Pyramid Building Society (In Liq) v Terry & Another

(1997) 189 CLR 176

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(Judgment by: Gaudron, Gummow JJ)

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

Court:

Judges: Toohey

Gaudron, GummowMcHugh
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

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Judgment by:
Gaudron, Gummow JJ

In the Supreme Court of Victoria, the appellant, Pyramid Building Society (in liquidation) ("Pyramid"), sued parties including the present respondents ("Mr and Mrs Terry") upon a guarantee of the obligations to Pyramid of Something Better Pty Ltd ("Something Better"). Something Better was controlled by interests associated with Mr and Mrs Terry. Mr Terry was a property developer.

The guarantors, who included Mr and Mrs Terry, undertook to Pyramid, upon demand being made on them, to pay all moneys then owing but unpaid by Something Better to Pyramid in respect of financial accommodation provided to Something Better by Pyramid. The litigation has proceeded on the footing that, upon execution of the guarantee, Mr and Mrs Terry undertook a liability to Pyramid which was contingent upon default by the debtor and the making of demand by Pyramid. The guarantee was dated 20 April 1988 and demand on the guarantors was made by Pyramid on 16 November 1993.

In the meantime, in November 1992, Mr and Mrs Terry had entered into a composition under the provisions of Pt X (ss 187-243A) of the Bankruptcy Act 1966 (Cth) ("the Act"). Part X provides for three species of arrangement with creditors without sequestration and administration in bankruptcy of the estate of the bankrupt. These are deeds of assignment (whereby all the divisible property of the debtor is assigned for the benefit of creditors), compositions (whereby the creditors accept payment by instalments of debts due to them or accept less than the full amount thereof in full satisfaction) and deeds of arrangement (being deeds which are not deeds of assignment or deeds in respect of a composition, but which provide for the arrangement of the affairs of the debtor with a view to the whole or partial payment of debts) ^[F1] . In contrast to the requirements for a deed of assignment, a composition does not involve any disposition by the debtor of all the divisible property of the debtor. Section 213(3) of the Act provides that a composition is void unless accepted by a special resolution of a meeting of creditors under s 204.

On 22 October 1992, Mr and Mrs Terry signed an authority pursuant to s 188(1) of the Act which authorised their solicitor to call a meeting of creditors. The meeting was held on 9 November 1992 and a special resolution was passed under s 204 for the acceptance of a composition under Pt X of the Act which stipulated payment of $10,000 in full satisfaction of all debts and liabilities of Mr and Mrs Terry. At that meeting, the Chairman was the solicitor for Mr and Mrs Terry. He ruled that Pyramid was not entitled to vote in respect of the special resolution in reliance upon s 198(2) of the Act ^[F2] . Division 2 of Pt X (ss 188-212B) dealt with meetings of creditors and s 198(2) stated:

"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."

By its action brought on the guarantee, Pyramid sought to recover a sum greatly in excess of $10,000. However, Mr and Mrs Terry pleaded that, by reason of s 240 of the Act, the composition operated to release them from any liability they may have had under the guarantee. That argument depended for its success on the propositions that s 240 released Mr and Mrs Terry from all provable debts and that the contingent liability under the guarantee was a provable debt. The defence was rejected by the primary judge (Hayne J) but the appeal by Mr and Mrs Terry to the Court of Appeal was successful ^[F3] .

In this Court, Pyramid submits that s 240 did not operate to effect the discharge of the guarantee and that on the day on which the composition was accepted there was, in respect of the guarantee, no "provable debt" within the meaning of s 240.

Section 240 was in the following terms:

"(1)

Subject to this section, a composition under this Part operates, 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 composition was accepted.

(2)

Subsection (1) does not affect the right of a secured creditor, or any person claiming through or under him, to realize or otherwise deal with his security:

(a)

if the secured creditor has not proved in the composition for any part of the secured debt - for the purposes of obtaining payment of the secured debt; or

(b)

if the secured creditor has proved in the composition for part of the secured debt - for the purposes of obtaining payment of the part of the secured debt for which he has not proved in the composition;

and, for the purposes of enabling the secured creditor or a person claiming through or under him so to realize or deal with his security, but not otherwise, the secured debt, or the part of the secured debt, as the case may be, shall be deemed not to have been released.

(3)

A composition does not release from any liability a person who, at the date on which the composition was accepted, was a partner or a co-trustee with the debtor or was jointly bound or had made a joint contract with him, or a person who was surety or in the nature of a surety for the debtor."

It will be apparent that s 240(1) uses the phrase "release the debtor from all provable debts" and, in that regard, Mr and Mrs Terry rely strongly upon the definition provision in s 187(2). This stated:

"In this Part, a reference, in relation to a deed or 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 he executed the deed or on which the special resolution accepting the composition was passed, as the case may be."

Mr and Mrs Terry submit that had they each become a bankrupt on 9 November 1992 there would have been provable "all debts and liabilities, present or future, certain or contingent", to which each of them was subject at that date. That result would have followed from the operation of s 82 of the Act. This section deals with debts provable in bankruptcy. Section 82 is found in Div 1 (headed " Proof of Debts ") of Pt VI (ss 82-147), which is headed "ADMINISTRATION OF PROPERTY". Section 82(1) identifies in broad terms those debts and liabilities which may found a proof in a bankruptcy. In particular, it uses the phrases "present or future, certain or contingent".

This appeal turns upon the extent to which, in the light of certain other provisions of Pt X, s 240 effected a release of Mr and Mrs Terry on the footing that the "provable debts" spoken of in s 240(1) are of the same description as those for proof under Pt VI. Our conclusion is that these other provisions of Pt X operate so as to deny to s 240 an operation to effect the release claimed by Mr and Mrs Terry. The result is that the decision on the point by the primary judge was correct and that the appeal from the Court of Appeal should be allowed.

It is appropriate to commence consideration of the matter by reference to further legislative provisions. These include r 84 of the Bankruptcy Rules (Cth) ("the Rules") ^[F4] made in exercise of the power conferred by s 315 of the Act to make rules which are "not inconsistent with this Act" and which prescribe matters by the Act permitted to be prescribed. At the time of the making of r 84, s 243 of the Act provided:

"(1)

Subject to this section, the provisions of sections 82 to 107 (inclusive) and sections 140 to 148 (inclusive) of this Act apply, subject to such modifications and adaptations (if any) as are prescribed by the rules, to and in relation to a composition under this Part as if -

(a)

a sequestration order had been made against the debtor on the day on which the special resolution accepting the composition was passed; and

(b)

the trustee of the composition were the trustee in his bankruptcy.

(2)

In the application of the provisions of this Act specified in the last preceding sub-section to and 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.

(3)

The provisions of sections 162 to 169 (inclusive), sub-section (2) of section 170, sections 171 to 174 (inclusive), section 175 (other than paragraph (b) of sub-section (1)) and sections 176 to 184 (inclusive) of this Act apply, subject to such modifications and adaptations (if any) as are prescribed by the rules, to and in relation to a trustee of a composition under this Part as if the debtor by whom the composition was made were a bankrupt and the trustee of the composition were the trustee in his bankruptcy.

(4)

If, after taking into account the modifications and adaptations made by the rules and the provisions of sub-section (2) of this section, a provision specified in sub-section (1) or (3) of this section is incapable of application to or in relation to a composition, or the trustee of a composition, as the case requires, or is inconsistent with this Part, that provision does not so have application.

(5)

In this section, 'modification' includes the addition or omission of a provision or the substitution of a provision for another provision."

Section 243 had been amended by the time of the events giving rise to this appeal, but r 84 remained in the same form ^[F5] .

At the time of the acceptance of the composition with which this appeal is concerned, s 243(1) read:

"Sections 82 to 107 (inclusive) and 140 to 147 (inclusive) apply, with the prescribed modifications (if any), in relation to a composition under this Part as if:

(a)

a sequestration order had been made against the debtor on the day on which the special resolution accepting the composition was passed; and

(b)

the trustee of the composition were the trustee in his bankruptcy."

Section 243(4) read:

"If, after taking into account the prescribed modifications and the provisions of subsection (2), a provision specified in subsection (1) or (3) is incapable of application in relation to a composition, or the trustee of a composition, as the case requires, or is inconsistent with this Part, that provision does not so have application."

Section 243 is not a "severance" provision, operating where invalid and valid provisions are found in the one enactment or other legislative instrument. Rather, it authorises the making of delegated legislation to adapt one legislative regime to another. In so doing, s 243(1) leaves to one side certain provisions which apply in a bankruptcy administration. For example, s 109 lists various claims to which a trustee in bankruptcy must give priority but it is not among those provisions carried across by s 243(1) ^[F6] .

It was submitted for Mr and Mrs Terry that the definition provision in s 187(2) prevented a restriction upon the class of debts provable in the composition by exercise of the power to make certain modifications conferred by s 243. In particular, it was submitted that the class could not be made narrower than that which otherwise, by full adoption of s 82, would have been allowable if a debtor had become a bankrupt on the day of the passage of the special resolution accepting the composition. It was then said to follow that the rule-making power should not be construed so as to permit an exclusion of the proof of contingent liabilities in a composition. These submissions should be rejected.

Several points should be made as to the construction of s 243. The first concerns the interrelation of sub-ss (1) and (2). Section 82 deals in terms with proof of debts in a bankruptcy administration under Pt VI, whereas Pt X deals with assignments, compositions and arrangements outside bankruptcy. Paragraphs (a) and (b) of s 243(1) seek to adjust in two respects a bankruptcy administration to the regime established by a composition. They do so by treating the passage of a special resolution as if it had been the making of a sequestration order and by treating the trustee of a composition as the trustee in a bankruptcy. A third adjustment is necessary to substitute proof in the composition for proof in bankruptcy. Rather than doing so by the addition of a par (c) of s 243(1), s 243(2) requires references to debts provable in the composition to be read with the meaning given for that concept for the purpose of Pt X by s 187(2). In its application to s 243(2), the definition in s 187(2) requires the phrase "provable debt" in relation to a composition to be read as a reference to a debt or liability that would have been a provable debt in the bankruptcy of the debtor if the debtor had become a bankrupt on the day of the passage of the special resolution accepting the composition.

It is that state of affairs established by the joint operation of sub-ss (1) and (2) which is subjected to the prescription by the Rules of the addition or omission of a provision or the substitution of one provision for another provision. This power of prescription is identified in s 243(1). It includes power to deal, in relation to a composition, with what (by force of s 82, in combination with ss 187(2) and 243(2)) otherwise would be treated as a provable debt. The submission to the contrary should be rejected.

Further, it should be noted that s 243 in its original form spoke of "the provisions of" various sections, commencing with s 82, and at the time of the making of r 84, the power of modification was identified in s 243(5) in terms of the addition or omission "of a provision ", and of the substitution of one " provision for another provision " (emphasis added). It is apparent that r 84 ^[F7] was drawn on the footing that each sub-section of the sections identified in s 243(1) constituted a "provision". The result in par (a) of r 84 was to treat each of sub-ss (1) and (8) of s 82 as a "provision" and to omit each sub-section and substitute another sub-section. Hence the force of the observation by Toohey J in Morris v. Maroudas ^[F8] to the effect that ^[F9] , where r 84 is applicable, the proper course is to look at s 82 of the Act as modified thereby and not to seek to construe s 82 by reason of semantic differences that exist between s 82 as modified and as unmodified.

However, the term "provision" does not bear a meaning which is so restricted as to identify only each section or sub-section as a whole and to permit only of the making of additions, omissions and substitutions in respect of each such distinct entity. The structure of a particular sub-section may be such that it contains more than one "provision", being a distinct subject-matter susceptible to omission and to the making of an addition or substitution ^[F10] . For the purposes of this appeal it will be unnecessary to determine more closely the necessary constituents of each such distinct subject-matter.

Paragraph (a) of r 84 is as follows:

"The following modifications of the provisions of the Act specified in section 243 of the Act are prescribed for the purposes of that section:

(a)

section 82 of the Act is modified:

(i)

by omitting subsection (1) and substituting the following subsection:

'(1)

Subject to this Division, all debts and liabilities to which a bankrupt was subject at the date of the bankruptcy are provable in his bankruptcy.'; and

(ii)

by omitting subsection (8) and substituting the following subsection:

'(8)

In this section, "liability" includes:

(a)

compensation for work or labour done; and

(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 the manner of valuation - capable of being ascertained by fixed rules or only as matter of opinion.'"

The text of s 82, so far as is relevant and without the substitute sub-ss (1) and (8), was 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.

...

(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.

...

(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;

(b)

an obligation or possible obligation to pay money or money's worth on the breach of an express or implied covenant, contract, agreement or undertaking, whether or not the breach occurs, is likely to occur or is capable of occurring, before the discharge of the bankrupt; and

(c)

an express or implied engagement, agreement or undertaking, to pay, or capable of resulting in the payment of, money or money's worth, whether the payment is:

(i)

in respect of amount - fixed or unliquidated;

(ii)

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

(iii)

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

The task of construction should be directed to the text set out above but with the substitution of sub-ss (1) and (8) in terms provided in par (a) of r 84. If that be done, attention first is called to the phrase in the substituted sub-s (1) "all debts and liabilities to which a bankrupt was subject at the date of the bankruptcy". In statutory construction, terms are to be taken in their legal sense unless a contrary intention appears ^[F11] . As Pyramid submits, in ordinary legal usage, the term "debt", when not expanded (as in sub-s (1) in its primary form) by such phrases as "certain or contingent" and "present or future", identifies an obligation actually incurred, rather than one subjected to a contingency yet to be fulfilled. The absence from the substitute sub-s (1) of those words of expansion indicates an intention to use the phrase "all debts and liabilities" in its ordinary legal sense. Further, the legislative development of the English law of bankruptcy was such that, before specific provision was made in 1825 by s 56 of the statute 6 Geo IV c 16 ^[F12] , contingent demands could not be proved under a commission of bankruptcy taken out before the contingencies upon which they were made payable had taken effect ^[F13] .

There may be a question of whether a present debt not payable until some time in the future is one of the "debts" identified in the substituted s 82(1) as those "to which a bankrupt was subject at the date of the bankruptcy". Such an obligation is not a "future debt", that is to say a debt only to become payable on the occurrence of an event which has yet to come to pass ^[F14] . In any event, a present engagement to pay a certain sum at some time in the future answers the description of a liability to which the bankrupt was subject at the date of bankruptcy. Such a result is consistent with s 198(3) as it stood at the relevant time. According to that section, for the purpose of enabling a creditor to vote at a meeting called pursuant to s 188, "a debt that is certain but is payable in the future shall be deemed to be payable at the time of the meeting".

The identification in the substituted s 82(1) of debts and liabilities as those to which the bankrupt was subject at the date of bankruptcy controls the meaning of the phrase in par (b) of the substituted s 82(8), "capable of resulting in the payment of, money or money's worth". The capacity referred to is ascertained at the date of bankruptcy. Moreover, in the substituted s 82(8) there is not to be found the reference to dependence on a contingency which appears in the primary form of that sub-section. Again, the intention to contract the statutory scope of the term "liability" is apparent.

Thus par (b) is apt to apply to a liability in respect to an amount yet to be fixed upon a quantum meruit as compensation for work and labour which has been done. There is a presently effective implied engagement, agreement or undertaking to pass money or money's worth. Further, as we have indicated, an engagement to pay a certain sum at some future time is presently "capable of resulting in the payment of ... money", within the meaning of par (b). However, par (b) does not identify a liability yet to arise, such as that of Mr and Mrs Terry upon the guarantee before it had been called upon by Pyramid.

There is an apparently unresolved question as to whether moneys due and payable under an assessment of income tax issued after the passage of a special resolution accepting a composition but in respect of income earned before the date thereof, is a debt payable under an implied engagement or agreement within the meaning of par (b) of the substituted definition of "liability" ^[F15] . The resolution of that particular issue will not detract from the conclusion that a contingent liability is not capable of resulting in payment of money at the date of bankruptcy.

Accordingly, subject to what follows, the submissions of Pyramid upon construction should be accepted.

It is true that, even after the operation of r 84, s 82(4), as picked up by s 243, still provides for the estimation of the value of a debt or liability which is provable in the bankruptcy but which does not "bear a certain value". That phrase is used to identify debts and liabilities which require estimation (i) by reason of their being "subject to a contingency" or (ii) "for any other reason". There is no difficulty with the second of these classes. An action on a quantum meruit would be an example within that class. However, it is submitted by Mr and Mrs Terry that the failure in r 84 to omit from s 82(4) the phrase "by reason of its being subject to a contingency" indicates that s 82(4) in its primary form controls content of the phrase "debts and liabilities" in the substituted s 82(1). For several reasons, that submission should not be accepted.

The first reason, as indicated above, is that s 82(4) does not control the interpretation of s 82(1). Section 82(4) empowers, and indeed requires, the trustee to take certain steps in a bankruptcy administration if there be, as may not always be the case, a debt or liability which is provable in the bankruptcy but does not bear a certain value. However, if s 82 be read as a whole after the operation upon it of s 243 and r 84, contingent debts and liabilities will not be allowed in a composition. To that extent, there will be no occasion at all for the exercise of the authority or performance of the duty conferred by s 82(4). That circumstance of itself does not require a re-interpretation of the substituted s 82(1) so that it will, or may, provide occasions for such an exercise to be performed.

Secondly, and in any event, allowance must be made for the operation of s 243(4). The text is set out earlier in these reasons. Section 243 so operated in respect of the composition by Mr and Mrs Terry that, after taking into account the substitutions made by r 84, a provision of s 82 did not apply in relation to the composition if either or both of two conditions outlined in s 243 applied. The first condition was that the provision was "incapable of application in relation to a composition" and the second was that the provision was "inconsistent with" Pt X.

It is the second condition which is presently material. It operated to take a provision such as s 82(4) out of the operation of s 243 in the circumstances described above. It was incapable of application as to so much of s 82(4) as dealt with the estimation and a value of a debt or liability which did not bear a certain value by reason of it being subject to a contingency. Here there was an incapacity in the sense that no occasion could arise for the exercise of the particular function conferred by s 82(4) upon the trustee of the composition. Therefore, the particular circumstances envisaged by s 243(4) arose, with the result that the particular limit of s 82(4) relating to contingencies was of no application.

The result is that there is nothing in the provisions particularly relied upon by Mr and Mrs Terry, namely the definition of "provable debt" in s 187(2) and the terms of s 82(4), which gainsay the giving to s 82 in its modified form the operation which it otherwise bears on its face.

Some subsidiary submissions remain for consideration.

As indicated earlier in these reasons, s 198(2) operated upon the passing of the special resolution to accept the composition so as to render Pyramid ineligible to vote. Section 238(1) rendered the composition binding "on all the creditors" of Mr and Mrs Terry and s 240(1) provided that the composition operated to release them from "all provable debts" other than those which would not be released upon the discharge of Mr and Mrs Terry from bankruptcy if they had become bankrupt on the day on which the composition was accepted.

However, it is submitted by Mr and Mrs Terry that, although Pyramid was subjected to the disabilities, that subjection would have ceased had Pyramid followed the course open to it under s 239 of the Act. They seek to develop the point as one supporting their construction of the primary provisions of the modified s 82. Section 239 states:

"(1)

A creditor may, within 21 days from the date on which the special resolution accepting a composition under this Part was passed, apply to the Court for an order setting aside the composition and may also apply for the making of a sequestration order against the estate of the debtor.

(2)

If the Court, on such an application, considers that the terms of the composition are unreasonable or are not calculated to benefit the creditors generally or that for any other reason the composition ought to be set aside, it may make an order setting it aside and, if it thinks fit, may forthwith make the sequestration order sought.

(3)

The Court may, if it thinks fit, dispense with service on the debtor of notice of an application under this section, either unconditionally or subject to conditions.

(4)

The making of an application for a sequestration order against the estate of a debtor under this section shall, for the purposes of this Act, be deemed to be equivalent to the presentation of a creditor's petition against the debtor, but the provisions of subsection 43(1), sections 44 and 47, subsections 52(1) and (2) and Part XIA do not apply in relation to such an application."

Certainly, s 239 provides a remedy to those creditors in the minority upon the successful passage of the special resolution. The section also may be utilised by a creditor who voted in favour but now seeks to have the composition set aside because, for example, there was an undisclosed arrangement between the debtor and one or more of the creditors ^[F16] . However, the submissions for Mr and Mrs Terry go further and contend that a creditor denied by s 198(2) an entitlement to vote upon the special resolution may, within 21 days of that special resolution, apply to the court under s 239(1). Such a party is said to be a "creditor" for the purposes of that section. This construction is then said to remove any apparent asperity in a construction of a statute which would release a debtor by virtue of a composition in respect of the adoption of which the creditor had been disenfranchised. The result, the submission concludes, is to confirm that the release was properly pleaded to the action by Pyramid upon the guarantee.

The term "creditor" is used in various senses throughout the Act. It takes its colour from the particular context. An example is s 41(2). This deals with bankruptcy notices and is contained in Div 1 (ss 40-42) of Pt IV. Division 1 is headed " Acts of Bankruptcy ". At the relevant time, s 41(2) provided for the prescribed form of bankruptcy notice, amongst other things, to require the debtor to secure the payment of a judgment debt or sum "to the satisfaction of the Court or the creditor or his agent" (emphasis added). The creditor there referred to is not merely a judgment creditor but the particular species of judgment creditor identified in par (g) of s 40(1). This is a judgment creditor entitled directly to the benefits or fruits of the judgment or order made against the debtor and does not extend to a judgment creditor who is not able to issue execution ^[F17] .

Division 6 (ss 238-243A) of Pt X contains special provisions applicable to compositions. Section 238 takes as the starting point a composition which has been accepted by special resolution at a meeting at which, subject to further provisions of s 198, that section had treated "every creditor" as entitled to vote. No creditor was entitled to vote, otherwise than in respect of the election of chairman, unless particulars of the debt had been made known to the chairman (s 198(4)). A secured creditor might vote in respect of the balance of the secured debt above the estimated value of the security (s 198(6)) or upon surrendering the security (s 198(5)). Creditors who satisfied these requirements no doubt would be creditors entitled to move under s 239 to satisfy the composition. But what of a creditor disentitled under s 198(4) only by reason of accidental and non-culpable failure to have made known to the chairman particulars of the debt? It would be an odd construction of s 239 which foreclosed this remedy to such a party. This suggests that the class of creditors referred to in s 239 is not necessarily co-extensive with those who were entitled to vote at the meeting which passed the special resolution accepting the composition. It is unnecessary to determine these questions.

In the end, whatever be the true construction of s 239, it cannot be determinative of the issue here. This turns upon whether Pyramid had a provable debt within the operation of the modified s 82. If so, the composition effected the release of Mr and Mrs Terry by force of s 240. If there had been no modification of s 82 prescribed as indicated in s 243(1), then contingent debts and liabilities would have been susceptible of proof in the composition. This would have been so even though the contingent creditor had been disentitled by s 198(2) from voting on the special resolution for acceptance of the composition.

One returns to the point that curiosities which may be found in the interrelation between ss 198, 238, 239 and 243 cannot control what otherwise is the operation of the modified s 82 in this case. Even if it be conceded that Pyramid might have moved under s 239, its failure to do so did not render the modified s 82 applicable to it and thereby effect a release under s 240.

There remains for consideration Hardy v. Fothergill ^[F18] , a decision of the House of Lords upon which Mr and Mrs Terry strongly relied. In the present case, in the Court of Appeal ^[F19] , Tadgell JA held that the guarantee taken by Pyramid placed the parties to all intents and purposes in the same position as those in Hardy v. Fothergill . His Honour continued ^[F20] :

"The liability thereunder was accordingly a provable debt within the terms of s 82(1) as modified by r 84, and the omission of the words 'present or future, certain or contingent' from the subsection has no bearing on the matter."

In Hardy v. Fothergill , the successors in title of the lessor of certain premises brought an action for damages for breach of covenant against the successors in title of the lessee. The defendants joined their assignee as a third party, claiming an indemnity under a covenant in the assignment. The third party pleaded a discharge. Proceedings for a liquidation by arrangement of the affairs of the third party had been taken under the procedures established by s 125 of the Bankruptcy Act 1869 (UK) ("the 1869 Act"). Section 125(10) thereof provided that a certificate of discharge of the debtor given by the registrar had the same effect as an order of discharge of a bankrupt ^[F21] .

The issue tendered for the House of Lords was whether the liability in question was one which might have been proved in bankruptcy under the 1869 Act. The assignment containing the covenant of indemnity had been made in 1873, the discharge took effect in 1875 and the breach of covenant did not occur until 1883. The House held that the future and contingent liability of the assignee on the covenant to indemnity was a debt which might have been proved under s 31 of the 1869 Act. However, s 31 was in quite different, and broader, terms to those of the modified s 82(1) with which this appeal is concerned. Section 31 deemed as debts provable in bankruptcy "all debts and liabilities, present or future, certain or contingent, to which the bankrupt is subject at the date of the order of adjudication". The term "liability" was the subject of a lengthy definition in s 31, set out in the speech of the Earl of Selborne ^[F22] . That definition was considerably broader than is the definition of "liability" in the modified s 82(8). In particular, the earlier definition included the words:

"any obligation or possibility of an obligation to pay money or money's worth ... as respects time, present or future, certain or dependent on any one contingency or on two or more contingencies".

The submission of Pyramid that Hardy v. Fothergill does not bear upon the true construction of the modified s 82 should be accepted.

The appeal should be allowed with costs. Paragraph 2 of the order made by the Court of Appeal should be set aside and in place thereof it should be ordered that the appeal by Mr and Mrs Terry be dismissed with costs.