PYRAMID BUILDING SOCIETY (in liquidation) v BRUCE MITCHELL TERRY & ANOR

Judges: Toohey
Gaudron, Gummow
McHugh

Kirby JJ

Subject References:
BANKRUPTCY
Composition under Pt X of the Bankruptcy Act 1966 (Cth)
Contingent liability under a guarantee
Whether a "provable debt" in a Pt X composition.
STATUTORY INTERPRETATION
Relevance of statutory history and purpose.

Legislative References:
Bankruptcy Act 1966 (Cth) - 82; 187; 198; 238; 239; 240; 243.

Other References:
Bankruptcy Rules (Cth), r 84.

Judgment date: 25 SEPTEMBER 1997

Judgment by:
Kirby J

This appeal concerns the question whether s 82(1) of the Bankruptcy Act 1966 (Cth) ("the Act"), as modified by r 84 of the Bankruptcy Rules (Cth) ("the Rules"), includes within the expression "provable debt" a contingent liability under a guarantee. It also poses the question whether such a contingent liability is "an express ... engagement, agreement or undertaking to pay or capable of resulting in the payment of, money or money's worth ..." within s 82(8) of the Act as modified by r 84 of the Rules.

In Gye v. McIntyre ^[F26] , this Court found it unnecessary to determine what, if any, practical effect the alteration made by r 84 achieved in the case of s 82 of the Act. However, the question now before the Court arose in subsequent litigation involving those parties ^[F27] . In resolving that case in the New South Wales Court of Appeal, Powell JA, in an understatement, remarked that "s 82 of the Act as amended by r 82 [equally r 84] is hardly a shining example of the draftsman's art" ^[F28] . In the present case, in the Court of Appeal of Victoria, Brooking JA felt driven, out of comity ^[F29] , to follow the New South Wales decision ^[F30] . But he criticised it as falling short of "ideal justice" and as producing a result such which most fair-minded business people would not think well of ^[F31] . It was, his Honour thought, "a public scandal and a reproach to the bankruptcy laws" ^[F32] .

The question is, therefore, whether the provisions of the Act, modified by the rule, as understood against the background of the language, history, structure, purposes and of the Act, require the construction considered to be so uncongenial. The primary Judge in the Supreme Court of Victoria (Hayne J) ^[F33] did not think so. His conclusion was reversed by the Court of Appeal ^[F34] . This Court granted special leave to appeal. The appeal permits the Court to respond to the criticism of the authority which was felt to compel the outcome in this case. It also allows the Court to establish the principles which will govern the application of the Act in cases of compositions under Pt X, involving a contingent liability existing at the time of the composition.

Composition of the Debts of a Real Estate Developer

In the 1980s Mr Bruce Terry and his wife Mrs Judith Terry ("the respondents") were involved in real estate development in Victoria. For that purpose, in the five years before the proceedings, they or their relatives had been associated with, or interested in, no fewer than 37 property trusts ^[F35] . On 20 April 1988, operating through a company optimistically called Something Better Pty Ltd ("Something Better") they borrowed a sum of $2.704 million from the Pyramid Building Society ("the appellant") which subsequently went into liquidation. The respondents and a Mr Hegarty were the directors of Something Better. The loan was to finance a shop and office complex on land owned by Something Better in Moorabbin in Victoria. Something Better provided security by way of a first mortgage over the subject land. The respondents executed joint and several guarantees on the same day in favour of the appellant. By those instruments they guaranteed Something Better's obligations under the loan and mortgage ^[F36] .

The due date for Something Better to repay the loan was 20 October 1993. It continued to make all interest payments falling due under the loan up to October 1993. However, when on 20 October 1993 the principal fell due for repayment, Something Better did not repay it. It contended that the appellant had agreed to roll-over the loan for a further period of five years. The appellant denied that it had promised anything of the sort. Hayne J found against Something Better on this allegation. The Court of Appeal rejected the appeal against that finding. It has not concerned this Court.

Meanwhile, in late 1992, at a time when the payments of interest were being maintained, the respondents signed authorities under s 188(1) of the Act authorising a meeting of their creditors to be called by their solicitor pursuant to Pt X of the Act ("Arrangements With Creditors Without Sequestration") ^[F37] .

Pursuant to the authorisation, a meeting of creditors was called. Notice was given to the appellant ^[F38] . It attended the meeting and sought to vote against the composition which was proposed. However, the respondents' solicitor, presiding at the meeting, ruled that the appellant could not vote. He relied, in that regard, on s 198(2) of the Act. That sub-section reads:

"A creditor is not entitled to vote in respect of an unliquidated or contingent debt or a debt the value of which is not ascertained."

At the time of the meeting, Something Better was not in default under its obligations based on the loan to the appellant. Furthermore, the appellant had not served on the respondents any demand under the guarantee as was provided in that instrument, and as was a pre-condition to their liability. The respondents' solicitor therefore ruled that the appellant was not, at that time, entitled to enforce the guarantee. At most, it was a contingent creditor.

The statements of affairs of the respondents disclosed that Mr Terry had unsecured debts of $101,575 and only $200 in assets. Mrs Terry had unsecured debts of $61,575 and only $150 in assets. Brooking JA commented caustically that "although the debtors dwelt in Moule Avenue, Brighton, the assets of the wife might have been exhausted by filling to the brim a supermarket trolley" ^[F39] . Nonetheless, it was not contested that the compositions approved at the meeting were valid arrangements under Pt X of the Act ^[F40] . The compositions involved the creditors accepting the sum of $10,000, subject to the costs of administration, in full settlement of their claims. The respondents' case was that, although the appellant could not vote against the compositions, their contingent liabilities to the appellant under the guarantee were nonetheless provable debts. By force of s 240(1) of the Act, the compositions released them from those debts. It was common ground that the debts would have been provable in a bankruptcy of the respondents. The question for decision was whether they were provable in relation to the compositions approved in the circumstances described.

Following the default of Something Better in its repayment of the principal to the appellant when it fell due on 20 October 1993, the appellant made demand for repayment of the loan. At the same time it made demand under the guarantee upon the respondents. It claimed against them the payment of the principal, interest and other costs in the sum of approximately $2.7 million. This demand was not met by the respondents. Their liability was contested upon the ground that they had been released as a consequence of the earlier compositions. In November 1993, the appellant commenced proceedings in the Supreme Court of Victoria against Something Better seeking possession of the land under the mortgage and the payment of the principal with accrued interest. It also sued the respondents upon the guarantee.

Proceedings in the Supreme Court of Victoria

At first instance, Hayne J gave judgment in favour of the appellant against both Something Better and the respondents in the sum of approximately $1.3 million. That sum resulted from the realisation of the security given by Something Better over the property, the subject of the proposed development. Having rejected the alleged promise to roll-over the loan at its original expiry, Hayne J turned to consider the respondents' defence based on ss 238 and 240 of the Act. He posed for himself the question whether, at the time of the composition, the claim of the appellant against the respondents was "a provable debt" within the meaning of Div 6 of Pt X of the Act. If it was, so long as the compositions remained valid, they released the respondents from "all provable debts" ^[F41] . They rendered it incompetent for the appellant to enforce any remedy against the property or person of the respondents in respect of such "provable debt" ^[F42] .

As Hayne J explained, when the Parliament enacted the Act it did not provide directly for the debts and liabilities which would be included in those released in the case of a composition under Pt X. Instead, by s 243(1) the Parliament adopted a legislative technique of applying provisions of the Act expressed to deal with bankruptcy, to a composition under Pt X as if "a sequestration order had been made against the debtor on the day on which the special resolution accepting the composition was passed" ^[F43] and as if "the trustee of the composition were the trustee in his bankruptcy" ^[F44] . Amongst the provisions so applied was s 82 of the Act governing debts provable in bankruptcy. Sub-section 243(1) applied s 82 in relation to a composition "with the prescribed modifications (if any)". The phrase "prescribed modifications" is not itself defined by the Act. However, in s 5(1) of the Act there are definitions of "prescribed" and "modifications". "Prescribed" is defined as meaning "prescribed by this Act or by rules under this Act". "Modifications" is defined as including "additions, omissions and substitutions" ^[F45] . There is no relevant modification to s 82 prescribed by the Act as it applies to compositions under Pt X. But rr 82, 83 and 84 prescribe modifications of s 82 for the purposes of ss 231, 237 and 243 of the Act respectively. Much of the debate below, and in this Court, concerned what effect these "modifications", as "prescribed" by the Rules, had on the definition of "provable debt" in the case of a composition under Pt X.

Hayne J conceded that the question whether a contingent debt, such as that arising on the guarantee, was a "provable debt" within s 82, as modified, was arguable and supported by authority in the Federal Court of Australia ^[F46] . However, his Honour preferred to give a meaning to the phrase "provable debt" which took into account the modification to s 82(1) of the Act, effected by r 84 of the Rules. By that modification, specific reference to debts as "present or future, certain or contingent" was deleted. Likewise, Hayne J considered that the modification to s 82(8) by r 84, so as to omit reference in the definition of "liability" to payments which "in respect of time" are "present or future, or certain or dependent on a contingency", reinforced the impression that future and contingent debts were not included in the definition of a "provable debt" for the purpose of compositions under Pt X of the Act. Whilst acknowledging that ordinarily he would defer to a decision of the Federal Court on the construction of the Act, Hayne J felt unable to do so in this case as he could not accept the reasoning of that Court ^[F47] :

"With respect I consider that it is a chain of reasoning that gives no significance to the fact that s 82 is modified in its application to compositions and leads to a result that gives no effect to the changes that Rule 84 makes. Thus in my view the contingent obligations owed by the Terrys to Pyramid were not provable debts. It follows that I am of the opinion that the defence which the Terrys sought to maintain based on the operation of Part X of the Bankruptcy Act fails."

Hayne J's decision was reversed by the Court of Appeal. That Court had before it Gye v. Davies ^[F48] , decided after Hayne J's decision and, apparently, without reference to it. The New South Wales Court of Appeal, for reasons both of comity with the Federal Court ^[F49] and persuasion by its reasoning ^[F50] accepted that contingent debts were "provable debts" within a composition under Pt X of the Act. Consequently they could not be enforced against the debtor ^[F51] . The debtor was released unless and until the composition was set aside, declared void or terminated ^[F52] .

In the Court of Appeal of Victoria the Judges divided in their approach. Brooking JA expressed much sympathy for the approach and conclusion of Hayne J. But he held back from expressing a final opinion. In the light of the decision in Gye he felt obliged "in the interests of uniformity" to follow its holding, supported as it was by earlier opinions in the Federal Court ^[F53] . Tadgell JA reached an independent conclusion that, at the time of the approval of the composition, the respondents' liability to the appellant, although contingent, was nevertheless a "provable debt". This was because it was an "express or implied engagement, agreement or undertaking to pay, or capable of resulting in the payment of, money or money's worth" within s 82(8)(b) of the Act, as modified by r 84(a)(ii) of the Rules in its application to Pt X. McDonald AJA agreed with the conclusion of Tadgell JA and with his reasons. However, his Honour went on to refer to Gye . He expressed agreement in the reasoning of Cole JA in that case. In his view, the survival of ss 82(4)-(7), which refer to a debt, "subject to a contingency" ^[F54] and provide a mechanism for ascertaining its amount ^[F55] , supported the conclusion previously stated. This was so notwithstanding the modification of ss 82(1) and 82(8) to the effect that "provable debts", in the case of a composition, include contingent debts, such as the debt owed by the respondents to the appellant under the guarantee.

The result was that the Court of Appeal unanimously set aside the order of Hayne J, although not without the protest by Brooking JA to which reference has been made. This Court must now decide the correctness of that decision and of the earlier authority which helped to produce it.

Provisions of the Act

The technique adopted in the adaptation of the specified provisions of the Act ^[F56] , enacted for a case of bankruptcy, so that they might apply, with modifications introduced by Rules, is one which has become common in federal legislation in recent years ^[F57] . Provisions contemplating "prescribed modifications" are scattered throughout the Act ^[F58] . It is a technique of drafting very different from the precision originally adopted in federal legislation ^[F59] . It involves a real risk that a modification, not appearing on the statute books but hidden in statutory rules, may be overlooked by parties and even by courts ^[F60] .

The technique was adopted in s 243 of the Act. That provision contemplated "prescribed modifications" in the application (relevantly) of s 82 of the Act in relation to a composition. It was availed of by r 84 of the Rules. In order to show the effect of the modification, it is appropriate to set out the terms of s 82, as it then stood, with the deletions indicated as follows:

"(1)

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 bankruptcy.

(1A)

Without limiting the generality of subsection (1), debts and liabilities referred to in that subsection shall be taken to include a debt or liability by way of the whole or a part of:

(a)

a periodical sum that became payable by the bankrupt before, but not more than one year before, the date of the bankruptcy under a maintenance agreement or maintenance order (whether entered into or made, as the case may be, before or after the commencement of this subsection); and

(b)

a lump sum (whether payable in one amount or by instalments) that became payable by the bankrupt before the date of the bankruptcy under a maintenance agreement or maintenance order (whether entered into or made, as the case may be, before or after the commencement of this subsection).

(2)

Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy.

(3)

Subject to subsection (3A), penalties or fines imposed by a court in respect of an offence against a law, whether a law of the Commonwealth or not, are not provable in bankruptcy.

(3AA)

An amount payable under an order made under paragraph 1317EA(3)(b) of the Corporations Law of a State or Territory is not provable in bankruptcy.

(3A)

An amount payable under a pecuniary penalty order or an interstate pecuniary penalty order is provable in bankruptcy.

(3B)

A debt is not provable in a bankruptcy in so far as the debt consists of interest accruing, in respect of a period commencing on or after the date of the bankruptcy, on a debt that is provable in the bankruptcy.

(4)

The trustee shall make an estimate of the value of a debt or liability provable in 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 cannot be fairly estimated, the debt or liability shall be deemed not to be provable in the bankruptcy.

(7)

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; and

(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)

(b) 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; or

(ii)

in respect of time -present or future, or certain or dependent on a contingency; or

(iii)

(ii) in respect of the manner of valuation - capable of being ascertained by fixed rules or only as matter of opinion."

As if to acknowledge the dangers involved in this technique of lawmaking, s 243(4) of the Act contains a "remarkable" ^[F61] additional provision ^[F62] to deal with unforeseen cases of discord. The sub-section provides, relevantly:

"If, after taking into account the prescribed modifications and the provisions of subsection (2), a provision specified in subsection (1) ... is incapable of application in relation to a composition ... or is inconsistent with this Part, that provision does not so have application."

The reference in the foregoing sub-section to sub-s 243(2) is a reference to the following provision:

"In the application of the provisions of this Act specified in subsection (1) in relation to a composition, a reference to a provable debt shall be read as a reference to a provable debt within the meaning of this Part."

The Part referred to is Pt X. That Part begins with an interpretation section (s 187) which includes, relevantly:

"(2) In this Part, a reference, in relation to a ... composition, to a provable debt shall be read as a reference to a debt or liability that would have been a provable debt in the debtor's bankruptcy if the debtor had become a bankrupt on the day ... on which the special resolution accepting the composition was passed ..."

The authority of the Governor-General to make rules dealing with prescribed matters is found in s 315(1) of the Act. In the standard way, that sub-section permits the making of rules not inconsistent with the Act "that by this Act are required or permitted to be prescribed ...".

Matters not in issue

In order to refine the questions presented by the appeal, it is helpful to note a number of matters which were either not argued or which can safely be put to one side:

1.

No submission was made that the technique of modification of legislation by rules, found in s 243(1) of the Act, was outside the powers of the Parliament. The power to make laws with respect to bankruptcy and insolvency is conferred upon the Parliament by the Constitution ^[F63] . Whether the Parliament may validly delegate to the Executive the modification of a law made by the Parliament, at least in the terms adopted, has not been the subject of any submissions to this Court. I shall therefore assume, without deciding, that what has been done may be done. In a proper case, where the point is raised and argued, it may be appropriate for this Court to return to that question.

2.

In the Court of Appeal, it was argued for the respondents that r 84 of the Rules was ultra vires the rule-making power under s 315(1) of the Act, being limited to the making of rules "not inconsistent with this Act". It was submitted that, to the extent that r 84 introduced substantive changes into s 82, as applied to the case of a composition, it went beyond the authority of "modifications" permitted to the Executive. It was therefore void ^[F64] . This argument was rejected in light of the express contemplation in s 243 itself that certain provisions of the Act might be modified by rules. The scope of what could be done by such a "modification" was reserved in one of the early cases on the effect of s 243 ^[F65] . The mere fact that, by a rule such as r 84, the language of a section, such as s 82, could be modified, may not, of itself, be sufficient to sustain an alteration of the section which would completely change, or even reverse, its operation ^[F66] . However, this argument may also be left to another day. Before this Court, the respondents made it plain that they did not assert that r 84 was ultra vires. They confined their submission to the suggestion that the rule should be given a construction which would ensure that it did not go beyond the power of modification authorised by s 243(1) and thus within s 315(1) of the Act.

3.

One of the many disadvantages of the technique of drafting adopted by s 243(1) is that there is no reliable way of discovering the purpose of the law-maker save from the language of the rule. The Court does not have access, as it does in a change to legislation by the Parliament, to a Second Reading speech, explanatory memorandum or other background materials to assist in the elucidation of ambiguities and uncertainties ^[F67] . In the case of the Act, the Court was taken to such materials, including the Second Reading Speech ^[F68] and the Clyne Committee Report ^[F69] upon which the Bill, which became the Act, was based. By way of contrast, the purpose of the rule-maker, already unclear because of the partial modification which r 84 of the Rules introduced to the applied provisions of s 82 of the Act, remains an enigma. All that the Court has to go on is the language of the modification, supported, to the extent necessary, by the "remarkable" provisions of s 243(4).

4.

In Morris v. Maroudas ^[F70] one of the early decisions on the interpretation of s 82, Toohey J, then a member of the Federal Court of Australia, made a number of remarks, obiter concerning the proper approach to interpretation of such a provision. These observations were criticised by the appellant, and doubted by the primary Judge ^[F71] and in the Court of Appeal ^[F72] . In Morris , the Full Court of the Federal Court was considering what debts were provable under Pt X of the Act for the purposes of a deed of assignment. Because the same technique of statutory modification had been adopted in that case ^[F73] , and as the modifications effected were relevantly the same, the remarks of the Federal Court were pertinent, although stated to be obiter ^[F74] . Northrop J stated that he agreed with the reasoning of Toohey J ^[F75] . Spender J impliedly did so ^[F76] . Because of the Federal Court's general responsibility for interpreting and applying the Act, attention was properly given in the courts below to Toohey J's remarks. The following is the passage which the appellant criticised ^[F77] :

"The method of permitting a rule to amend a section for certain purposes carries its own dangers. But in my view, where r 82 is applicable, the proper course is to look at s 82 as modified and not seek to construe it by reason of semantic differences that exist between s 82(1) as modified and as unmodified."

I do not read this passage to mean more than that the ultimate duty of a court is to have regard to the provision of the Act, as modified by the Rules. This leaves the question of what the modification achieves. Toohey J was clearly right to refer to the dangers of the statutory technique adopted. They were dangers foreseen by the Parliament itself ^[F78] . What his Honour said does not cast doubt upon the propriety (indeed necessity) to ascertain the effect of the modification from the course which the modification took. Like the long history of bankruptcy legislation to which this Court was taken, a study of the changes effected in legislative provisions over time may help to explain the purpose of the particular change in question. But it is the legislation which must be given effect. The Court's duty is to ascertain the purpose of the Parliament as expressed in the language it has used ^[F79] . No attempt to give effect to an inferred purpose authorises a court to neglect the Act's language.

5.

Attempts were made to calculate the number of judges who had considered the present (or analogous) point, to show the preponderance supporting the construction for which the parties respectively argued. Such submissions may carry more persuasion in a Court of Appeal or a Full Court than before this Court. This is because in the case of federal or uniform legislation the duty of the courts below is to endeavour to accord such legislation a uniform interpretation ^[F80] . Some of the judges who have favoured the view urged by the respondents have done so primarily for the reason of comity in order to achieve a uniform interpretation ^[F81] . Others have acknowledged being affected by this consideration ^[F82] . Now that the appeal is before this Court it should simply construe the Act for itself. Its opinion will achieve the desired uniformity. Obviously, this Court will take into account the opinions previously expressed.

6.

Some features of the litigation had fallen away by the time the appeal was heard. In particular, although the appellant continued to press hints (especially in the opinion of Brooking JA) that there were, or might have been, suspicious features in the compositions agreed by the respondents' creditors, no reliance was placed upon this consideration, save as it might affect the question of interpretation. Thus, the appellant urged that if the respondents' construction of the Act were correct, it would provide a simple means by which debtors could effectively escape substantial contingent liabilities (as under guarantees not yet called up) by the simple expedient of a composition (or arrangement or assignment) under Pt X agreed to by present creditors. The contingent creditor could not vote in respect of the contingent debt ^[F83] . But upon the authority now challenged, that creditor would be bound by the decision made ^[F84] . The debtor would be released from the debt, leaving the contingent creditor to prove in the composition over the acceptance of which it had no control.

Arguments Against the Inclusion of Contingent Debts

The appellant advanced a number of arguments against the construction of the Act which has so far found favour in the Federal Court, the New South Wales Court of Appeal and, in this case, in the Court of Appeal of Victoria. Its chief arguments should be identified so that the point of construction may be clearly presented for decision:

1.

Meaning must be given to the modification effected by r 84 as it applies to the definition of "provable debt" in the case of a composition under Pt X. The deletion from the s 82 definition of future and contingent debts and liabilities in sub-s (1), and the modification of the definition of "liability" in sub-s (8), clarify the relevant purpose. This was to delete from debts provable in a composition "contingent" and "future" liabilities or debts. Unless this consequence were attributed to the modification, it would leave the changes with little work to do. This was a result which would not lightly be attributed to the rule-maker. The suggestion that the rule-maker was simply attempting, in an inept way, to modernise the verbiage of s 82(1) by the deletions effected had a number of defects. First, it would arguably amount to an inappropriate or incompetent use of the power to make "modifications" conferred for a substantive purpose. Secondly, such incompetence would not readily be ascribed to the rule-maker exercising the large powers afforded by the Parliament. Rather, a substantive purpose would be attributed to the modification. The only substantive purpose ascertainable from the amendments effected was that of deleting future and contingent debts and liabilities. No alternative rational and coherent explanation could be afforded for the modifications which had deliberately distinguished the case of "provable debts" in a composition from those provable in bankruptcy.

2.

The suggestion that the deletion of the words in question still left the generality of the expression "all debts and liabilities" in s 82, as applied to compositions under Pt X, ignored "the gradual steps taken by the legislature to extend the application of the bankruptcy law to future and contingent debts" ^[F85] . That history is surveyed in the Court of Appeal and I will not repeat it. It is enough to say that, in the context of a bankruptcy statute, the words "debts" and "liabilities", in their generality, would not easily attract future and contingent debts and liabilities ^[F86] . Section 82 of the Act is itself a product of this long history. Only a person who was wholly ignorant of that history and of the long struggle to achieve the scope of the application appearing in s 82 of the Act could assume that the deletion in s 82(1) of the specific reference to future and contingent debts and liabilities would revive, by the generality of those words, an application to contingent debts or liabilities which the addition of the deleted words had originally been enacted to secure ^[F87] . Such fundamental ignorance of the course of bankruptcy legislation ought not be attributed to the rule-maker who prescribed r 84 of the Rules.

3.

So far as the respondents' argument rested on the survival, in the modified s 82, of sub-ss (4) to (7), with their express reference to contingent debts and the calculation, in case of dispute, of their value, the appellant invoked s 243(4) of the Act. After the prescribed modifications have been taken into account and it is found that a provision specified is "incapable of application" (or is inconsistent with Pt X) such provision "does not so have application". Despite their apparent survival in the modified s 82, sub-ss (4) to (7), in terms of s 243(4) of the Act, had no application. Hayne J acknowledged the problem presented by the failure of the rule-maker to modify sub-ss (4) to (7). He preferred to explain this as presenting one of the factors to be taken into account in deciding the preferable construction of the modified section ^[F88] . No construction was wholly satisfactory. But in his Honour's view the better construction involved giving effect to the modification rather than ignoring it.

4.

Much reliance was placed in the Court of Appeal ^[F89] upon the fact that it was open to the appellant, if dissatisfied by the composition forced upon it in a meeting in which it could not vote, to apply to the Federal Court to set aside the composition pursuant to s 239 of the Act. The appellant disputed that this facility was available to it. Whilst the power of the Federal Court to set aside a composition was large ^[F90] and the considerations which it could take into account broadly expressed in the section ^[F91] , the only person with standing to initiate such an application was a "creditor". Taken in its context (including s 238), it was argued that this would not include a contingent creditor such as the appellant. If this interpretation were correct, the appellant would be excluded from voting in respect of a contingent debt ^[F92] which affected its interests. It would be bound by the outcome of the vote at the meeting. And it would not be entitled to apply to the Court to set the composition aside. Such an unjust operation of the Act would not be attributed to the Parliament. The Act would not be construed to have such an oppressive operation, effectively modifying property rights without a chance to be heard before, or after, such rights were lost.

5.

If, contrary to 4, it was open to a contingent creditor to make an application to set aside a composition pursuant to s 239 of the Act, this was a most burdensome procedure fraught with difficulty because of the disinclination of a court to disturb valid compositions made under Pt X ^[F93] . The cost and inconvenience of having to make such an application, and its doubtful success, suggested the alternative construction of the Act favoured by the primary Judge. This was that compositions could be made under Pt X with the concurrence of the creditors in respect of present and certain provable debts. But as to future or contingent debts, these would remain outside the composition to await future or contingent events. That construction would be consistent with the exclusion from entitlement to vote of a creditor with a contingent debt ^[F94] . The deletion of the reference to "present" and "certain" from s 82(1) of the Act, by the modification introduced by r 84, was simply explained by the fact that those words were not then required. They were sufficiently implied in the reference to "debts and liabilities" expressed in their generality ^[F95] .

6.

This construction would also have the advantage of removing the risk that a debtor could "engineer" a position whereby, through the vote of creditors having present and certain liabilities and debts, it could effectively secure release of substantial contingent debts, affording an undesirable potential loophole in the operation of Pt X. The possibility that this could occur reinforced the argument that the modification introduced to s 82 of the Act by r 84 of the Rules in the case of a composition, should be given real and substantial effect.

Contingent Debts are Provable Debts in a Composition

I acknowledge the arguability of the appellant's case. Support for it, deriving from the language of the Act is persuasively stated by Hayne J. Strong reasons of policy for favouring that construction, if it be open, were expressed in the opinion of Brooking JA in the Court of Appeal. If, conformably with the language of the Act (as modified by the Rules), and its apparent purpose I could come to the conclusion favoured by Hayne J, I would gladly do so in this case. I share Brooking JA's opinion that the contrary interpretation of the Act appears to defeat, at least in this case, justice and business efficacy.

Nevertheless, for reasons grounded in the language of the Act, as well as in its history and apparent policy, I do not consider that the apparent injustice in this case is one which this Court can cure. To do so would not be to adopt a purposive approach which I would always 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. My reasons for coming to this conclusion are these:

1.

Allowing for the modification of s 82 by r 84, the remaining references in s 82 to debts or liabilities "subject to a contingency" (s 82(4)) and the provision of a means of valuing them (s 82(5) and (6)) must be given effect according to their terms. This is so even if, for reasons of history or because the rule-maker has troubled to modify s 82(1), the words "debts and liabilities" in that sub-section were confined to present and certain debts and liabilities. Nor can s 243(4) be invoked, in effect, to expunge the provisions of sub-ss (4) to (7) where the rule-maker has held back from doing so. Not only would this involve ignoring (rather than to "take into account") the prescribed modifications. It would also involve distorting the pre-condition for the operation of that "remarkable" sub-section. This is that the provision should be incapable of application in relation to a composition. I read this as meaning to a particular composition and for particular reasons. The argument advanced, in effect, suggests that the rule-maker incompetently failed to carry throughout the modified s 82 the theory partly effected in sub-ss (1) and (8). This is not a course of additional surgery upon s 82 which s 243(4) authorises. The section therefore retains its references to contingent debts and liabilities and to the valuation of them. Such references are completely inconsistent with the hypothesis that contingent debts and liabilities are not included amongst "provable debts" in the case of a composition. Whatever else the modifications to sub-ss (1) and (8) achieved, they cannot be read to contradict the survival of the express references to contingent debts and liabilities.

2.

As modified, s 82(8) includes an express definition of "liability". To that extent, it provides a dictionary for the word, used in its generality, in s 82(1). Relevantly, "liability" in sub-s 8 is defined to include "an express ... agreement ... capable of resulting in the payment of, money". The rule-maker's removal from the section of the reference to the case whether the payment is "certain or dependent on a contingency" left the generality of the definition undisturbed. The elaboration in the closing sub-paragraphs, and their modification in the case of contingencies, does not limit the very general language used in the definition. Whilst a court will certainly take into account the course of legislative history, it must be careful not to allow that technique of ascertaining the legislative purpose to distort the meaning to be ascribed to the plain words. Most readers of legislation have no ready access to the detail of legislative history. Few have recourse to the Parliamentary debates and background material. That is why this Court has emphasised that the ultimate fidelity must be to the purpose of Parliament as ascertained from the language it has used to express that purpose ^[F96] . Particularly in the context of the survival of express provisions for the valuation of a debt subject to a contingency, the broad definition of "liability" which remains in s 82(8) as modified, should be given the meaning which the words used would ordinarily bear. Approaching the matter in that way, "an express ... agreement ... capable of resulting in the payment of, money" includes a guarantee subject to a contingency. Indeed, the phrase "capable of" implies the existence of a contingency or future event which must happen to convert the capability into an obligation ^[F97] .

3.

Whilst it is true that the explanations offered by the respondents for the modifications introduced into s 82(1) by r 84 of the Rules are less than wholly convincing, the attempts by the appellant to explain away the survival of the references to contingencies in sub-ss (4) to (7) are even more unsatisfactory. It does less offence to the construction of s 82, as applied to a composition under Pt X of the Act, to read "debts and liabilities" in s 82(1) broadly, notwithstanding the modification, than to ignore completely sub-sections which survive the modification and which must be given meaning.

4.

The power of modification afforded by s 243 of the Act is confined to particular sections, including s 82. Not included in the sections which might be modified is s 187. That section, in s 187(2), lays down the general principle adopted by the Parliament that "in relation to a ... composition" a provable debt is to be "read as a reference to a debt ... that would have been a provable debt in the debtor's bankruptcy". That general provision must be read with s 243, including the power to modify s 82. At least in the case of doubt, s 187(2) indicates the general approach which has the endorsement of the Parliament. That general approach may, by the modification of s 82, be altered. But any alteration by rule would surely need to be clear to override the general principle reflected in s 187(2) of the Act. That general principle is itself understandable when the history of bankruptcy law is remembered. Two features of that history are relevant. The first is the gradual way by which all debts and liabilities came to be included in the bankruptcy. The objective of legislation of this kind was, generally speaking, "that all creditors should be entitled to come in and prove, and that the bankrupt should emerge from the bankruptcy freed from all his liabilities" ^[F98] . The same general objectives apply to a composition under Pt X ^[F99] . Secondly, to the complaint that contingent creditors are included in the release yet excluded from voting, the answer may be given that this has been the case in bankruptcy for more than a century. By s 82 it is still so in the case of bankruptcy. To vary this established position in the case of a composition under Pt X it is not unreasonable that the modification should have been made abundantly clear ^[F100] .

5.

The denial to a contingent creditor of the right to vote does not negative the right of that creditor to prove ^[F101] . For whatever reason ^[F102] , that right was not exercised by the appellant in this case. I do not accept the argument that the appellant had no standing to apply to the Federal Court to set aside a composition. It is clear from the language, structure and purpose of the Act that this facility is available to a contingent creditor. The mere fact that s 239 uses the word "creditor" does not confine that section to creditors with present and certain debts. The word is used throughout Pt X to extend to creditors with future and contingent debts. No clearer illustration of this could be found than in s 198(2). That sub-section excludes a "creditor" from voting "in respect of an unliquidated or contingent debt or a debt the value of which is not ascertained". The Act thus draws a distinction between creditors and the qualities of their debts and liabilities. Section 239 should not be read down. Whilst it is true that such an application is inconvenient, the grounds for the Court's intervention are very broadly stated. Arguably, they would have been applicable to the facts of this case. The appellant failed to invoke that remedy.

6.

To exclude contingent debts from the category of provable debts in the case of s 82 would also be inconsistent with other provisions of the Act and the apparently intended operation of the Act, viewed as a whole. It would be inconsistent with the terms of s 238 which provide that:

"A composition ... is binding on all the creditors of the debtor."

It would be inconsistent with s 198(2), the terms of which support the conclusion that a contingent debt is provable. It would be inconsistent with the law relating to compositions made by bankrupts pursuant to s 73 of the Act. Furthermore, the identical amendment, made by r 82 of the Rules in respect of deeds of assignment, would have the effect that, although the debtor had, in accordance with s 214 of the Act assigned all of its divisible property for the benefit of its creditors, it would not be released from any future or contingent debts. Future and contingent creditors would have only a man of straw against whom to execute.

7.

In addition to the foregoing reasons resting on the language and structure of the Act and the policy derived from the history and general purpose of compositions, one final reason of legal policy may be mentioned. Given the long history of bankruptcy legislation, and the provisions for compositions and schemes of arrangement which have existed since 1869, parallel to those in bankruptcy, it is not surprising that creditors with contingent debts have been treated in ways similar to bankruptcy. Differentiation in the case of compositions (and presumably deeds of arrangement and deeds of assignment) would introduce a significant element of instability in the operation of the Act. It would undermine the certainty and finality of compositions (and deeds of arrangement and deeds of assignment) already concluded. Creditors with contingent debts would emerge to make their claims. At the very least, if this were to be allowed by the legislative technique of modification by rule, permitted by s 243 of the Act, it could be expected that the voice of the law-maker would be clear in the land as, by r 84, it is not.

Orders

The proper answer to the appellant's complaint about injustice lies not in a distortion of more than a century of bankruptcy law. Still less does it reside in the performance of major surgery on the language 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 such as the appellant, was to apply to the Federal Court to set the composition aside ^[F103] . It was not to press this Court to adopt an interpretation which the statutory language, properly analysed, will not hear.

The appeal should be dismissed with costs.