S440J(1) will not always protect director/guarantors where borrower is in administration - Directors and Officers

This week's TGIF considers Mizuho Bank Ltd v Ackroyd where the Court considered whether s 440J will prevent the continuation of proceedings to enforce a guarantee against a director of a company in administration.

Background

A bank lent a company a sum of money, secured in part by a personal guarantee provided by the company's director.

In June 2016, the bank commenced a proceeding against the director, seeking to enforce the guarantee.

In July 2016, administrators were appointed to the company.

The director brought an application seeking a stay of the proceeding on the basis that s 440J of the Corporations Act prevents a party from enforcing a guarantee against a director of a company in administration.

Section 440J(1) provides that, during the administration of a company:

a guarantee of a liability of the company cannot be enforced, as against:
1. a director of the company who is a natural person; or
2. a spouse, de facto spouse or relative of such a director; and

without limiting paragraph (a), a proceeding in relation to such a guarantee cannot be begun against such a director, spouse, de facto spouse or relative; except with the leave of the Court...

Proceeding

The question for determination was whether s 440J(1) prevents a creditor from continuing to pursue proceedings begun before the administration.

The bank argued that s 440J(1) has no application to a proceeding begun before the administration commenced.

The director argued that the ordinary meaning of 'enforce' in the context of a liability under a guarantee includes both the bringing and furthering of legal proceedings, and therefore the proceedings should be stayed pursuant to s 440J(1).

Decision

Justice Hammerschlag ultimately held that s 440J(1) does not prevent a creditor from continuing to pursue a proceeding begun before the administration.

His Honour held that:

The Explanatory Memorandum accompanying the introduction of s 440J(1) identified the purpose of the section is to assuage the risk that directors may be discouraged from placing their companies into administration where doing so would trigger immediate liability under a guarantee. The potential for discouragement seemed less in relation to the continued maintenance of proceedings on foot compared with the appointment immediately triggering liability under the guarantee.
There is a temporal sequence in which (a) and (b) of s 440J(1) appear, which may indicate that the legislature did not intend the continuation of a proceeding already on foot to be caught by s 400J(1).
S 440J(1) differs from other provisions in the Corporations Act, such as ss 440D, 440F and 471B, by which proceedings may not be begun or proceeded with. The submission by the director that little significance is to be attached to the difference in wording is incorrect – there is no logical or rational reason for the legislature to specifically provide for the commencement of proceedings, but to leave the continuation of proceedings to be covered by a general term.

His Honour also took comfort from the decision of Bank of Western Australia Ltd v Clift (2010) 80 ACSR 163, which his Honour noted was directly in point. There it was held that the continuation of proceedings to enforce a guarantee that had begun before the appointment of an administrator did not amount to enforcement of a guarantee within the meaning of s 440J. His Honour did not agree with the director's submission that Clift was clearly wrong, holding that there were both textual and contextual considerations which supported that conclusion.

Comment

This case confirms that proceedings to enforce a guarantee commenced before the appointment of an administrator are not caught by s 440J(1) of the Corporations Act, and may be continued during the administration period.

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