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Taylor's Refrigeration Pty Ltd v Syborn [1981] PNGLR 460 (30 October 1981)

Papua New Guinea Law Reports - 1981

[1981] PNGLR 460 - Taylor's Refrigeration Pty Ltd v Brian Syborn 

[1981] PNGLR 460

N325(L)

PAPUA NEW GUINEA

[NATIONAL COURT OF JUSTICE]

TAYLOR’S REFRIGERATION PTY. LIMITED

V

BRIAN WYBORN

Waigani

Pratt J

12 October 1981

30 October 1981

ASSIGNMENT - Debt or thing in action - Effect of assignment - Equitable assignment only till notice given - Effect of failure to give notice - Proceedings to recover debt - Non-joinder of assignee at time of assignment - Subsequent notice effective to transfer legal interest in debt - Proceedings rendered nugatory - Mercantile Act 1953, s. 7.

Section 7 of the Mercantile Act 1953 provides that upon “express notice in writing” of assignment of a debt being given to the debtor “the legal right to the debt or thing in action” together with all legal and other remedies will pass to the assignee.

On 13th June, 1980 T as plaintiff instituted proceedings against W as defendant to recover a debt.

On 8th August, 1980, the plaintiff T assigned the debt to M.

On 4th September, 1980, W counterclaimed for unliquidated damages.

On 4th September, 1980, M gave and W received notice of the assignment.

In proceedings by M as applicant seeking to be substituted as plaintiff in the proceedings against W and to have the claim and counterclaim split into two separate actions.

Held:

(1)      Until the requirements of s. 7 are fulfilled the assignee has only an equitable assignment and an equitable interest in the debt or thing in action;

Marchant v. Morton, Down & Co. [1901] UKLawRpKQB 151; [1901] 2 K.B. 829 at pp. 831 to 832;

Holt v. Heatherfield Trust, Ltd. [1942] 2 K.B. at p. 4; and

Westerton, In re Public Trustee v. Gray [1919] 2 Ch. 104 at p. 111, applied.

(2)      On receipt by the debtor of the notice complying with s. 7, the assignee acquires the absolute legal interest in the debt or thing in action and the assignor no longer has any interest therein at law or in equity, and cannot sue for it;

Read v. Brown [1888] UKLawRpKQB 186; (1888) 22 Q.B.D. 128 at p. 132.

(3)      Before legal proceedings are instituted by the assignee of a debt or thing in action, notice of the assignment to the debtor must be given and failure to give such notice is fatal to the action;

(4)      Accordingly, on 4th September, 1981, when notice of assignment was given, both the legal and equitable interests in the debt vested in M and T was left without any legal standing in the action in relation to which M could be substituted as a party;

(5)      Semble M should have been joined as a party to the proceedings at the time of assignment, thus avoiding the need for notice.

(6)      Furthermore, as from 4th September, 1981, W no longer had a counterclaim against T and was left with his counterclaim for damages in complete limbo and incapable of solution under the National Court Rules.

Notice of Motion.

This was a notice of motion by a person not a party to the proceedings seeking a division into separate actions of the plaintiff’s claim and the defendant’s counterclaim, and seeking to be substituted as plaintiff pursuant to O. 16 rr. 3 and 4 of the National Court Rules.

Counsel:

D. Francis, for the applicant.

P. Dempsey, for the plaintiff.

G. Lay, for the defendant.

Cur. adv. vult.

30 October 1981

PRATT J:  I have before me a notice of motion on behalf of John Howard MacArthur requesting a division into separate actions of the plaintiff’s claim and the defendant’s counterclaim and secondly, the substitution of “MacArthur” in place of “Taylor’s Refrigeration” as plaintiff in the present writ of summons under O. 16 rr. 3 and 4. Obviously the applicant is not a party to those proceedings.

The facts of the matter appear to me to be as follows. On 10th April, 1980, MacArthur entered into an agreement to sell his shares in Jem Investments Pty. Ltd. to Carpenters New Guinea Company Ltd. Jem was the sole shareholder in the plaintiff company, Taylor’s Refrigeration Pty. Ltd., at the time. Under cl. 3 the agreement was to be completed by 30th June, 1980, but in fact was not finalized until 8th August, 1980. The agreement also stipulates that such completion shall be, subject to the conditions set out within the agreement, effective from 24th March, 1980. On 8th August therefore, the effective date of completion of the agreement became 24th March, 1980. Clause 10 of the agreement provided that MacArthur would indemnify the company against all liabilities not declared in the company’s accounts because of any claims or demands made against the company after settlement date, that is after 8th August, 1980. It also should be noted in cl. 10 that the indemnity refers to claims etc. after settlement date “and not fully disclosed herein ... or by any other books or records of the company exhibited to the purchaser on completion”. MacArthur would have been fully aware of the writ which I shall mention in a moment, as at the date of the issue of the writ Taylor’s was the company which contracted with the defendant to carry out certain works and to whom the defendant was indebted for payment of those works. The term “company” covered both Jem Investments and Taylor’s Refrigeration under cl. 21.

Clause 23 establishes that on the settlement date the vendor will purchase from the company—that is both Taylor’s and Jem—all trade debts of the company then outstanding, provided that on the date of settlement the purchaser will cause the company to assign such of the trade debts as shall remain unpaid to the vendor.

On 13th June, 1980, Taylor’s instituted a writ for debt against one of the trade debtors. At this stage the solicitors for Taylor’s and for MacArthur were Messrs. Francis & Francis. That action is still “alive” but from 24th August, 1981, the solicitors for Taylor’s in the present action changed to Gadens.

On 4th September, 1980, the defendant served his defence on the company which contained a counterclaim for unliquidated damages. However in the interim, namely on 8th August, the debt from the defendant to the company was assigned to MacArthur. No notice of this assignment however was served on the defendant debtor until 4th September, 1981, and thus the assignment did not come within the terms of s. 7 of the Mercantile Act 1953, until that date.

There is no evidence that the company did not have any power to make such an assignment. Indeed cl. 23 provides for it. Of course the agreement was between MacArthur and Carpenters but Carpenters have not said that Taylor’s acted without their knowledge or authority. If that were so, the position may be different but it is not necessary for me to decide. I assume that Taylor’s acted in pursuance of the agreement between MacArthur and the sole shareholder of Taylor’s, that is Carpenters. It is well to point out here however that an agreement for sale of shares is not the same thing as an agreement for sale of goods or chattels. As Gower says in The Principles of Modern Company Law 3rd ed. (1969), at p. 395:

“... for shares are not like goods and the property in them does not pass as a result of the contract. In this respect they more closely resemble land; just as the contract of sale of land requires to be completed by a conveyance, so a contract for the sale of shares requires to be completed by transfer.”

At the time of instituting the proceedings, the shareholding in Taylor’s was still owned by Jem whose shares were owned by MacArthur. The company was therefore prima facie entitled to institute the proceedings, and MacArthur should have been aware of the consequences.

It seems to me that under O. 16 rr. 3 and 4, of the National Court Rules on 8th August, 1980, MacArthur should have applied to have been joined as a plaintiff in the present writ. He could not, as will become apparent, apply to be substituted as plaintiff for he had only an equitable assignment and not a legal assignment.

If the assignment were of a legal chose in action, for example a debt, as opposed to an equitable chose in action, for example an interest in a trust fund, the failure to comply with the provisions of s. 7 of the Mercantile Act 1953 would not prevent the assignee from bringing court action to recover the debt. Section 7 of our Mercantile Act is in exactly the same terms as s. 136 of the United Kingdom Law of Property Act 1925 which reflects the original statutory provisions governing assignment of choses in action brought in the United Kingdom under the Judicature Act of 1873. Section 7 requires a written form of assignment of which “express notice in writing” must be given to the debtor. Provided the requirements of the Act are complied with, then there is under s. 7(1)(a) a transfer from the date of receipt of the notice of “the legal right to the debt or the thing in action” together with all legal and other remedies. Lack of notice however is not fatal to the assignee’s right to bring proceedings though it does have some important consequences. Provided that the assignment still complies with the requirements of equity, and in this case I so hold, there is nevertheless a valid assignment of a chose in action upon which an equitable suit may be brought. However, if the assignee does sue he must join the assignor in the action. For example see Performing Right Society, Ld. v. London Theatre of Varieties, Ld.[dccxliv]¹. See also Tolhurst v. Associated Portland Cement Manufacturers[dccxlv]². If however it is the assignor who commenced proceedings, then he has an obligation to join the assignee (see Walter & Sullivan Ld. v. J. Murphy & Sons Ld.[dccxlvi]³) where Parker L.J. says at p. 588:

“In the present case, however, it is the assignor who is seeking to recover, and in his own right, and it is strongly urged that he is entitled to do so without joining the assignee. We think that that is an impossible contention. The whole object of the notice to the debtor is to protect the assignee. After receipt of that notice the debtor pays the assignor at his peril.”

A little further on at p. 589 his Lordship goes on to point out that unless the assignee was joined—

“The court, however, will not give judgment for the plaintiffs when there is an admitted interest outstanding in (the assignee), and unless and until the authority to pay (the assignee) is withdrawn, or (the assignee) are joined in the proceedings, judgment cannot be given.”

It is obvious that this must be so, for until notice is served or until all requirements of the Act are performed, the legal title does not pass from the assignor to the assignee—(see for example Helmore’s Personal Property and Mercantile Law in N.S.W., 7th ed. (1965) at p. 215 and Marchant v. Morton, Down & Co.[dccxlvii]⁴). Thus on 8th August, 1980, the equitable title was transferred by the plaintiff to MacArthur whilst the plaintiff still retained the legal title. Although it had, at the actual time of instituting the proceedings, both the legal and equitable title, the company transferred part of that interest to another party several months after causing the writ to issue. It is not without significance that at institution of the writ and at the time of assignment the plaintiff company was represented by the same solicitors and indeed has been up until the notice of change of solicitor was filed on 31st August, 1981.

Atkinson J. in Holt v. Heatherfield Trust, Ld.[dccxlviii]⁵ examines several of the judgments in Performing Right Society, Ld. v. London Theatre of Varieties, Ld.[dccxlix]⁶ and in dealing with the contention that no right of action for an infringement of copyright could arise without joining the composer as plaintiff or defendant in the action, his Honour quotes Lord Finley thus:

“The society became entitled to sue in respect of the interests so acquired, but their right to sue is subject to the general rule that the owner of the legal estate should be joined as a party.”

He goes on to underline Lord Sumner’s point that though the matter had been raised and the plaintiffs given an opportunity to join the legal owner, they refused to do so. Thus the court was being asked to deal with a matter in the absence of the legal owner and therefore could not give the relief requested. This the court refused to do. Atkinson J. goes on at p. 5 to make an observation which is particularly pertinent to the present problem, where one of the parties who should be before the court is not joined:

“It is elementary, I think, in such a case, because even in a student’s book (Snell’s Equity, 22nd ed., p. 56) it is laid down quite clearly: ‘But, if the assignment of a legal thing in action is only equitable, the original creditor must usually be joined, as plaintiff if he consents, if not, as defendant.’ ”

His Honour then deals with another point which is again relevant to this case in the next paragraph:

“Therefore, it seems beyond argument that the absence of notice does not affect the efficacy of the transaction as between assignor and assignee.”

Finally I refer to the ruling by his Honour at p. 14 of the report:

“Bearing in mind these two results, first, that the assignment was a perfectly good equitable assignment, which could be turned into a legal assignment at any moment by giving notice, and which without notice, the assignee could have sued upon so long as he joined the assignor as defendant, ... it seems to me perfectly clear that the plaintiff’s title is a good one, and I so decide.”

Another example that failure to give notice does not affect the creation or continuance of an equitable assignment between assignor and assignee, is Westerton, In re Public Trustee v. Gray[dccl]⁷. Reference may also be made to Helmore on Personal Property, 5th ed., (1947) p. 274, and Snell’s Principles of Equity, 27th ed. (1973), p. 77.

Leaving aside for the moment cl. 3 of the agreement between MacArthur and Carpenters New Guinea Company Ltd., the position on 3rd September, 1981, (being the day before the notice of assignment was sent to the debtor, and for the purpose of this application also received by the debtor) was as follows. At the time of instituting the writ the present plaintiff held both the legal and equitable interests in the debt owing from the defendant to the company. On 8th August, 1980, the equitable interest in that debt was assigned from the plaintiff to MacArthur. At that stage MacArthur should have made application to the court to be joined as plaintiff or, alternatively, the present plaintiff should have joined MacArthur. On 4th September however, when notice was sent and nominally received by the defendant debtor, what was an equitable assignment then became an assignment at law under s. 7 of the Mercantile Act. Consequently Taylor’s Refrigeration no longer has any continuing interest in the matter—it has neither an interest in equity nor at law, the debt having become assigned absolutely by receipt of the notice.

An excellent illustration of the various interests involved and their legal consequences may be found in a dissenting judgment (but not on this point) of Evatt J. in McIntosh v. Shashoua[dccli]⁸. The appeal involved a petition in bankruptcy based on an assignment of a common law judgment debt. One must bear in mind that at this time there was a strict separation between common law and equity in New South Wales. His Honour says at p. 515:

“... The Permanent Trustee Co. was still entitled to sue him at law on the judgment, but Mrs. Shashoua was entitled to institute a suit against him in the Supreme Court of New South Wales in its equitable jurisdiction. In the latter case, it was necessary for her to join the Trustee Co. as a party to the suit, in order that it should also be bound by the decree and prevented from suing at law for the debt.”

Where there is a division between equity and common law, the distinction between an equitable assignment and a legal assignment is thrown into much greater relief and is far more apparent than in those jurisdictions where the two systems are merged. It is therefore worth bearing in mind his Honour’s further remarks at pp. 515-16:

“In these circumstances it is not true to say, without qualification, that, on March 2nd, merely by reason of the deed of assignment, McIntosh ‘owed’ a ‘debt’ of £99 2s. 2d. to Mrs. Shashoua. No doubt the decree of the Equity Court, when made, would have ordered McIntosh to pay Mrs. Shashoua that sum of money. And, when made, it might possibly be described as an ‘equitable debt’ owing by him to her. Of this phrase, Jessel M.R. said in Ex parte Jones; In re Jones ((1881) [1881] UKLawRpCh 176; 18 Ch. D. 109, at p. 120):— ‘I use the words “legal debt” advisedly; of course there can be no other debt than a legal debt, but the inaccurate phrase “equitable debt” has crept into the books. But this liability is not really a debt at all, it is only a liability in equity to pay a sum of money, and whenever a debt is required by law in order to found any proceedings, this equitable liability will not be enough.’ ”

I do not think that cl. 3 of the agreement stating that the effectiveness of the agreement dates back to 24th March has any real effect on the legal issues before me. The essential thing is that whether the date is taken as August or March 1980, neither assignor nor assignee made any attempt to join the other on 8th August.

Although the giving of notice does not have any effect on the relationship between assignor and assignee, it does have a considerable effect when either of those parties institutes proceedings before giving notice. In Starke’s Assignments of Choses in Action in Australia at p. 46, we find the following:

“The debtor or fundholder must of course receive notice before payment by him, or before action brought by the assignee.”

Returning to Atkinson J. in Holt v. Heatherfield Trust, Ld.[dcclii]⁹, his Honour says at p. 4:

“Until notice be given the assignment is an equitable assignment, but it is an assignment which requires nothing more from the assignor to become a legal assignment. The assignee may himself give notice at any time before action brought, and further than that, even before notice, he may sue in his own name provided that he makes the assignor a party to the action, as plaintiff if he consents, and as defendant if he does not consent.” (Emphasis mine.)

A like view is taken by Sargant J. in Westerton’s case[dccliii]¹⁰ where his Honour says at p. 111:

“Another point which I ought to mention is that no notice of the assignment was given to the bank at the time; but it was not disputed by Mr. Paterson that the mere omission to give notice at the time was of no consequence so long as notice was given before action brought.”

The same principle was taken as axiomatic by Roskill J. in Compania Colombiana De Seguros v. Pacific Steam Navigation Co.[dccliv]¹¹ where his Honour says at p. 129, when dealing with facts which established that notice was given after the suit had begun:

“Antecedent notice to the debtor before action brought is clearly required by the proper law of the debt, namely, English law.”

It may be said that the authorities which I have examined, together with the passage from Starke’s text, deal with notice being given by an assignee whereas in the present case it was the assignor who commenced proceedings prior to notice being given, or who failed to join with the assignee once the assignment was operative on 8th August, 1980. In my view however, the case I have earlier quoted of Walter & Sullivan Ld. v. J. Murphy & Sons Ld.[dcclv]¹² is adequate authority, if authority were needed at all, for justifying the necessity in the assignor likewise giving notice where suit is going to be instituted by him. The giving of notice in the above case however did not convert the equitable assignment into a legal one because the assignment was for part only of a debt.

In the present case when notice was eventually given and received in September 1981, it converted a mere equitable interest in a debt to interests comprising both legal and equitable and thus converted an equitable assignment into a legal assignment under s. 7 of the Mercantile Act. The authorities make it clear that before any legal proceedings are instituted, be they equitable or at common law, notice of the assignment to the debtor must be given and a failure to give such notice is fatal to the action. The legal right of the plaintiff company disappeared on that date. It now has no basis to sustain the present proceedings. As is pointed out in Read v. Brown[dcclvi]¹³, where an assignment is perfected under the Act the thing in action no longer belongs to the assignor, and he cannot sue for it. The delay in giving the notice for a period of thirteen months after the assignment has no effect on the legal issues though it may well result in an adverse ruling on costs.

One final matter however must be taken into account in coming to a determination as to what is the legal situation and what future action should be taken. The defendant of course, having no notice from either assignee or assignor of any assignment, delivered his defence and counterclaim to the plaintiff’s solicitors on 4th September, 1980,—that is almost a month after the assignment from the plaintiff to the present applicant. This defence is by way of set-off and counterclaim. Put in its simplest terms, the plaintiff says he carried out certain works for the defendant who failed to pay for such work and labour. The defendant replies that not only did the plaintiff overcharge for the work done but that the work done was unsatisfactory, unworkmanlike and as a result he suffered great damage. The debt claimed by the plaintiff amounts to K6,441.60 whereas the counterclaim sues for damage in the sum of K100,000. The situation is not unlike that which arose before the House of Lords in Government of Newfoundland v. Newfoundland Railway Co.[dcclvii]¹⁴ where their Lordships say at p. 212:

“The two claims under consideration have their origin in the same portion of the same contract, where the obligations which gave rise to them are intertwined in the closest manner. The claim of the Government does not arise from any fresh transaction freely entered into by it after notice of assignment by the company. It was utterly powerless to prevent the company from inflicting injury on it by breaking the contract. It would be a lamentable thing if it were found to be the law that a party to a contract may assign a portion of it, perhaps a beneficial portion, so that the assignee shall take the benefit, wholly discharged of any counter-claim by the other party in respect of the rest of the contract, which may be burdensome.”

Their Lordships then continue at p. 213 to say:

“Unliquidated damages may now be set off as between the original parties, and also against an assignee if flowing out of and inseparably connected with the dealings and transactions which also give rise to the subject of the assignment.”

To use the words of Crossley Vaines on Personal Property, 5th ed., (1973) pp. 267 to 268:

“... the availability, against an assignee, of rights of defence or counter-claim against the assignor is subject to the general rule that after notice of an assignment of a chose in action the debtor cannot by payment or otherwise do anything to take away or diminish the rights of the assignee as they stood at the time of the notice. And so no set-off or counter-claim will be allowed in respect of a debt arising between the original parties subsequently to the notice of the assignment, unless such debt flows out of, and is inseparably connected with, the dealings and transactions which also give rise to the subject of the assignment.”

In my view there is no doubt that the case presently before me is one in which the counterclaim is inseparably connected with the original contract entered into between the plaintiff company and the defendant. But what the applicant in the present notice of motion is endeavouring to achieve is a separation of the action for debt from the counterclaim by the defendant on the plaintiff company alleging shoddy workmanship, and in the process has left the plaintiff without any legal basis and the defendant without recourse to his counterclaim. I do not think it can be for one moment contemplated that MacArthur is a stranger to this action as Mr. Dempsey would have it. It is not a matter of going behind “the corporate veil”. The facts are that MacArthur and the plaintiff company both held separate interests in the one debt, that these interests came into existence before the defence and counterclaim were served upon the plaintiff, that at that stage the solicitors on the record for the plaintiff were Francis & Francis and at the same time were solicitors for the applicant, who was the sole shareholder in the company which held all the shares in the plaintiff company, whose debts the applicant had taken over on assignment.

The existence of the counterclaim however highlights the impossible situation created by the applicant in not joining with the plaintiff in the original action. Whilst a party cannot avoid the consequences of a counterclaim by transferring part of his interest to another, this however does not end the defendant’s difficulties for at par. 15/2/7 of The Supreme Court Practice 1976, Vol. 1, we find the following:

“If a debt be assigned, the debtor may in certain cases set-off or counterclaim against the assignee a debt due from the assignor to himself; but if the amount of such set-off or counterclaim exceed the amount of the debt assigned, the defendant can recover nothing from the assignee; he must sue the assignor for the balance.”

Amongst the cases quoted are Young v. Kitchin[dcclviii]¹⁵, where in a short judgment Baron Cleasby at p. 131 says:

“The form has been followed of a counterclaim in an ordinary case, where the plaintiff does not sue as the assignee of a chose in action, and where the defendant is entitled to judgment for the balance of his counterclaim if it overtops that of the plaintiff. But this is not the case here; the defendant has no claim to recover anything against the plaintiff; he only meets the plaintiff’s claim by a counterclaim of damages arising out of the same contract, and this ought to appear upon his defence and counterclaim.”

Perhaps the matter is set out a little more clearly by James L.J. at p. 526 of the report on Roxburghe v. Cox[dcclix]¹⁶:

“Now an assignee of a chose in action, according to my view of the law, takes subject to all rights of set-off and other defences which were available against the assignor, subject only to this exception, that after notice of an assignment of a chose in action the debtor cannot by payment or otherwise do anything to take away or diminish the rights of the assignee as they stood at the time of the notice.”

Even more relevant to the present facts before me are the words of Kennedy L.J. in Stoddart v. Union Trust, Limited[dcclx]¹⁷:

“There seems to be no doubt, upon the authority of the cases which have been cited to us ... that, where there is a claim arising out of the contract itself under which the debt arises, and the claim affects the value or amount of that which one of the parties to that contract has purported to assign for value, then, if the assignee subsequently sues, the other party to the contract may set up that claim by way of defence as cancelling or diminishing the amount of that to which the assignee asserts his right under the assignment.”

Had the assignor and assignee been joined on 8th August, 1980, with due notice served on the debtor of such joinder, and were the debtor successful in his defence, the defendant would have the opportunity to obtain judgment against the assignee MacArthur for the whole of the amount of the debt by way of set-off with damages being awarded against the assignor, being the party with whom the defendant entered into the original contract of employment and whose work resulted in damage to the defendant. However, I have ruled that on 4th September, 1981 both the legal and equitable interests in the debt vested in the assignee. I have further ruled that following this merger of the two interests, the plaintiff company was left without any legal standing in the action. It therefore follows that the defendant has no longer a set-off against the plaintiff company but is left with his counterclaim for damages in complete limbo. Consequently the defendant’s predicament apart from any other factor, must point to the quite untenable situation which has been created by the parties to the assignment, and more particularly by the assignee, especially when one bears in mind that none of this legal entanglement is in any way the doing of the defendant.

The applicant has drawn attention to the provisions of O. 16 rr. 3 and 4 of the National Court Rules. These rules are procedural and they can only be brought into operation where there is a legal basis for so doing. It is clear from what I have already said that no such legal basis exists in the present case. The action has become defunct. If the assignor and assignee had been joined at the time of assignment, notice would not have been required. If notice had been given before the action, joinder would not have been required because the legal and equitable interest would have vested in the same party. The facts of this case highlight the reason behind the law. If there had been a joinder whilst the interests were still separate, the defendant’s defence and counterclaim would have been effective to permit a trial of all issues and permit the court to bring down a verdict which would bind all interested parties. If notice had been served before action brought, the defendant would then be in a position to defend the debt and establish a set-off to the amount of that debt, and bring a separate action for his counterclaim—no doubt seeking to join the two actions. As neither of these courses has been taken, the plaintiff is left without any basis for continuing and the defendant is deprived of both his defence of the debt against the plaintiff and his counterclaim because the plaintiff to the present action has suddenly evaporated. No amount of patching up can remedy the situation. It is beyond repair.

I therefore dismiss the application with costs to be the subject of submission by counsel. As there is no further application before me, I cannot strike out the action, but I would be prepared to deal with the matter as one of first priority.

Application dismissed with costs.

Solicitors for applicant: Francis & Francis.

Solicitors for plaintiff: Gadens.

Solicitors for defendant: Young & Williams.