3.1 Opinion is divided amongst those who have considered the appropriateness of the repeal of the Statutes of Set-off in New South Wales. Some have considered the repeal of the Statutes to be part of a natural progression of procedural reforms1 and that there had been no “blunder” in recommending their repeal.2 However, others have noted the repeal of the Statutes with some regret. Justice Young has considered that the repeal was “perhaps unintended”,3 while Meagher, Gummow and Lehane state that the Statutes may have been repealed “one suspects, unwittingly”.4 Parties to litigation have even contemplated applying for a proclamation to revive the Statutes of Set-off.5
DIFFICULTIES ARISING FROM THE REPEAL OF THE STATUTES OF SET-OFF
3.2 There are a number of specific matters which have been brought to the attention of the Commission which show what are thought to be the undesirable effects of the absence of the Statutes of Set-off in New South Wales.
Matters involving original parties to a transaction
Procedural practicality
3.3 There are some important practical differences between what is possible through set-off and what can be achieved by a cross claim. Most significantly, a cross claim by a defendant, being merely an independent action, can never be a defence to a plaintiff’s claim.6 However, set-off can be used, where available, by a defendant to avoid entry of a summary judgment in favour of the plaintiff, a result which could not be achieved by the defendant raising a mere counterclaim. Set-off would, therefore, prevent unnecessary additional procedures. The Commission is of the view that it is preferable to have such matters dealt with in one action.
Costs
3.4 The non-availability of set-off as provided for by the Statutes of Set-off has meant that in situations where defendants now only have counterclaim available to them, each party may be liable to costs depending on the outcome of their individual claims. Where a plaintiff is successful, that plaintiff is prima facie entitled to costs in his or her claim. And, if the defendant is successful in his or her counterclaim, the defendant is also prima facie entitled to costs in the counterclaim. That is, where the defendant is successful, in effect, in defeating the plaintiff’s claim by counterclaim, he or she is only entitled prima facie to additional costs incurred by reason of the cross-claim. However, when set-off is successfully pleaded as a defence, normally the defendant will be awarded costs.7
Matters involving third parties to an original transaction
Joinder of principal debtors by guarantors
3.5 In situations not involving insolvency set-off,8 where a creditor took action against a guarantor under a contract of guarantee and the Statutes of Set-off allowed for set-off between the creditor and principal debtor, it appears to have been the case that the guarantor could rely on the availability of set-off to reduce his or her liability to the creditor without the need to join the principal debtor to the proceedings.9 The availability of set-off to the guarantor extended only to instances where the debts existing between the parties were liquidated. Set-off was, therefore, not available for a guarantor to exercise against the creditor where the debts between the creditor and principal debtor were unliquidated.10
3.6 With the repeal of the Statutes of Set-off in New South Wales, the availability, albeit limited, of so simple a remedy to a guarantor has been removed. Justice Handley has suggested that the need now to join the principal debtor to proceedings between a creditor and guarantor is one of the unfortunate side effects of the repeal of the Statutes of Set-off.11 This is particularly so where the guarantor is resisting an application for summary judgment by the creditor.12
3.7 Chief Justice Stawell of Victoria in 1867 considered it desirable to allow a guarantor to rely on a right to set-off between a creditor and principal debtor:
If there is a sum which may be set-off in reduction, it must be set-off; for if the setting-off were to depend on the option of either the creditor or the principal debtor, the surety might be compelled to pay the creditor more of the original debt, than the creditor himself could have recovered from the principal debtor.13
3.8 Derham has suggested that the preferred approach is for the guarantor to be able to defend him or herself “on the basis of any defence of set-off available to the debtor”.14 Others, however, have argued that the availability of the right of a guarantor to plead a set-off existing between the creditor and principal debtor is not desirable on a number of grounds. Some have suggested that it is unreasonable, as a matter of policy:
for the guarantor to be able to reduce her or his clear liability on the guarantee by reason of a debt owed by the creditor to the debtor which might be quite unrelated to the principal transaction. Without an assignment of such a claim by the principal debtor to the guarantor, it is difficult to find any justification for allowing the guarantor to invoke the claim against the creditor by way of defence.15
3.9 It has also been argued that there is some difficulty in finding the necessary mutuality, for the purposes of the Statutes of Set-off, between the creditor and guarantor when the mutual debts are in fact between the creditor and principal debtor.16
3.10 The above discussion should, however, be considered in light of the policy of the law to protect guarantors by ensuring that, subject to the right of the creditor to be paid, the burden of relief should fall on those primarily liable, namely the principal debtors.17
Limitation of actions
3.11 Originally, there was a distinction between set-off and counterclaim for the purposes of limitation of actions so that, in the case of counterclaim, the period of limitation was calculated back from the date of the counterclaim and not from the date of the commencement of the principal action, as would be the case with the defence of set-off.18 This situation was altered by s 74 of the Limitation Act 1969 (NSW) under which, for the purposes of limitation of actions, defendants claiming by way of either set-off or counterclaim, are taken to have made the claim on the date on which they became parties to the principal action (usually at its commencement).19 However, Justice Handley has suggested this has left guarantors in a worse position since the repeal of the Statutes of Set-off, because guarantors can no longer plead a set-off which is available to the principal debtor.
Set-off against an assignee
3.12 It is a general rule that an assignee of a chose in action takes subject to all the equities, including such rights of set-off and other defences which may have been available against the assignor. A debtor can, therefore, plead set-off against an assignee of a debt up until such time as the debtor receives notice of the assignment.20 The mutuality necessary for set-off under the Statutes of Set-off would not, in such circumstances, be destroyed.21 Counterclaim, on the other hand, is not available to a debtor against an assignee of a creditor’s claim because while a debtor usually has a cross claim against the creditor he or she generally does not have one against the assignee. Set-off under the Statutes of Set-off may, therefore, be the only remedy available to debtors in such a situation,22 although equitable set-off and other analogous rights may be available in some cases.23 Wood considers this to be the most important reason for the existence of set-off:
In practice, the non-availability of counterclaims against an intervener is by far the most important distinguishing characteristic between set-off and counterclaim: otherwise there is often little difference in the actual result if both claims are for the payment of money.
Administration of estates
3.13 As already noted, one of the reforms implemented by the provisions of the 1729 statute was to allow set-off in situations where either the plaintiff or defendant is the executor or administrator of a deceased person with whom the other party has a mutual debt. This was needed to cover situations in the administration of deceased estates where mutual debts could not be set off because all the assets of the estate had been applied to other debts of higher priority. This was enacted notwithstanding the availability of set-off under insolvency legislation from as early as 1705.24
3.14 Today in New South Wales it is still possible to administer a deceased estate that is insolvent without recourse to the Bankruptcy Act 1966 (Cth).25 The priority of debts established under the New South Wales provisions may, therefore, when combined with the absence of set-off under the Statutes of Set-off, lead to injustice to some creditors of insolvent deceased estates.
THE COMMISSION’S VIEW
3.15 The Commission has decided, in light of the difficulties posed by the repeal of the Statutes of Set-off in New South Wales, to affirm the conclusion in DP 40 that set-off under the Statutes of Set-off be reintroduced.
FOOTNOTES
1. Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980] 2 NSWLR 514 at 522-524 (Glass JA).
2. Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980] 2 NSWLR 514 at 520 (Hutley JA).
3. Wentworth v Wentworth (NSW, Supreme Court, No 3748/89, Young J, 12 December 1994, unreported).
4. R P Meagher, W M C Gummow and J R F Lehane, Equity: Doctrines and Remedies (3rd edition, Butterworths, Sydney, 1992) at para 3704.
5. Under s 11 of the Imperial Acts Application Act 1969 (NSW). The option was not pursued because the re-introduction of the Statutes may have only had a future effect: Southern Textile Converters Pty Ltd v Stehar Knitting Mills Pty Ltd [1979] 1 NSWLR 692.
6. See Hutley JA in Stehar Knitting Mills Pty Ltd v Southern Textile Converters Pty Ltd [1980] 2 NSWLR 514 at 519.
7. The effect of set-off on costs was noted by Morris LJ in Hanak v Green [1958] 2 QB 9 at 16. See also P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at para 6-42.
8. The availability of insolvency set-off would mean that the guaranteed debt is extinguished to the extent of the set-off which occurs automatically on the date of liquidation: S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 641. See also Langford Concrete Pty Ltd v Finlay [1978] 1 NSWLR 14 at 19.
9. J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 551 suggest that Bechervaise v Lewis (1872) LR 7 CP 372 especially at 377 and Murphy v Glass (1869) LR 2 PC 408 provide some support for this proposition. But see S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 649-652.
10. Cellulose Products Pty Ltd v Truda (1970) 92 WN (NSW) 561. The position in England may be different: see National Westminster Bank plc v Skelton [1993] 1 All ER 242 at 250-251.
11. K R Handley, Letter to the Chairman of the NSW Law Reform Commission (28 February 1994) at 5 (attachment). Justice Handley has also suggested that, although no authority exists on this point, where there has been a voluntary release of a liquidated claim by the principal debtor, a guarantor could, before the repeal of the Statutes of Set-off, have relied upon set-off of that claim.
12. J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 549.
13. Murphy v Glass (1867) 4 WW & a’B (L) 199 at 203. The case was affirmed on appeal to the Privy Council which considered the set-off point immaterial: Murphy v Glass (1869) LR 2 PC 408 at 418.
14. S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 642.
15. J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 552.
16. J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 552.
17. See S Rowlatt, Rowlatt on the Law of Principal and Surety (4th edition, Sweet & Maxwell, London, 1982) at 131; and J O’Donovan and J Phillips, The Modern Contract of Guarantee (3rd edition, LBC Information Services, Sydney, 1996) at 533-534.
18. See McDonnell & East Ltd v McGregor (1936) 56 CLR 50 at 57 (Dixon J; McTiernan J agreeing).
19. For a discussion of the effect of the equivalent English provision (s 28 of the Limitation Act 1939 (Eng)) see Henriksens Rederi A/S v T H Z Rolimpex “The Brede” [1974] QB 233 at 245-247.
20. Roxburge v Cox (1881) 17 ChD 520 at 526 (James LJ); Edward Nelson & Co Ltd v Faber & Co [1903] 2 KB 367 at 375 (Joyce J). See also R P Meagher, W M C Gummow and J R F Lehane, Equity: Doctrines and Remedies (3rd edition, Butterworths, Sydney, 1992) at para 699. For a discussion of a number of English cases involving set-off by a debtor after an assignment of a debt see Business Computers Ltd v Anglo-African Leasing Ltd [1977] 1 WLR 578 at 583-585.
21. The requirements to maintain set-off are summarised by P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at para 16-38. In Canada, however, it has been held that any assignment destroys the necessary mutuality so that the assignment of a debt prevents a debtor from raising set-off against an assignee: Holt v Telford (1987) 41 DLR (4th) 385 at 394.
22. P R Wood, English and International Set-off (Sweet & Maxwell, London, 1989) at para 6-35 and 14-83.
23. Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd (1997) 42 NSWLR 462 at 481-484. See also S R Derham, Set-off (2nd edition, Clarendon Press, Oxford, 1996) at 573.
24. 4 & 5 Anne c 17 (1705).
25. See Wills Probate and Administration Act 1898 (NSW) s 46C(1) and Sch 3 Pt 1. Administration in accordance with the Wills Probate and Administration Act 1898 (NSW) may be undertaken because one of the grounds for bringing a petition under the Commonwealth regime is absent, or there may simply be no creditor who wishes to bring a petition: New South Wales Law Reform Commission, Uniform Succession Laws: Administration of Estates of Deceased Persons (Discussion Paper 42, 1999) at para 15.12-15.15.
