is intended. With regard to the words "which equals or exceeds the amount of the judgment debt," I agree with Romer L.J. that that must mean or refer to a claim against the creditor, either for money, or, at any rate, for money or property of value which equals or exceeds the amount of the judgment debt. For instance, it is possible, although the question does not arise here, if the creditor possessed a bag of diamonds belonging to the debtor of a value exceeding the amount of the judgment debt, this bankruptcy notice would be set aside. That, as I say, may very well be the case. If we are considering the word "cross-demand" in the present case, it has to be a cross-demand against the creditor effective at the time of the hearing of the application to set aside the bankruptcy notice, either for an amount equal to or exceeding the amount of the judgment debt or, at any rate, for property of the value which at that moment exceeds the amount of the judgment debt. If that construction is correct, I think it only requires a consideration of the statement of claim in the Chancery action, the nature of which has been stated by the Master of the Rolls to arrive at the conclusion that the debtor cannot bring his cross-demand within the definition. As already pointed out, there is property in the hands of the third parties in the Chancery action to which they are partially entitled as trustees, and it has not been shown that at the present date the debtor has money or property in the hands of the creditor which amounts to or is in value equal to the amount of the judgment debt. On those grounds it seems to me that the present order [1934] Ch. 431 Page 442 by the learned Registrar is wrong and that the appeal must be allowed with costs. I would only wish to add, following what has been said by the Master of the Rolls, that it does not therefore follow that there will be an adjudication, because, contrary to the position with regard to a receiving order, the Court has a judicial discretion under the Act whether it will or will not adjudicate a man bankrupt on a creditor's petition. It may be, as he has pointed out, if the facts are established they will justify the view that this is not a case in which there should be such an order. Appeal allowed. Solicitors for appellant: Stafford Clark & Co. Solicitor for respondent: Herbert W. T. Smith.

W. I. C.