Bankruptcy-Composition-Guarantor-Promisory 1Z0ie given by bankrupt in
exchange for a release by a preferential creditor-Whether guarantor of the
composition is also guarantor of the note-s-Settlement of disputed claim

Guarantee-Bankruptcy-Composition-Liability of guarantor of composition
on a promisory note given by bankrupt /0 secure a release from a prefer-
ential creditor

Negotiable Instrument=Promisory note-Bankrupt-Whether guarantor of
composition is liable on note given by bankrupt to secure release from a
preferential creditor

Khalid Ahmed Suliman's bankruptcy was annulled by the court in
October 1932 upon approval of a composition scheme propounded by the
. bankrupt as guaranteed by the appellant. The property of -the bankrupt
was to be invested in the appellant as trustee. The proceeds of sales
which had already taken place were to he kept in deposit to the order of
the Official Receiver to pay the preferential creditors. The guarantor was
was to pay all ordinary creditors and to balance any deficiency in the as-
sets payable to preferential creditors. The respondent, a preferential credi-

• Court: Owen C.J. and Evans 1.

tor, was awarded £ E.22.780 m/ms by the Official Receiver. The guar-
antor discovered an entry in the bankrupt's books showing that the respond-
ent owed the bankrupt £E.9.580 m Zrns. He showed it to the Official Re-
ceiver and claimed that it should be deducted from the £E.22.780 m/ms
due to the respondent. A dispute arose and the issue was settled by the
respondent discharging the bankrupt in consideration of a prornisory note in
the amount of £E.9.4S0 m/ms, signed by the bankrup: and maturing in
20 days. On default in payment, the respondent brought action against the
bankrupt as maker and against the appellant as guarantor. The district
judge and the High Court found in the respondent's favour against both,
and the guarantor appealed.

Held: The appellant had guaranteed the due carrying out of the
cornposi.ion scheme. He would, consequently, only be liable for deficiency
in the event of there being insufficient funds in the hands of the Official
Receiver to settle the preferential claims. The contract of discharge was
an entirely fresh one and cannot be related back (0 the bankrupt's liability
under the composition, which was the only liability the appellant guaran-
teed.

Revision

January 29, 1934. Owen C.J.: This case is not free from
difficulty.

Khalid Ahmed Suliman's bankruptcy was annulled by the court
on October 10, 1932, under section 46 of the Bankruptcy Ordinance
1928 upon approval of a composition propounded by the bankrupt
and guaranteed by Mutassim Mohammed Osman; the court ordered
that the property of the bankrupt should vest in Mutassim Mohammed
Osman as trustee, and it was further directed, inter alia, that the
proceeds of the sates that had already taken place (amounting to
about £E.130) should be kept in deposit to the order of the Official
Receiver to pay the preferential claims, and that all preferential claims
were to be paid through the Official Receiver.

The Official Receiver'S view of the meaning and effect of this
order was set out in a letter by him to Mutassim Mohammed written
two days later. The material parts of this letter are as follows: "All
assets vest in you as guarantor, and you will be responsible for the
payment to all ordinary creditors on the attached list marked 'A' in
accordance with the terms (of the composition) i.e., 20% in three
instalments to be paid in cash. The preferential creditors shown on the
attached list 'B' will upon proof be paid by me out of the proceeds
of assets realized in this bankruptcy. Should. however. these assets
prove insufficient to settle these preferential claims together with the
court fees and administration expenses, I require an undertaking from

you to refund (sic) any balance which may be required to make up
the deficiency."

It was reasonable to infer from this that when these preferential
claims had been proved and paid by the Official Receiver any balance
remaining in his hands would be available to the trustee for application
to the claims of the ordinary creditors. It was also reasonable to infer
that the words "upon proof' meant that the amounts set out in list
'B' were not co-nclusive and were subject to scrutiny and reduction if
necessary by the Official Receiver himself. Whether or not the' Of-
ficial Receiver was entitled to do this is not a question that is necessary
to answer here. All panics appear to have accepted the situation and
acted in accordance with his views.

Included in list 'B' was the name of the plaintiff, Gaafar Suliman.

The amount against his name was £E.29.780 m/rns. Shortly after the
letter I have quoted was written this sum was reduced by the Of-
ficial Receiver to £ E.22.780 m/ms because he does not appear to
have been satisfied that £ E.7 of the amount claimed was preferential.
This decision was again accepted by all parties. Some time in Novem-
ber of the same year the trustee, Mutassim Mohammed-who for
obvious reasons wished to secure that as large a sum as possible would
be available to him for distribution by him amongst the ordinary
creditors-called the attention of the Official Receiver to an entry in
the bankrupt's books purporting to show that there was due. from
Gaafar Suliman to the bankrupt the sum of £E.9.580 m/ms repre-
senting a loan from the one to the other some years previously. He
claimed that this sum again should be deducted from the £E.22.780
m/ms.

No action appears to have been taken by the Official Receiver,
but the parties continued to quarrel about it amongst themselves,
Gaafar Suliman saying that this sum should not be deducted, Mutassim
Mohammed declaring that it should. The dispute seems to have gone
on till December 4, when, after a conference in which several people
appear to have taken part, the two documents were signed which are
the basis of this litigation.

The first was signed by the creditor Gaafar Suliman and was in
the following terms:

"This is' a discharge between Khalid Ahmed Suliman and
myself relating to the settlement of my account due from him and

I have received all that is due to me and he owes me nothing."
Dated: December 4, 1932

Sgd., Gaafar Sullman.

The second was a promissory note for £ E.9 .450 m/ms payable
20 days thereafter and signed by Khalid Ahmed Suliman, the bankurpt.

On receipt of the discharge, the Official Receiver paid the balance
outstanding of the money in his hands to Mutassim Mohammed. The
difference between £E.22.780 m/ms and £E.9.450 m/rns had been
paid to the creditor in circumstances that are irrelevant to the present
problem. The important point is that the promissory note represented
the amount remaining due to the creditor on the assumption that
£E.22.780 m/ms represented his real provable claim.

Khalid Ahmed Suliman having defaulted in his promise to pay,
Gaafar brought an action against him as maker and against Mutassim
Mohammed as guarantor. The district judge found in his favour
against both defendants and the present application for revision is
one by the guarantor from the decision of the High Court that the
district judge's conclusion was right. The maker of the promissory
note Khalid Ahmed Suliman does not dispute his own liability.

I am unable to follow the reasoning by which the guarantor has
been held liable jointly and severally with the maker of this note.
He guaranteed the due carrying out of a composition by the bankrupt
and nothing else. He was instructed by the Official Receiver that
preferential debts would be paid "upon proof," by that officer, and
that he would only be liable for deficiency in the event of there
being insufficient funds in the hands of the Official Receiver himself
to settle those claims. No sum would be paid to him until those
preferential claims were settled to the satisfaction of the Official Re-
ceiver.

He had called the Official Receiver's attention to an item in
the creditor's account which he, rightly or wrongly, thought should be
deducted from the claim. That contention was never investigated
by the Official Receiver for the simple reason that before any attempt
was made on the part of the creditor to get his money from the sum
then in hand for payment of preferential claims, he (Official
Receiver) received a discharge which not only absolved him from
the necessity of investigating the creditor's claim and putting it to

proof, but also prevented the guarantor from proving his case that
the sum of £E.9.580 m/ms should be deducted from the claim and
asking that a decision be arrived at upon it.

Whether or not his case was a good one IS neither here nor
there. The point is that he had objected to a certain item and
that he was entitled to a decision upon it in order that his proper
liability as guarantor might be finally determined.

Tbe district judge has held that the Dote was given in considera-
tion of the discharge and 1 agree with him. But this seems to me
to conclude the case against the guarantor. It is an entirely fresh
contract for fresh consideration and cannot be related back to the
bankrupt's liability under the composition which 'is the only liability
that Mutassim Mohammed guaranteed, It is not an accessory contract
at all, it is, as I have said, an entirely fresh one, and, in my opinion
it is fair to infer from the circumstance~ of its making that what
bappened was that having regard to the guarantor's insistence about
the disputed item of £E.9.S80 m/rns, the bankrupt persuaded the
creditor to accept his own (the bankrupt's) note of hand for the full
amount in consideration of the creditor's giving the discharge to enable
the guarantor to get on ' .. ith his work of paying the ordinary creditors
as far as possible without his having to put his hand in his own
pocket.

Perhaps it is fair to suggest that there is little real merit in the
guarantor's case, fo: he must have known that a promissory note
payable in 20 da; ..• time by an ex-bankrupt who was absolutely
penniless was scare. ly worth the paper it was written on, but his answer
to it is that all he was concerned with was the insistence on his
contention that tJ is sum of £E.9.580 rn/rns should be deducted,
and that all parties concluded the matter with their eyes open to the
real situation. \nd it may well be so. Furthermore, it is well
settled that the l ghts of sureties should be most jealously guarded by
our courts and tbat claims against them should ~ subject to the
closest proof and scrutiny. This action was brought on a promissory
note, and to succeed making a man liable as guarantor on a promis-
sory note with nothing to support it in writing is a task which is
difficult enough of fulfillment in any circumstances. In the circum-
stances disclosed in this case the task was hopeless.

For the above reasons I am of opinion that the revision should