BANKRUPTCY POLICYANDTHE DECISION OF THE HIGH COURT IN P Y W I D BUILDING SOCIETY (IN L I B v TERRY

In Pyramid Building Society (in liq) v Terry,' the High Court held that a contingent creditor was not bound by the terms of a composition entered into pursuant to Part X of the Bankruptcy Act 1966 Accordingly the debtors (Mt and Mrsrerry),under this form of insolvency administration,were not able to make a fsesh start upon entering the composition, released from theit. liabilities Similarly creditors were not ueated equally by the High Court decision - the unsecured creditors were bound by the k t X arrangementwhile the contingent creditor (the Building Society) was not The purpose of this article is to examine this decision against the background of the insolvency legislationpolicy rationale

The decision of the High Court in Pyramid Building Society (in liq) v Terry2 implicitly brings into focus one of the fundamental tensions in insolvency law That is, to what extent should the fresh start policy the idea that upon discharge fsom insolvency,the natufal person has the opportunity to begin anew without the burden of the previous accumulated debt -be subjugatedto what may be perceived to be the communityor public interrst in ensuing that the laws designedto assist the individual are not abused by high-profile bankrupts Ultimately,the High Court was in favour of lenders It was decided that contingent crrditors were not bound by the composition as their debts were not provable -hence they could pursue those debts despite the insolvency administsation But at what expense to the tenet of the clean sheet for the debtos?3

Senior Lecturer in law, University of rasmania,Barrister and Solicitor Supreme Court ofTasmania,High Court ofAusudia

(1997)189 CIR 176

lbid Note the commentsby M Gronow, ContingentCreditorsand b t Xilrrangernents


The putpose of this article is to examine the case against this dichotomy of competing aims of insolvency - to provide the insolvent with a clean start hut to enact laws which fairly represent the interrsts of creditors and of the wider communityThe firstpart of the articlewill consider the purposes of insolvency law,including an analysisof what is meant by a 'provable debt' and to examine how this accords with the histoly and objectives of insolvency The second part of the article will consider the facts and holding of the High Court decision and will conclude with a discussion as to whether the decision sits in accord with the stated purposes, history and aims of insolvency legislation

Brief summaryof the objectivesof insolvency law The Australian law Reform commission4 considered that there were a number of principles that guided the development of modern insolvency law These were as follows: insolvency law is to provide a fair and orderly process for dealing with the financial affairs of insolvent individualsand companies; insolvency law should provide mechanisms that enable both the debtor and creditors to participate in the process; insolvency administrations should be impartial, efficient and expeditious; there should be a convenient means to collect and realise the

.

property; equality between credztors should be retained and enhanced, the end result of insolvency administrution, particularly as it affects individuak, should, with very limited exceptions, be the erective relief or release from the financial liabilities and obligations of the insolvent, insolvency law should, support the commerczal and economzc processes of the communzty,

(1996) 4 Insolvency Law Journal 139 139 in reference to theVictorian Court of Appeal decision in this case (a result reversed upon appeal to the High Court) that: Ibe decisionsare good news for guarantors,and bad news for lenders Ihey mean that a guarantor with a small group of fmunbiy disposed direct creditors can escape a large contingent liability under a guarantee notwithstanding opposition from the contingent creditor Given that the result was reversed by the High Court.lenders can now breathe more easily AustralianIaw Reform Commission,GeneralIaiolvazcy Inquily,vol 1,Rcport No 45 (1988)

*


B M W C Y POIICYAND IHE DECISION OF TEE HIGH COURI

insolvency law should harmonise with the general law;and insolvency law should enable ancillary assistance in the administfation of an insolvency originating in a foreign country5 (emphasis added) The principlesitalicised dominate cutrent thinking As stated by Kirby J in Pyramid Building Society (in liq) zrTerry:6'Two features of [bankruptcy law]history arerelevant The fwst is the gradualwayby which alldebts and liabilities came to be included in the bankruptcy Ihe objective of legislation of this kind was,generdly speaking,"that all creditors should be entitled to come in andprove, and that the bankrupt should emage pom the bankruptcyfreed fram his iiabilities"'7(emphasis added) The application of these two principles - that all creditors should be entitled to prove (and, I would add, prove equally) and that the bankrupt should be freed from his liabilities - can cause very significant difficulties,as the decision in Pyramid Building Society (in liqj v Terry demonstrates The essence of this decisionwas that, on the facts, to treat contingent creditors in the same category as other unsecured crrditors would have led to a severe injustice - a point recognised by Brooking JAin the Victorian Court ofAppeal:9 I suspect that most &-minded business men and women would not think present dayAustraliaescape from banlauptcy by payment of a uivlal sum to settle huge debts has been seen by some as a public scandaland a reproach to the banhuptly laws In the present case the debtors,having $350to th.31 name and debts of the order of $1 5 d o n were able to procure the paymentof $10OWfromsomefundor other to theirminor creditorsand (by way of rtmuneration) those administeringthe composition hs a result of this $10,000payment thry have destroyedthe debt of their major creditor

well of what the law has allowed to be accomplished in this hislase In

'

Ibid 15-17 See also the comments by R Iomasic and K Whitford.Ausfmlian Insolvenq and Bankruptcy Law (znd.ed, 1987) 4-7 (1997) 189CIR 176,212 Kirby J quoted from Hardy v Fothergill(1888) 13App Cas 351,364 Set also the comments by D Rose, Lewis Aur~aliuvzBankfuptcy Law (loth td, 1994) 1;S Dowling, Whether Penalty'Ikx on Unpaid Income Fax is a Provable Debt: Ihc Decision in ReVera Kavich (1995) 3 Insolvency Law Iourrzal 208 209,referring to the Federal Co~utdecision of Re Vera Kavich (Unreported, Federal Coutt of Austmlia 30June 1995);A Kcay Insolvency - Personal and Corporate Law and Practice (1993) 9;R BVermeesch and K E Iindgren,Business Iaw of Australia

(athed,1995) 1194

It is also a problem in the tax area See:SDowling,Whether PenaltyIixon Unpaid Income Tbx is a Provable Debt: I k Decision in Re Vera Kavich (1995) 3 Insolvency l a wJournal 208 For a discussion of theAmerican position in respect of this tension between bankruptcy law and equalityof creditors,see SH NicWcs, Consider Process Before Substance, Cornmenial Iaw Consequences of the BankruptcySystem:Urging the Merger of thekticle 9 DraftingCommitteeand thc Bankruptcy Commission (1995) 69Ameicun Bankruptcy LawJournal589 TonrethingBette Ply Ltd 0PyramidBuilding Society (in liq) 1199612VR 352,362


By the sametoken,to trrat creditors differentlycan lead to erosion of the fresh start principle What must be criticallyremembered in respect of banktuptcy policy is that, by necessity,it is a Ircognition that the current cash flow of the individualis insufficient to meet the cutrent debts It is not necessarily a situation where the assets of the individual are exceeded by theit liabilities As stated in Sandell v Porter:l0 [The] debtor's own moneys are not limited to his cash resources immediatelyavailable Ihey extend to moneys which he can procure by redisation by sale or by mortgage or pledge of his assets within a relatively short time -relative to the nature and amount of the debt and to the circumstances including the nature of the business of the debtor Ihe concluion of insolvcacy ought to be clear from a consideration of the debtor s financial position in its entirety and generdly speaking ought not to be drawn simply from evidence of a temporary lack of liquidity It is the debtor's inability,utilising such cash resources as he has or can command through the use of his assets to meet his debts as they fall due which indicates insolvency The response of the law to this situation has changed dramaticallyover the years l1 Early Greek and Roman remedies allowedfor the body of an individualto be pledged as a slave to pay off his or her debts,l2 with the English permitting the imprisonment of the individualby the end of the 1 3 century '3 The law of insolvency was seen to have a punishment ~ ~ role - that the community and society would be best served by adopting a rule that would have as its central tenet, deterrence for others, punishment of the individual The malicious harshness of the time can be recognised in the following:'4 It one be in execution he ought to livc of his own, and neither the plaintiff nor the sheriff is bound to give him meat or drink,no more than

if one distrains cattle and puts them in a pound for thcrc the owner of the cartie ought to give them meat, and not he that distraincd them, no more is the party or the sheriff,who has one in execution, bound to give meat to the prisoner, but he ought to live of his own goods - and if he has no goods,he shall live of the charity of others and if others will give him nothing, let him die in the name of God, if he will and impute the cause of it to his own fault,fot his presumption and illbehaviour brought him to that imprisonment

lo Sandell v Porter (1966) I15 CIR 666,670 See also:Rees v Bank @New South

WaleS (1964) 111C11(210,218,229-30;HymisConcrete* 13ALR 321,328 Itd v Garlit?, (1977)

l1

l3 l4

For a discussionofthe historicalantecedents of the present legislation,scc I Duify English Bankrupts,1571-1861'(1980)24 TheAmericanJournal of Legal flistory 283 See also:W Holdsworth,A History ofEnglish Law (4th cd, 192n"01 8 230 Statute of Marlborouzh 1 2 6 7 , 23;25 Edw I11 c 17 ~ Dive v Mznningham (1551) 1 Plomicn 60.65;75 ER 35 108-9


&UKRLFICV POLICYANE IHE DECISION OF IHE HIGH COURI

The frst English legislation to deal with bankruptcy and to make provision for distribution amongst all creditors was the Act of 1542:An Act against suchpersons as do make Bankrupt '5 IhisAct providedfor a body of commissionersto take control of the debtor's property and to recover property fraudulently transferred The property was distributed pro-rataThe debtor was not trleased fiam the unpaid debts The 1571 legislation16 built upon this Act by providing more extensive powers of investigation and the acquisition of after acquited property The law was limited to traders Ihe act does not explain why hanluuptcy was conflned to traders However, parliament clearly accepted contemporary allegations of widespreadmercantilemisconductwhich accordingto the pramhies of

twoJ;lcohe;in bankruptcy statues had been detrimentalnot only to trade itself, hut also to the country at large and the m a y clothiers who employed a large portion of the workforce

Importantly,this legislation reflected the idea that people should not be released from their debts, but that whatever property was available should become payable and distributable pro-rata amongst creditors Essentially, the law still saw the debtor as responsible for his or her obligations, but with the realisation that greater community benefit would flow from pro-rata distribution as against individual creditors pursuing their own remedy Banktuptcy legislationwas extended in England in the 1 7 century ~ with the Acts of 1604,18 1623'9 and 166220 Ihese Acts, whilst still confined to traders,were notable for the introduction of the penalty of pillory stock imprisonment Debtors found guilty of improper conduct were attached to the pillory by one ear That ear was left remainingwhen the debtor was released

The legislation was again amended in the isth and

reflected, one suspects, a softening of community attitude,22

l5 l6 l7

l9

22

34 & 35 HenYIII,c 4 The Act of Elizabeth, 13 E k 1, c 7 See also: The Act Tiuch'?~g Orders fo? Bankrrqts 34 & 35 HenVIII,c 4 I Duffy,'EnglishBankrupts,1571-1861 (1980) 24 TheAmerican Journnl of legal Histov 283 284 l J a c I c l 5 21 Jac I, c 19 13& 14Car 11,c 24 Bunk?uptcyAD 1705,4Anne,c 17;and 1732,5Gco II,c 30 .& stated by I Duffy, English Bankrupts, 1571-1861 (1980) 24 Ihe American Journal of Legal his to^ 283 286-7: Ihese were adopted hemse of thc conviction.previouslyhintedatinthe 1624act,that a law whichwas allPenaltyand noRewardwasstlfdefeatmg;by compellinghanluuptsto relinquishallpropertyto some cxditors and then exposing them to perpetual imprisonmentby othcn, it encouragedevasioncven by traders who would otherwise be willing to cooperate


whereby the debtor was released from his or her debts Blackstone noted:23 Ifby accidental calamities,as by the lossof a ship in a tempest,the failure of brother traders, or by the nonpayment of persons out of trade, a merchant or trader becomes incapable of discharginghis own debts it is his misfornme and not his fault This amelioration of the legislation in the attitude to debtors was extended the law to all persons and set up a Court of Bankruptcy Importantly, the debtor was also permitted to file a declaration of insolvency,and arrangementsoutside of bankruptcy were permitted 25 Ultimately, a consolidated Bankruptcy Act was passed in 1914~" which formed the basis of the first Austrdian Federal legislation, the Bankruptcy Act of 1924 This Act was repealed and replaced by the present legislation,the CommonwealthBankruptcy Act 1966 As shown by this summary,the legislative history of bankruptcy has seen a move away from the idea that the bankrupt was a criminal and deserving of punishment to a theme that wherr the bankrupt has not been guilty of dishonesty,that person should be able to make a fresh start -a journey fsom the idea that insolvencyis an individual ptablem to a reflection that for the benefit of the community as a whole, less harsh legislation is appropriate 27 Ihe soul of debtor fmancial relief, the fresh start, is found in the availability of a dischqe and in the protection of exempt property Iogether these attributes can be viewed as a unifled system whose focus is on the debtor and his future as a living, breathing person Debtor fmancial relief should be considered a separate and distinct policy objective of Congresswhich should not be intertwined with the policies relating to the creditor-orientated debt collection and distribution

reflected more stronglyin the isthcentury legislation The ~egislation~~

23

24 25

William Blackstone,Commentaries on the Laws of England(18'~cd, 1829)"01 2 (with the last corrections of the author,and copious notes by J E Hovcnden) 474 Conuast the comment by Lord Kenyon in 1798: Banktuptcy is considered as a Crime and bankrupt in the old laws is called an offender'Powla o Padget (1798) 7 Rrm R ~ 509; 101ER 1103,1103 D For orample, 1 &ZWmIV,c 56;5 &GVict c 116 12S 13Vict,c 106,24&25Vict c 134 32 & 33Vict.c 71 and 46 & 47Vict c 52. D Rose Iewir AzrstralianBankruptq Law (loth ed 1994) 15 comments tha the change in the legislation was attributable to the humanitarian views of the late 4 & 5 GeoV,c 59 Interestingly,some of the amendments in recent years such as the Law and Justice Legislation Amendment Act I990 and the Bankruptcy AmendmentAct 1991 have imposed more onerous requirements on banktupts In many respects these amendments, which introduced concepts such as the Income Contribution

isfh century led by the Benthamite school of reformers

26 27

W reflected abuse of the legislation by certain in&mduals


BANKRUPTCY POIICY AND THE DECISION OF THE HIGH COURI function of the law Debtorfinancialrelief is an ethicaland m o d response to the inevitable inability to pay debt Sucha response stands as a beacon in a long history oihglo-American responses to debtor financialdefault which has ranged from death to imprisonment

The question that needs to be addressed in any discussion of insolvency policy is:what is the policy behind the provision of a clean slate to the debtor - why is the debtor permitted to make that fresh start? What is the central justification for financial rehabilitation of the consumer debtor? Ihe answer to this question goes to the very heart oi our present consumer bdnkruptcy process For without a central understanding of why the process exists,it is not logically possible to evaluatewhether the goalsobtained by the implementationof that policy through legislation are justified 29 These competing ideals of a fresh start and creditors ranking equally caused a division of opinion amongst the judicia1y3~in Pyrumid Building Sbcriety fin liq) v Terry When undertaking an examination of this case it must be borne in mind that the facts of the High Court decision concerned a Part X arrangement under the Bankruptcy Act 1966, this being a composition However this is not to deny the fundamental tenet that the purpose and aim of Part X of the Bankruptcy Act 1966,as with insolvency law generallx3l is to ensure a fresh start and to see that creditors rank equally Whilst it can be appreciated that Part X arrangements offet advantages such as the avoidance of the stigma of bankruptcy,the avoidance of the personal inconveniences of banktuptcy, and a faster and less costly process for crrdit0rs,3~the objective is still,as Kirby J appreciated in Permanent Buildzng Society (in liq) v Terry,that33

28

29 3O

R E Flint, 'Bankruptcy Policy: Toward a Moral Justification for Financi.d Rehabilitation of the Consumer Debtor (1991) 48 Washington and Lee Law Review 515 529 Ibid 518 Ihe trial judge favouredthe Building Society:PyramidBuilding Society (in lid v Somethinp Bener Ptv Ztd (Unre~orted,Supreme Comt of Victoria Hayne J 8

-

September 1994);the three judges of the Cotut of Appeal favoured tho Terry's: Somethink- Bcttw Ph. Itd v Pymmid Buildinp Society (in liq) [I99612VR 352;

. -

3I

32 33

It sho"ld he noted that the Ausu;Ilian Iaw Reform Commission, General Insolvency Inquzry, vol 1 Report No 45 (1988) when discussing insolvency principles at 15-17 commented in reference to insolvency law generally See the discussionin D Rose,LewisAustralian Bankruptcy ZLaw(loth ed, 1994) 248-9 Barnard (1888) 22 QBD 90 92-4; and Report of the Committee Appointed to Review the Bankruptcy Law of the Commonwealth (1962)par% 291-5,337

(1997) 189 CIR 176,212 In support of this, His Honour referred to Flint v


all cred~ttotsshould be enutied to come m and prove, and that the bankrupt should emerge from the bankruptcy freed from all hs llabht~esIhe same general ohjrcnves apply to a composltton under Pt X

Given these twin objectives of insolvency law,how has the definitionof a 'provable debt' adapted to meet these societal aims? It is an issue to which I will now turn 34 I'he history of the law relating to what is a 'provable debt' in an insolvency administration The earliest insolvency legislation did not define what was meant by 'a debt'35 Perhaps in rrsponse to this, the courts narrowly defined what constituted a 'provable debt' The debt had to be a liquidated sum and could not be subject to any contingency36 This was altered in 1721and subsequently in 1809by legislation 37 These acts permitted the proof of debt so that a debt due at the date of bankruptcy but not payable until some later date could be proved These amendments were held not to assist the contingent credit01ls Fram this position gradual relief was provided to the contingent creditor39whereby the categories of debts that could be proved in an insolvency became more numerous, leading ultimately to the provisions of the cutrent s 82 of the Bankruptcy Act 1966 Section 82(1) reads as follows (and without modification for how it reads in relation to Part X arrangements): Subject to this division,all debts dncl liabilities,present or future, certain or contingent, to which a bankrupt was subject at the date of the banktuptcy,or to which he may bccomc subject before his disLharge by reason of an obligation incurred before thc date of the bankruptcy are provable in the b.ankruptcy Subsection 82(8) provides (again without modification for how it reads when applied to Pdrt X arrangements):

3*

35 36

37 38 39

Ihis history is outlinedby Brooking JAin the Court ofAppealdecision Something Better PQJ Itd v Pyamid Building Society (in lig) 119961 2VR 352,353-5 I'he summary is taken principally from this judgment 34 & 35 HenVtU,c 4 1542;13Eliz,c 7 1570 Re Browne G Wingrove,BzparteAdor 1189112 QB 574,579,TrusteesErecutorr undAgency Co Ltd v Cowun (1906) SASR 155 174Tully v Sprarkes(1728) 2 Strd 867;92 ER 903 7 Geo I,c 31 1721;49Geo I11 c 121 1809 See the authorities cited by Brooking JAin SnmethtngBener Pty Ltd v Pyramid Building Society (in liq) 1199612VR 352,354 Eg: 19 Geo 11,c 32;6 Geo nic 16;Bankrupt Luw ConsolidationAct 1849(12 & I3Vict,c 106);BankruptcyAct 1861(24 &25Vict c 134);BankruptcyAct1869 (32 & 33Vict,c 71)


BMKRUPICY POIILYMVDTHE DECISION OF IHE HIGH COIEI In this section liability includes: ( a compensatlon for work or labour donr (b) an obligation or possible obligation to pay money or moneys worth on the breach of an express or implied covenant contract agreement 01undertaking:whether or not the breach occws is bkely to occur or is capable of ocu~rring,before the dischargeof the bankruptcy;and (c) an express or implied engagement, agreement or undertaking, to pay, or capable of resulting in the yayment of, money or moneys worth whether the payment is:

(i) in respect of .mount - fued or unliquidated;

(ii) in respect of time -present or hrture or certain or

dependent on a contingency;or (iii) in respect of the manner of valuation

-capable of

being zscerrained by fucd rules or only as matter of opinion The result of this legislative development was convenientlysummarised by Tadgell JA in Somethzng Better Pty Ltd u Pyramid Building Soczety (in liq): Mellish LJ in Re Hide, partc Ilynvz Coal and Iron Co (1871) IR 7 Ch App 28 at 33,referring to the 1869Act,regarded it as quite plain that the object of these sections is th.at the bankrupt shall he ahsolutcly relieved from any liabilityunder any contmct he has ever cnteredinto Srcti01182, in unmodified form, is to he given a similarly wide signification with a view to providing for the result that the bankrupt is to be a freed man -freednotonlyfromdebtsbutfromcontrzctslk~bilitits,engagements

and contingcncits of every kind

*'

Mr and MsTer~ywere the directors,along with one Hegarty,of aproperty development company called Something Better Pty Ltd Ihe company sought kance to develop a shop and officecomplex with monies raised fromthe PyrzmidBuilding SocietyThe Societylentthe companyanamount in excessofthree milliondollars Firstmor.tgagesecuritywastaken over the site In addition, Mt and Mrs Terry were guarantors of this debt When defaultwas made,the propertywas realised leavingMt and MrsTerry liable under the guaranteefor an amount slightlyin excess of $13M l'he Arguments Mi and MrsTerry argued that they were not liable on the guarantee as they had, prior to default by the company,entered mto a composition


under Part X of the Bankruptcy Act 1966 which released them from liability for any provable debts Under the composition, the crrditors accepted in full settlement the sum of $10 000, subject to the costs of administiation Mr.Terry disclosed assets of $200with debts of $101 575 whereas Mrs Terry disclosed assets of $150 against unsecured debts of $61 575 41 The asgument by Mr and ~Mtsrerry was that, at the time of operated to release them from all provable debts The guarantee to the Pyramid Building Society was a contingent debt (contingent upon the failureof the company to meet the loan obligations);all debts,contingent or otherwise,were provable;and thus the debtor was released from any obligationpursuant to the provisions of the legislation The Building Society argued that the amendments to s 82 which modified its operation led to the result that contingent debts were not released upon the entering into of a composition This argument found favour with the trial judge43 and by a 3:2 majority in the High Court 44 The Full Court of Victoria preferred the argument of Mr and Mrs Terry*5 Ihe decision The decision of the High Court was that a contingent debt was not a provable debt for the purposes of a composition Accordingly Mr and Mrs rerry stillhad an obligation to pay - an obligationwhich could not be submersed behind a composition Behind the technical argumentson the wording of the legislation(an aspect which will be discussedshortly) lies the policy debate Should MI and Mrs rerry, upon entering into an insolvency administration, be entitled to a fresh start, fire from the suictuses of a $13M debt, and should all creditors,be they contingent or otherwise,be treated equally? Has the ultimatefinding of the High Court led to aweakening of the idea of a clean slate for the debtor; or was this a particular finding on the

entering into the composition, s ~ 4 of0the~Bankruptcy Act 1966 ~

41

As stated by Broolang JAin Something Bette?Pty Ltd v Pyamzd Butldtng Society e n liql [I9961 2 VR 352 353, although the debtors dwelt in Moule Avenue,

Brighton the assets of the wife might have been exhausted by W a supermarket trolley g to the brim

42

43 44 45

Section 240(1) provides: Subject to this section, a composition under this Part opentes, unless set aside, declared void or terminated under this Part,to release the debtor from all provable debts, other than those (if any) that would not be released by his discharge from bankruptcy if he had become a bankrupt on the day on which the compos,c,on was accepted Pyamid Building Society v Something Better Pfy Itd (Unreported Supreme Cout ofVictaria,Hayne J,8 September 1994) (1997) 189CIR 176 Something Better Py Ltd @warnid Building Society fin li@ [I9961 ZVR 352

CJ


&UKRUPICY POIICYAND IHE DECISION OF IHE HIGH COURI

facts,a decisionwhich accordswith community expectation?Given this scenat.io,how does one balance the community expectation of afair and just insolvency system with the underlying tationale and axiomatic principle that the debtor is entitled to a fiesh start? The joint judgment oj'Gaudvon and GummowJJ Iheir Honows proceeded upon a statutory analysis of the provisions Section 240 of the Bankruptcy Act 1966 provided for a rrlease upon entering into a composition for all provable debts Section 82, in its unmodified form, provided that all debts, including contingent debts, wese provable However for the purposes of a composition,r 84 of the Bankr.uptcy Rules 1968 (Cth) indicated that s 82 was to be amended as noted below (the patts deletedfrom the originals 82 ase struck through):

82(l) Subject to this Division,all debts and liabilities present or future, certain or 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 h&uptcy

Subsection 82(8) is modified as follows: In this section, liability includes: (a) compensation for work or labour done.&

te3 aanexpress

to pay or capable of resulting in the payment of, money or money's worth whether the payment is:

(1) (ii) in respect of amount -frxed or unliquidatcd;or

cleeentlfftc-etresnxiRgRRtreP in respect of the manner ofvaluation -capable of being ascertained by fixed rules or only as matter of opinion The submission of the appellant Pyramid Building Society (a submission ultimately accepted by Gaudron and Gummow JJ) was that the term 'present or future',identified an obligation actually incutred,rather than one yet to be fulflled46 Further,the legislative history of the term 'debt' indicated that until the legislation specifically included the phrase 'contingent', these sorts of debts werc not provable

'debt',when not expanded by phrases such as'certain 01 contingent'and

-

or implied engagement agreement or undertaking,

46 47 Pyramid Building 5ociety (in liqj u Tmy (1997) 189CIR 176 188-9 Ibid


McHugh,J His Honour agreed with their Honours Gaudron and Gummow JJ that the appeal should be allowed,but with one important qualification He was unable to agree with their conclusion that, read literally,s 82(1) as modified did not cover a liability under a guarantee of the kind entered into by MI and MISTerry48McHugh J consideredthat the provision had to be considerrd in light of its history and purpose When the history of the secuon and the purpose of the modifications

- -

enacted by r 84 are oramined, the best conclusion that can be drawn from the statutory scheme is that liabilities of the kind in aurstion in this case remain an foot after a debtor makes a composition with his or her creditors 49

Kipby J (in dissent) (with whom TooheyJ agreed) 5O Kitby J summ~isedwhat he considered as his role in the following statement:

like the long history of banluuptcy legislation to which this Court was taken a study of the changes effected in legislativeprovisions over time may help to explainthe purpose of the particular change in question But it is the legislation which must be given effect Ihe Court's duty is to ascertainthe purpose of the Parliamentasexpressed in the languageit has used No attempt to give effect to an inferred purpose authoriscs a court to neglect theActs language 51 Kirby J considered that the appellant's case was extsemely arguable52 and importantly,that justice and business efficacy supported its case 53 Nevertheless,for reasons grounded in the language of the Act as well as in its history and apparent poliq, I do not consider that the apparent injusticein this case is one which thiscourt can cure 1'0 do sowould not be to adopt a purposive approach which I wol~ldalways be foremost to favour It would be to strain the language of the Act already modified by the operation of a rule whose purpose is obscure and whose effect is limited 54 His Honout then prwceeded to counter the arguments put forward by the majority judges First,even allowingforthe alteration to s 82 brought about by r 84, the language of the section still permitted contingent debts to be included in the categoryof provable debts 55 Secondly,even

Bid 194 Ibid Ibid 181 lbid 206 Bid 210 Bid 210 Bid In particular, his Honour referred (at 210-11) to subs5 82(4)-(6)which refer to debts subject to a contingency and a provision for their valuation


BANKRUPICY POIICYAND IRE DECISION OF IHE RlGH COURI

as modified,s 82(8) rrfers to a'liability'and this phrase should be given the meaning that it would ordinarik beas56Additionalpoints were that that the history and purpose of insolvency legislation was that all creditors should rank equally and that the insolvent should be freed from all his liabilities57 Accordingly, contingent creditors were within the category of provable debts for a composition Finally his Honour considered that to conclude that contingent debts were not provable for the purposes ofa Part X arrangementwould lead to asignificantelement of instability in the Act and in the certainty and finality of compositions 58 Kirby J concluded:59 Ihe proper answer to the appellants complaint about injusticelies not in a distortion of more than a cennuy of bankruptcy law Still less does it reside in the performance of major surgery on the hnguage of the Act which the rule-maker with explicit power to modify it held back from attempting If there was an injustice in the composition agreed by the respondents creditors with present and certain debts and liabilities the remedy for a contingent creditor suchasthe appellant was to applyto the Federal Court to set the composition aside It was not to press this Court to adopt an interpretation which the statutory language properly anaiysed will not hear

There is no doubt that the aims of insolvency law are to permit the debtor to obtain a fresh start,yet to treat all crrditors equally Similarly the laws must be seen to harmonise with the legitimate expectations of the wider community Indeed many reforms in recent years have sought to recontipre that balance so that abuse by high profile entrepreneurs is discontinued 60 Nevertheless the underlyingfeature of the bankruptcy law is the discharge - the idea that the debtor can begin again on the economic treadmill -'to earn,consume and borrow'61 It is recognised as a feature of insolvency wherever the purposes and objectives on bankruptcy are discussed In that sense, has the majority view ignored this principle by providing that in a composition, contingent creditors occupy a privileged position? If this is accepted, the judgment of Kirby J (with

56 57

Ibid 211-12 Ibid &id211

59 lbid 214

60 61

62

See the comments at note 27 R E Flint, Bankruptcy Policy: Ihward a Moral Justification for Financial Rehabilitation of the Consumer Debtor (1991) 48 Washington and Lee Lazu Review 515,516 See the Ust of authorities at note 7


(1999) 1UNDALR whom roohey 1agreed) is to be preferred Ultimately the decision must be one of legislative policy Should the fsesh start principle have been eroded? Should all creditors, including contingent creditors, be trrated equally?The High Court,by a majority,indicated that Mr and Mis Terry were not entitled to have a clean slate and that certain creditors were in a privileged position In any considesationof the law the judiciary must aticulate the policies applicable to the interpretation of the provision, for only then can the true value of precedent be seen If the community demands a different interpretation because of changing societal conditions, then the interpretation of the law can be fairly and justly altered But in the case of Pamanent Building Shciety (in Ziq) v Terry, where we have five judges in favour of Mr and Mrs Tary and four supporting the Building Society, it is difficult to see the decision as establishinga principle with significantprecedent value One suspects it is a mattes that will be reappraised ~53

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It should he noted that since this decision the Bankruptcy Act 1966 has been amendcdso that if a debtor s Part X proposal is approvedby creditors.the debtor mill obtaina release of all provabledebts,includingcontingentdebts,upon her or his release from bankruptcy See the comment by I Greenall Alternatives to Bankruptcyfor Debtors (199918 New Directions in Bankruptcy 25 26