Directors who are guarantors may consider one reason to place
their struggling or insolvent company into external administration
is the benefit of avoiding, at least temporarily, being personally
liable for the company's debts under the guarantee, pursuant to
s440J of the Corporations Act 2001 . (The director has a reprieve
while the administration continues, but if the creditors or the
administrators place the company into liquidation, the
director-guarantor's amnesty ends).
Some may be unaware that the director-guarantor's amnesty
operates if the company is already under administration by the time
a creditor seeks to enforce the guarantee, but the situation is
different if the creditor takes enforcement action against the
director-guarantor before the administrator is appointed.
In that case, the director-guarantor will still be liable to pay
out under the guarantee according to the NSW Supreme Court in
Mizuho Bank Ltd v Mark Anthony Ackroyd  NSWSC 1148. This is
because s440J of the Corporations Act 2001 does not affect claims
commenced before the administrators' appointment.
This is very important to remember especially if you are a sole
or minority director and guarantor trying to prop up a company in
financial difficulty using your own money. In that case, consider
the effect of s440D of the Corporations Act. Under s440D, you will
not be able to sue the company under administration for an
indemnity (basically, all your money back) or a contribution
(basically, some of your money back) if you have had to pay out the
company's debts under the guarantee.
So you may lose all recourse against the struggling company and
have to foot all of its bills by yourself if you place it under
administration before seeking a contribution from the company
toward the debts that you have guaranteed. Consider, though, that
where the law requires or it otherwise appears to be in the best
interest of members as a whole, that the company be placed into
external administration, and you as director decide against doing
so, to preserve your personal rights, as guarantor, of indemnity
against the company, this may represent a conflict of interest. You
may then become liable and face penalties for breaching your duties
as a director.
This area of the law can leave director-guarantors personally
exposed in ways that are often unanticipated. Directors should,
independently of the company itself, always seek specialist legal
advice before deciding whether or not to appoint an external
administrator. Any lawyer or insolvency practitioner advising the
company is professionally not allowed to consider the interests of
the individual director-guarantor because of the conflict of
interest that arises.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Courts, through judicial discretion, supervise the proposed transition from winding up to a deed of company arrangement.
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