Recent developments on enforcement of director guarantees and voidable transactions

What you need to know

Mizuho Bank Ltd v Ackroyd [2016] NSWSC 1148

• The Corporations Act 2001 (Cth) stay on the enforcement of a guarantee given by a director of a debtor company that has gone into voluntary administration does not prevent the continuation of proceedings against the director under the guarantee commenced before the company went into administration.

Sydney Recycling Park Pty Ltd v Cardinal Group Pty Ltd (in liq) [2016] NSWCA 329

• New claims for recovery of voidable transactions can be added to an existing claim that was made within the stipulated time, even though that time has expired, provided that the new claims arise from the same (or substantially the same) facts as those giving rise to the original claim.

What you need to do

• Ensure that proceedings under a guarantee are commenced before a debtor company enters into voluntary administration, to avoid being subject to a stay on enforcement.
• Be aware that new voidable transaction claims can be added to an existing claim after the expiry of the stipulated time if the original claim was filed within the stipulated time and the new claims are based on substantially the same facts.

Mizuho Bank Ltd v Ackroyd

On 19 August 2016, Hammerschlag J handed down his decision in Mizuho Bank Ltd v Ackroyd [2016] NSWSC 1148. He held that s 440J of the Corporations Act 2001 (Cth) (the Act) does not impose a stay on proceedings under a guarantee against a director guarantor that are commenced before the company enters into voluntary administration.

The key facts

Mizuho Bank Ltd (the plaintiff) had lent money under a facility agreement to National Plant & Equipment Pty Ltd (the company). The defendant, who was a director of the company, had guaranteed the company's obligations under the facility. The plaintiff commenced proceedings under the guarantee on 10 June 2016. The company appointed administrators on 14 July 2016.

The defendant subsequently filed a notice of motion seeking a stay of the proceedings under s 440J of the Act.

The legal issues

Paragraph 440J(1)(a) of the Act states that during the administration of a company, "a guarantee of a liability of the company cannot be enforced, as against: (i) a director of the company who is a natural person", except with the Court's leave.

Paragraph 440J(1)(b) goes on to say that "a proceeding in relation to such a guarantee cannot be begun against such a director".

The key question was whether s 440J(1)(a) covered the continuation of proceedings commenced before the company entered into administration. His Honour found that it did not.

The issue had previously been directly considered only in Bank of Western Australia Limited v Clift (2010) 80 ACSR 163; [2010] QSC 366, where her Honour Justice Wilson found, on an unopposed application for summary judgement, that s 440J did not apply to proceedings commenced prior to the administration.

A number of statutory interpretation and policy considerations were canvassed by the parties in submissions, and considered by Hammerschlag J in dismissing the motion.

Statutory interpretation

• The commencement of proceedings invokes the Court's jurisdiction. For a statute to be interpreted as limiting this jurisdiction there must be a clear intention that it do so. Section 440J does not evince a clear intention of this kind.
• Similarly, a clear intention must be expressed before a statute will be interpreted as depriving a party of its common law rights, including the right to sue to vindicate a chose in action. The section does not evince a clear intention of this kind either.
• There is a significant distinction between s 440J(1), which refers only to proceedings being begun, and other sections of the Act that restrict legal proceedings and that specifically refer to proceedings being both begun and continued.

Policy considerations

• The purpose of s 440J is to ensure that guarantor directors are not discouraged from appointing an administrator by the prospect of liability under the guarantee being triggered by the appointment. The potential for discouragement is less where such a proceeding has already begun.
• Conversely, finding that s 440J does stay proceedings commenced prior to the administration may encourage company directors to appoint an administrator to protect their own personal position.
• Unlike proceedings against the company or the administrators, proceedings against a guarantor do not have a direct effect on the administration. Accordingly, the policy considerations that favour a moratorium on the former do not apply to the latter.

The outcome and its implications

For these reasons, Hammerschlag J dismissed the motion, finding that the Court's leave is not required for the continuation of proceedings against a guarantor director commenced before the company goes into voluntary administration.

The practical implication of the decision is that, where possible, proceedings under a guarantee should be commenced early, to avoid the stay on commencing proceedings that would apply once the company enters into voluntary administration.

Sydney Recycling Park Pty Ltd v Cardinal Group Pty Ltd (in liq)

On 29 November 2016, the New South Wales Court of Appeal handed down its decision in Sydney Recycling Park Pty Ltd v Cardinal Group Pty Ltd (in liq) [2016] NSWCA 329. The Court allowed new transactions to be added to an application under s 588FF of the Act for orders concerning voidable transactions.

The key facts

Cardinal Group Pty Ltd (Cardinal) provided waste management and skip bin services. Sydney Recycling Park Pty Ltd (SRP) supplied tipping services to Cardinal.

On 11 December 2014, Cardinal and its liquidators filed an originating process seeking orders pursuant to s 588FF to recover payments totalling $280,000 to SRP, on the basis that they constituted unfair preferences pursuant to s 588FA, insolvent transactions pursuant to s 588FC and voidable transactions pursuant to s 588FE.

That application was made within the time stipulated in s 588FF(3).

On 8 September 2015, Cardinal and its liquidators filed a notice of motion seeking leave to file an amended statement of claim to add:

• three further transactions allegedly constituting unfair preferences, insolvent transactions and voidable transactions, thereby increasing the amount claimed to $340,000
• a new allegation regarding a set-off arrangement that, if allowed, would, together with the amount claimed for the three further transactions, increase the total claimed to $494,000.

Both matters arose from the same facts as those giving rise to the existing cause of action.

The application for leave was made after the expiry of the time specified in s 588FF(3).

The legal issue

The question was whether the time limit in s 588FF(3) prevented the application for leave to amend the original claim.

Statutory interpretation

Under the Judiciary Act 1903 (Cth) s 79, State law governs procedural issues such as amendment of an application, unless the Constitution or the laws of the Commonwealth otherwise provide.

The question was whether s 588FF(3) 'otherwise provided'. The Court held that it did not, as it was concerned with the time within which proceedings must be commenced, not with the amendment of proceedings commenced within time. Amendment of proceedings was therefore to be determined according to State law, in accordance with the Judiciary Act.

Accordingly, ss 64 and 65 of the Civil Procedure Act 2005 (NSW) applied. Those sections permitted the amendment of the originating process to add the new causes of action, as the new causes arose out of the same facts as those identified in the statement of claim originally filed.

Policy considerations

The joint judgment of Bathurst CJ and Payne JA and the separate judgment of Beazley P specifically rejected the argument that commercial certainty would be better promoted by requiring applications for amendments to add further transactions to be made within the period stipulated in s 588FF(3).

The judges referred to the fact that s 588FF(3) balances competing interests. Those interests are, on the one hand, those of the general body of creditors and, on the other hand, those of persons who have had previous dealings with the company and might therefore be subject to recovery proceedings under s 588FF(1).

In particular, the judges pointed out that a requirement that all transactions must be specified within the stipulated period would preclude 'shelf orders', which extend the time for commencing voidable transaction proceedings under s 588FF(3) without identifying any particular transaction or transactions. The High Court in Fortress Credit Corporation (Australia) II Pty Limited v Fletcher (2015) 254 CLR 489; [2015] HCA 10 specifically held that shelf orders are permissible.

The practical implication

There may be good reasons why a liquidator does not become aware of some possible causes of action until after the expiry of the s 588FF(3) period. It can therefore be useful for the liquidator to be able to add these causes of action to an existing claim.

In Sydney Recycling Park Pty Ltd v Cardinal Group Pty Ltd (in liq), factors that caused a delay in discovering the additional payments included the bulk of the documentation that the liquidators were required to review, the lack of funding available to them and the destruction of company documents prior to their appointment.