What Is It?

By s.292(1) Corporations Act 2001 all public companies and large proprietary companies are to prepare a financial report and directors' report for each financial year. The ASIC, by s.341, can grant an exemption order. By s.341(1) ASIC may make an order in writing in respect of a specified class of companies, registered schemes or disclosing entities, relieving any or all of the following from all requirements of Parts 2M.2 (solvency resolution), 2M.3 (financial records) and 2M4 (other than Division 4 (auditor appointment save for deliberate disqualification)), being:

  • directors;
  • the company's registered schemes or disclosing entities;
  • auditors.

These orders may be subject to conditions and be indefinite or limited to a specified period. They need to be published in the Gazette.

ASIC Class Order 98/1418 provides relief to companies from the requirements of lodging financial reports, directors' reports and auditors' reports. The company obtains relief under:

  1. s.292(1)(b) and (c) (directors' report and financial report):
  2. Section 301(1) (financial report to be audited);
  3. Sections 314(1), 315(1), 315(4) and 316 (regarding distribution of the financial report, directors' report, auditors' report and any concise financial report);
  4. Section 317 (company is to report before annual general meeting);
  5. Section 319(1) (requirement to lodge reports with ASIC; and
  6. Sections 327A, 327B and 327C (public company to appoint an auditor).

ASIC had required when lodging the application for the cross-guarantee class order, lodgement also of an ASIC Form 390, which required a resolution from directors that in their opinion there were reasonable grounds to believe that the members of the corporate group could meet their obligations or liabilities the subject of the deed of cross-guarantee; and certification from a lawyer that the relevant deed wording was in accordance with the ASIC pro forma, that the audited reports of each company for the last three years were unqualified and were lodged with ASIC on time. That Form has now been retired although ASIC still requires the information (ASIC Information Memoranda dated 1 December 2004 and 22 June 2005).


The purpose of the class order was summarised in Westmex Operations Pty Ltd (In Liq.) v. Westmex Limited (In Liq.) (1992) 8 ACSR 146 at p.151 by McLelland J with respect to a predecessor to the present deed of cross-guarantee as follows:

"Each deed was, as its recitals confirm, executed to fulfil a condition of an order having statutory effect, for the purpose of obtaining relief from compliance with statutory requirements for the preparation and lodgement with the Commission of individual audited financial statements of each of the subsidiaries, where there was a requirement to prepare and lodge audited financial statements for the Group as a whole. It is reasonable to infer that the primary purpose of the imposition of a condition of that client was to give the creditors of an (insolvent) subsidiary indirect access to the assets of the holding company, thus diminishing the significance of the unavailability of audited financial statements of individual subsidiaries to persons contemplating investment in, or the extension of credit to, such individual subsidiaries. Reciprocally the creditors of the holding company were to be given (indirect) access to the assets of each subsidiary, over and above the benefit deriving from ownership (direct or indirect) of the shares and subsidiaries" (p.152).

This statement of purpose was not disagreed with on appeal (BC9300034, 11 June 1993). McLelland J construed the debts and claims as "denoting only debts and claims external to the deed itself and anterior to the obligations arising under it" (at p.153).

What Does the Deed Say?

There is a preliminary requirement to have a trustee, which is to be explicitly named.

By clause 3.1, each Group Entity (which must be listed in Part 1 of the Schedule and any entity executing an Assumption Deed) covenants with the Trustee for the benefit of each Creditor that the Group Entity guarantees to each Creditor payment in full of any debt in accordance with the deed of cross-guarantee.

"Creditor" means a person (whether now ascertained or ascertainable or not) who is not a Group Entity and to whom now or at any time in the future any Debt (whether now or existing or not) is or may at any future time be or become payable.

"Debt" means any debt or claim which is now or at any future time admissible to proof in the winding up of a Group Entity and no other claim (clause 1.1 – definition).

By clause 3.2, each Group Entity agrees with the Trustee that the deed of cross-guarantee becomes enforceable in respect of a Debt of a Group Entity upon winding up of a Group Entity under s.459A or ss.461(1)(a), (h) or (j) or as a creditors' voluntary winding up under Part 5.5 Division 3; or, if six months after a resolution or order for the winding up of the Group Entity any Debt of a Creditor of the Group Entity has not paid in full. (Presumably this applies to a winding up arising under Part 5.3A, being through a voluntary administration).

By clause 3.4, the Trustee and each Group Entity acknowledges that the Trustee holds the benefit of the covenants of each Group Entity made pursuant to the Deed upon trust for each Creditor. That also applies if an alternative Trustee is appointed. This arises in the event of a Group Entity being a Trustee and then being replaced (clause 3.4).

By clause 4, the deed of cross-guarantee and its trusts must not be revoked or released unless:


  1. A liquidator [or other insolvency practitioner] is appointed to or for the property of the Group Entity or each Group Entity owning shares in a Group Entity, and that Group Entity sells its shares and lodges notice of that at ASIC; or
  2. an (independent) mortgagee of shares owned by a Group Entity disposes of all issued Shares in the Group Entity sold; or
  3. a Group Entity disposes by a bona fide sale and the directors lodge certificates at ASIC provided the sale is not to an Associate;
  4. whereby the Group Entity is released;

The release applies to any Group Entities sold including liabilities accrued prior to the disposal or arising from it and the deed of cross-guarantee becoming enforceable prior to the disposal;

Each Group Entity is released from liability from that entity's debt. The Trustee can be required to execute a release of the Group Entities sold (clause 4.4).

By clause 4.5 the Group Entities can execute a Revocation Deed, provided the holding entity lodges an original at ASIC and each Group Entity gives notice to its Creditors by public advertisement within one month after lodgement at ASIC and there is no winding up of any Group Entity within 6 months of the original being lodged at ASIC. Upon satisfaction of those conditions the Group Entity is released. By clause 4.6 a Revocation Deed may be executed even if the Deed of Cross-guarantee is enforceable in respect of a Group Entity and the winding up of a Group Entity has commenced.

By clause 5.1 the holding entity may execute an Assumption Deed in which the Trustee joins a further Group Entity to the deed. That Group Entity assumes liability under the Deed of Cross-guarantee.

Importantly, there is a separate covenant by deed poll whereby each entity agrees with each Creditor that the Group Entity will guarantee to each Creditor payment of any debt due from the Creditor from any other Group Entity in accordance with the Deed of Cross-guarantee (clause 6).

The obligations of the Trustee are set out in clause 7:

  • to act as bare trustee for the benefit of each Creditor of the covenants in the Deed of Cross-guarantee;
  • by request to assign to the Creditor the benefit of the Deed of Cross-guarantee as it benefits the Creditor;
  • to permit its name to be used on any demand or notice made or legal proceedings brought by any Creditor seeking to enforce the benefit of the Deed of Cross-guarantee, but the Creditor must fully indemnify the Trustee;
  • upon request lodge in its name on behalf of any Creditors a proof of debt in the winding of a Group Entity;
  • execute a release when required to do so.

The Trustee is entitled to a full indemnity from any Creditor for anything done by the Trustee at the request of the Creditor (clause 7.4).

Execution of the Deed of Cross-guarantee does not bar any person disposing of shares in a Group Entity nor from executing a Revocation Deed at any time (clause 8).

By clause 9.1 each Group Entity agrees with the Trustee that it is not entitled to the benefit of securities acquired by the Creditor from a Group Entity, dividends received by any Creditor from any Group Entity under such security or prove for or claim to receive those dividends. If any security given for payment made to a Creditor by a Group Entity is avoided by laws relating to liquidation, the Creditor shall be entitled to recover the value of each amount from each Group Entity despite any prior settlement, discharge or release.

By clause 9.2 each Group Entity agrees with the Trustee for the benefit of each Creditor that no Creditor is obliged to give notice to any Group Entity of any amendment of an agreement giving rise to a debt or any breach of that agreement, or enforce the guarantee against all Group Entities it may in its absolute discretion at any time proceed against any of them. By clause 9.2 each Group Entity agrees with the Trustee for the benefit of each Creditor that the liability of each Creditor shall not be affected by:

  • any collateral rights or obligations which may exist between them;
  • any variations of those rights;
  • any other person becoming a guarantor of a Group Entity's obligations;
  • any other person intended to be bound as a surety in respect of a Group Entity's obligations, not being or becoming so bound;
  • any other Group Entity being released from the Deed of Cross-guarantee;
  • the giving of any release or waiver by any Creditor to any Group Entity;
  • the making of any arrangement or compromise by any Creditor with any Group Entity;
  • delay or failure by any Creditor to enforce the Deed of Cross-guarantee;
  • liquidation of any Group Entity or any surety of a Group Entity;
  • the giving of any security by any Group Entity;
  • where a Group Entity is member of any partnership, any change of membership.
  • By clause 9.4 each Group Entity agrees with the Trustee for the benefit of each Creditor that without the consent of any Group Entity each Creditor may at any time without affecting the liability of any Group Entity:
  • grant to the Group Entity any indulgence or consideration;
  • compound or release a Group Entity which is the principal debtor;
  • assign to trustees, for the benefit of Creditors any scheme of arrangement of which the Group Entity is the principal debtor;
  • consent to the appointment of a receiver, administrator or controller of the Group Entity which is the principal debtor;
  • release or otherwise deal with any property comprised in any security from the Group Entity which is the principal debtor.

By clause 9.5 each Group Entity agrees with the Trustee for the benefit of each Creditor that no failure or delay to exercise its rights by a Creditor constitute a waiver or variation or prejudice of a Creditor's rights.
By clause 9.6 any dividend paid will not be treated as a payment in gross by the Creditor nor any dividend received by the Creditor affects its rights to the full extent of the Deed of Cross-guarantee to recover the debt from each Group Entity.

ASIC has listed a number of criteria required by it to procure the benefit of a cross-guarantee. They include:

  • that the deed has been correctly executed;
  • that an alternative trustee has been appointed if a group entity is appointed as the trustee;
  • that the entity seeking relief substantially complied with financial reporting and audit requirements for at least three years, including by lodgement on time;
  • that there is a diagram showing a group structure. In that regard, an entity within a "closed group" (i.e. a group of companies in which shares are owned by other companies in the group) must all be included. However a stand-alone subsidiary need not be;
  • every entity has a solvency statement executed by at least two directors, which can be in one statement. The solvency statement must identify the relevant deed of cross-guarantee by reference to the parties and date of execution;
  • all entities the subject of the order need to be listed. (See ASIC Information Sheet, 1 December 2004)

The deed must exactly duplicate the ASIC pro forma. If there is non-compliance, the wholly owned subsidiary must comply with all normal financial reporting requirements (see ASIC Information Sheet dated 22 June 2005).


Consequences of Non-Lodgement

In Aquila Resources Ltd v. Spark [2003] FCA 394, significant creditors (claiming $153,000,000 for misleading conduct) of the Savage Group of Companies sought an interim injunction restraining a proposed DOCA. The circumstances were that the directors of the Savage group of companies thought those companies were bound by a Deed of Cross-guarantee which had been executed by them, but not lodged at ASIC. They then proceeded on the basis of an erroneous understanding that the contingent liabilities of those companies had been assumed pursuant to the Deed of Cross-guarantee with other Pasminco companies, and placed the companies into voluntary administration when they may have been solvent. At the various creditors' meetings voting rights were given to each creditor of the companies, including the Savage companies. It was proposed that a Revocation Deed be executed and that all of the companies enter into a new Deed of Cross-guarantee, including the Savage companies. This would mean contractual liabilities existed to third parties where otherwise none existed, thereby diluting the applicants' rights of recourse. The applicants sought an interim injunction. The administrators argued that if the resolutions went forward there was still remedies under s.445B or s.445D (power to vary or cancel a DOCA). However Nicholson J held the balance of convenience was in favour of the applicants (par. 23). Whilst there were serious questions to be tried, the resolutions would create hardship to the applicants because it would bring into existence new rights where rights did not exist at the moment, or arguably so (par. 22).

Creditors' Meetings

In J Aron Corporation & The Goldman Sachs Group Inc v. Newmont Yandal Operations Pty Ltd (2006) 57 ACSR 149, [2006] NSWCA 46 the Court of Appeal considered whether a corporate group which had a deed of cross-guarantee could allow for external creditors to vote for their obligations owing under the deed of cross-guarantee for each guarantor entity. This was the dominating reality of the administration, as it did not matter which was the principal debtor in relation to any particular creditor (par. 11).

It was argued that external creditors should not be treated as creditors of each company in the group because there were no debts to which the Deed of Cross-guarantee applied to at any relevant time. That was because by clause 3.2, it was only upon an insolvency, that the deed of cross-guarantee became enforceable. By clause 6.1 as a separate covenant, each group company guaranteed with each Creditor that it guaranteed to each Creditor payment of any debt due from any other group company in accordance with the deed of cross-guarantee.

Bryson JA at par. 31, said that clauses 3 and 6 created entirely separate obligations. In the case of clause 3 that was by way of a covenant with the trustee for the benefit of each creditor, and in the case of clause 6, by a covenant by deed poll with each creditor. The mechanisms in clause 3 relating to the covenant with the trustee, including the agreement with the trustee in clause 3.2, have no part in the operation of clause 6.1. The two clauses are also different in their operation, in that clause 3 is a present covenant, whilst clause 6 is a covenant to take effect in the future, presumably when a creditor demands a guarantee. Clause 6 is contingent in its own way in that it is a promise about future action enforceability which is deferred until there is a requirement for action, but clause 3.2 plays no part in its operation. The contingency in clause 6.1 is not remote or distant.

Obligations under the deed of cross-guarantee fall within the extensions to present or future and to certain or contingent debts or claims, and in view of the size of the outstanding claims against group companies, ... the contingency of winding up group companies was not remote or distant ... it was appropriate for the administrators to treat all creditors of each ... group company as creditors of each other ... group company, having regard to the deed of cross-guarantee (par. 32).

It was argued that each company required a separate proof of debt and proxy form and just estimate of value. However nothing indicated that more than one proof of debt form is required, or that the creditor will have or may be limited to voting only in respect of the company whose name is inserted as the relevant company name. ... The requirement for lodgement of a proof of debt was not only a requirement that one proof of debt be lodged, but also an indication that one proof of debt would be treated as sufficient (par. 39).

The circular in the creditors report did not indicate there was any need to complete more than one form or to complete fourteen of them. ... It would be a bizarre departure to suppose that the appointment of proxy form had a meaning only to authorisation to vote with respect to one of those companies when the accompanying documents are not so limited (par. 41).

Overshadowing all other considerations is the web of liabilities under the deed of cross-guarantee, which for all purposes relevant to the meeting placed all creditors in the same relationship of creditor and debtor with all companies and the conditionality of the proposed ... deed of company arrangement on the adoption of all of them. These considerations meant that separate treatment of business relating to each company could serve only formal purposes (par. 46). ... It is simply the true position that, if the contingencies to which clause 6.1 were subject were fulfilled, each guarantee company would be liable to each external creditor for the whole amount (par. 63). The administrator accepted the value of the claims at their full amounts. No error was shown to the decision with respect to that just estimate. The decision to admit votes through group companies in respect of their indemnity entitlements against other group companies only for the nominal amount of $1.00 bears no anomaly about this (par. 59).

At first instance Austin J [2005] NSWSC 238 had found that whilst no formal proof of debt had been required other than from the principal debtor, an entitlement to vote could be found by the lodgement of the particulars of debt, as the administrators were well aware of the provisions of the deed of cross-guarantee. That constituted supply of particulars of the debts for the group companies other than the principal debtor company (par. 95). In this special context the creditors became entitled to vote with respect to the debts owed to them by all of the group companies by virtue of the deed of cross-guarantee (par. 96).

There is an important difference between the claims of external creditors and indemnity claims of group companies. Even if strictly the external creditors claims under the deed of cross-guarantee are contingent, the contingency is relatively proximate, namely the winding up of the principal entity or the other similar matters in clause 3.2. In contrast, the contingencies underlying the inter-company indemnity claims are more remote namely the failure of the principal debtor to meet the claim made by the external creditor and recovery by the external creditor from another group company under the deed of cross-guarantee. "In my opinion it is not implausible that Mr Korda may have reached the conclusion that the correct just estimate in the latter case is $1.00, while in the former case the correct just estimate is the full amount of the external debt" (par. 105).

In circumstances where the financial welfare of each group company was interdependent with the financial welfare of every other group company by virtue of the indemnity arising by the guarantee of external debts, the making of a winding up order or creditors resolution for winding up might reasonably be regarded as a likely event should the principal debtor fail to pay, with the result that estimation of the value of the external creditors' claims at the full value of their debts would seem to be justifiable and reasonable (par. 106).
The plaintiff submitted that the proposition that each external creditor was entitled to vote at all 14 meetings by virtue of the deed of cross-guarantee infringed the rule against double proofs. They argued that the cross-guarantee, by clauses 3.1, 3.3 and 7.1(d) made them liable to the trustee (NYOL) rather than the creditors directly for the debts and the trustee retained the right of first action in respect of the debts. That was consistent with lodging a proof of debt based on the indemnity which it said was done in its capacity as trustee on behalf of all external creditors. It was then argued no external creditor could be admitted for voting purposes without infringing the rule against double proofs (par. 137). This argument failed on two grounds. It disregarded the effect of clause 6.1 which operated as a deed poll by each group company for the benefit of creditors without the interposition of any trustee. Secondly, the proofs of debt for $1 lodged in the administration by NYOL were based on an asserted indemnity right rather than the terms of the deed of cross-guarantee which did not itself, give a group company that has paid a creditor any right of recoupment from the principal debtor company. The deed of cross-guarantee operates as between the group companies and external creditors under the general law of rights of indemnity and contribution arising out of any performance of guarantee obligations in favour of those creditors (pars. 138, 139).

In Re Ansett Australia Ltd (2006) 56 ACSR 718, [2006] FCA 277 the administrators sought a pooling order for various companies within the Ansett Group, inter alia, because the operation of deeds of cross-guarantee may affect the various companies in the group in a manner that would create substantial uncertainty as to their potential liability. The resolution of this would involve the use of substantial resources and the expenditure of large sums of money (par. 26). The cross-guarantees were significant because the value of the combined net realisations of assets held in the class companies was approximately $512,000,000.00 out of total net realisations of $590,000,000.00 across the Ansett Group. According to the administrators, the claims of creditors under the cross-guarantees are likely to be admissible for voting and all other purposes in the administration of all class companies (par. 42). Ultimately the application for a pooling order was rejected.

Pooling Order – Existing Property

In the Matter of Kirby Street (Holding) Pty Ltd [2011] NSWSC 1536 Barrett J considered whether to make a pooling order for a corporate group under s.579E. A relevant factor was that 40 companies in the group had entered into a deed of cross-guarantee. In order to make a pooling order the Court had to consider whether various conditions under s.579E(1) were met. That included whether one or more companies in the group owned particular property that is or was used, by all or any of the companies, in connection with the "scheme" carried on jointly by the companies in the group (s.579E(b)(iv)). He found the companies did operate a scheme because they pursued objectives to benefit one particular company. However he found that that property referred to needed to be owned at the time of the application (par. 44). Barrett J held that there was relevant property still owned, being the product of the deed of cross-guarantee. The guarantee is a thing in action. The class order guarantee carried with it the ordinary incidence of a guarantee, including the right to call on it, and if called upon, the right of indemnity and the right of contribution from co-guarantors. It was used to assist in the publication of consolidated accounts of the group (par. 48). The guarantee is held for the benefit of each creditor (par. 53). Each other Group Entity as a guarantor could, at the time the guarantee became enforceable under clause 3.2 require the Trustee to institute debt recovery proceedings against the Group Entity liable to pay, and after satisfying the guarantee, claim by subrogation the Trustee's rights against the defaulting Group Entity. The rights to require the Trustee to act in those ways arose immediately upon the deed being executed but, until the debt of a Group Entity became due and payable, the right, although existing, was not exercisable (par. 55). A person who owns property may "use" that property simply by holding it, where the mere holding can be regarded as the source of some advantage. In the present case the entities entered into the deed in favour of the Trustee to reduce the workload and administrative burdens to which they would have been subjected had each individual company not had the benefit of the relief from ASIC's s.341 order and therefore remained obliged to produce their own financial statements and directors reports (par. 62). Each party to the deed of cross-guarantee today has "property" in the form of the chose in action. That property was used by the company in which it was vested to maintain in existence the economies and advantages that came from the ASIC order which became available only because of the execution and continuing existence of the deed that is the source of the order (par. 63). The use of the relevant choses in action was at least ancillary or incidental to the scheme so that the use was in connection with the scheme. The scheme was to generate and apply revenues from retail trading so that the full financial benefit for those revenues came to be enjoyed by one of the companies in the group. A necessary component of the profit making objective was such financial efficiencies as could be achieved. The deed of cross-guarantee and ASIC relief that had assisted in producing were aspects of those efficiencies (par. 66, 67).

Unexplored Issues

  1. Generally, a guarantee may not be enforceable if it is given without any benefit to the guarantor. Where the requisite "corporate benefit" is absent, the guarantee may be challenged by shareholders, or possibly by some creditors of the guarantor company (for example, a direct creditor may seek to challenge the corporate benefit if it is sought to be enforced by a trustee, or another guarantor creditor under the deed poll in clause 6.1). A guarantee is not necessarily for the benefit of the guarantor merely because it is for the benefit of another member of the group of companies of which it is a member. Generally it is my view that the administrative efficiencies referred to in Kirby, give rise to adequate corporate benefit for the issuance of the guarantee. However, this could be debated because of the unlimited liability of the cross-guarantee, where the only real benefit to the subsidiary is the savings on account preparation.
  2. There may be significant issues in a creditor succeeding in having a group member who is the trustee, bring an action against other group companies. This could give rise to an application under the Trustee Act to change the trustee, a claim in equitable compensation against the trustee, or the appointment of a Court appointed receiver to the trustee to enforce the right.
  3. Is there an obligation for a deed poll in clause 6.1 to be "delivered"? In my view there is effectively a deemed delivery by its registration at ASIC, for the benefit of creditors generally. This however could be debated.
  4. There could also be an argument as to whether the covenant in clause 6.1 is enforceable by creditors who are non-existent or unascertainable at the time when the covenant was given. Obviously that is not the case with a covenant inter partes, as each party executes the deed. In my view, the deed is intended to cover future creditors.
  5. Any creditors who rely on the deed of cross-guarantee rather than taking a properly drafted guarantee from relevant companies runs a number of risks, not limited to the credit risk taken on the group as a whole. This includes the release and revocation provisions, including that, whilst advertised, a creditor may not be aware of the release. There is also no separate indemnity which is important if any debt is partly or wholly unenforceable for any reason. There is no provision for interest. There are no provisions for suspending the guarantor's rights, for example to reduce its liability by a defence or set-off. There is no power of attorney in favour of the trustee or creditors enabling the attorney to do things in the name of the guarantor to insist on enforcement. There is no provision expressly for recoupment of costs, charges and expenses of the creditor enforcing the cross-guarantee.
  6. The trustee's obligations to sue in the name of the creditor or to assign the creditor the benefit of the cross-guarantee, is only upon a full indemnity of the trustee which can also require security for costs. This cuts back some of the benefits, and could be expensive. Generally the trustee has no duty to monitor any group company or to pursue any Debt except upon request as set out above.

In short, the cross-guarantee should not be relied upon by creditors as a substitute for a properly drafted collateralised guarantee or individual guarantees.

There is a significant incentive for creditors to seek to have at least one group company wound up. Whilst under clause 3.2(a) creditors' voluntary windings up are limited to Part 5.5 Division 3, if the company is wound up under Part 5.3A (voluntary administration) and there is no payment in full of the creditor within six months, the terms of the deed of cross-guarantee apply. In other words, a creditor who otherwise did not have a corporate guarantee, and proceeds to liquidation against a member of a large corporate group, can obtain compensation against other companies within the group, upon the liquidation of its debtor. That is a very powerful weapon, and a disincentive to vote for a deed of company arrangement.1

In summary, insolvency practitioners, and creditors generally, do not appear to have considered on a regular basis the potential effects of cross-guarantee class orders, possibly because most corporate groups publish their accounts. That is however not necessarily the case. Insolvency practitioners should ensure that they carefully peruse ASIC searches, obtain copies of any class order deeds of cross-guarantee and adequately advise creditors of their rights relating to them. Creditors also should be aware that if they have a debtor entity which is in liquidation, they can take full advantage of the terms of the ASIC cross-guarantee.


1Another incentive to vote for liquidation rather than a compromise, is the present GEERS scheme which only applies on a liquidation to benefit employees for unpaid entitlements, other than superannuation.

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.