Administrators and liquidators owe a duty to guarantors of company debts
In brief: The question of whether administrators and liquidators owe a duty to guarantors of company debts is an area which has just been settled by the Victorian Supreme Court in a case that has ramifications for all liquidators and administrators.
What you need to know:
- Administrators and liquidators owe a duty of care to guarantors of the company when realising the company's assets.
- In order not to breach this duty liquidators should:
- Be aware of the duty they owe to the guarantors.
- Obtain valuations of all property.
- Act on advice with regards to the advertising campaign.
- Do everything necessary to obtain the best price for the property at the time of sale.
Although a liquidator should in any event take these steps, they should now do so with the duty to guarantors of the company in mind. This case now paves the path for claims by guarantors against liquidators for breaching this duty.
In the case, Perpetual Nominees Ltd v McGoldrick & Anor (No 3)  VSC 78, the Plaintiff (Perpetual Nominees Ltd (Perpetual)) sued the defendants (the Guarantors) pursuant to personal guarantees for company liabilities, which were secured by:
- a second mortgage over the property at 441 Maroondah Highway, Lilydale; and
- a first mortgage over the property at an adjoining property at 443 Maroondah Highway, Lilydale.
The Guarantors contended that the Liquidators (both in their capacity as liquidators and formerly as administrators) owed them duties which bound them to act, in their interests as sureties of the company's liability to Perpetual. They claimed that the liquidators owed them a duty to ensure that the properties were sold for market value.
The Guarantors further claimed that the sales process was flawed and therefore market value was not obtained. They stated that the market value of the properties was $10.9 million and that they were sold for $3 million.
The Legal findings
The Court found that the administrators and liquidators owed the Guarantors a duty of care. In coming to this finding, the Court considered (amongst other matters) the following:
- Reasonable foreseeability of loss – if the sale was for less than market value and didn't fully satisfy the Perpetual debt, then there would be loss to the Guarantors;
- Indeterminacy of liability – in this case the liability can be determined. It is the shortfall between the outstanding debt payable by company and the sum realised on the sale of the Properties;
- Knowledge of the risk and its magnitude – the liquidators knew the risk and magnitude of the potential loss to the Guarantors.
- Vulnerability of the plaintiff to the risk – the Guarantors found themselves in a position in which they were not able to adequately protect themselves and were left to suffer from the consequences of the sale by the liquidators of those assets.
- Inconsistent duties – there is no conflict of the liquidators' duties to the creditors shareholders and in this case their duties to the Guarantors because:
- The duty to the creditors and shareholders involved taking reasonable care to secure the best price possible in the commercial context which existed at the time;
- The duty which the Guarantors sought to enforce is a duty to secure the best price reasonably obtainable in the circumstances for the assets which have been sold; and
- The duties are therefore entirely compatible.
In determining that the administrators and liquidators did not breach their duties to the Guarantors the Court found:
- The sale and marketing of the properties were not undertaken without imperfections.
- However, the conduct of the Liquidators was undertaken with due care and skill to an extent that was reasonable in all the circumstances.
- The sales were undertaken with good faith and not in a manner which was unconscionable.
- The sales secured the best price possible in the commercial context which existed at the time.
This case illustrates the position that liquidators hold in providing a duty of care to guarantors. The duty involved is to sell or otherwise dispose of the property of a company whilst acting in good faith and with due care and skill to the extent that is reasonable in all the circumstances. This extends to taking reasonable care to secure the best price possible in the commercial context, which exists at the time.
In this case, it was found that the liquidators did not breach their duty of care. The best price at the time, which the market was prepared to offer, was accepted for the sale of properties, and the liquidators acted reasonably and on professional advice in the conduct of the sale.
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. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.