by Mark Winn, Partner and Jessica Carroll, Lawyer

Earlier this year, Thynne + Macartney’s Business Advisory and Dispute Resolution Team, led by Mark Winn, brought an application in the Supreme Court of New South Wales challenging the scope of section 440J of the Corporations Act 2001 (Cth). It was ultimately held that section 440J does not apply to proceedings for enforcement of a director’s guarantee if that proceeding was commenced prior to the appointment of administrators.

This article considers the protection afforded to directors by section 440J during the administration of a company in light of this recent decision.

Section 440J of the Corporations Act 2001 (Cth) (Act) protects directors from enforcement of guarantees provided on behalf of a company during the company’s administration.

Section 440J(1) reads:

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In the recent decision of Mizuho Bank Ltd v Mark Anthony Ackroyd [2016] NSWSC 1148, the New South Wales Supreme Court was asked to consider whether the protection afforded by section 440J prevented the continuance of proceedings against a director for enforcement of a guarantee commenced prior to the company going into administration.

It was found in this case that proceedings to enforce a guarantee which had already been commenced prior to administrators being appointed was not precluded by section 440J and could continue.

Facts

The plaintiff bank lent a company the sum of $44,481,375.87, approximately half of which was secured by a personal guarantee provided by the defendant director.

In June 2016 the plaintiff bank begun proceedings against the defendant director on his guarantee.

In July 2016 the company appointed administrators under s 436A of the Act.

The defendant director brought an application seeking a stay of the proceedings on the basis that the proceedings were precluded by section 440J from continuing whilst the company was in administration without leave of the court.

Decision

In determining that section 440J did not prevent a creditor from continuing to pursue a proceeding begun before the administration, the court followed the Queensland decision of Wilson J in Bank of Western Australia Limited v Clift [2010] QSC 366 (Clift) in which her Honour held the continuation of proceedings did not amount to the ‘enforcement’ of a guarantee liability within the meaning of section 440J.

In Clift, her Honour:

  1. made reference to (amongst other things) the Explanatory Memorandum accompanying the introduction of s440J(1), which referred to a concern that directors of insolvent companies would be discouraged from appointing administrators if guarantees became enforceable as soon as administrators were appointed.  Her Honour considered that there was a relevant distinction between the appointment of an administrator triggering liability under a guarantee on the one hand, and the continued maintenance of proceedings on foot on the other, and that in the latter case, potential for discouragement seemed less
  2. drew attention to the fact that s440J(1) differs from other provisions of the Act such as ss440D, 440F and 471B by which proceedings may not be begun or proceeded with
  3. observed that there is a temporal sequence in which subsections (a) and (b) of section 440J(1) appear, which may be an indication that the legislature did not intend the maintenance of a proceeding already on foot to be caught by the prohibition.

Points to take away

  • Proceedings to enforce a guarantee commenced prior to the appointment of administrators will not be stayed by section 440J of the Act and may be continued.
  • Directors should be mindful of this limitation in the protections afforded by the Act particularly considering any cross claim against the company (such as an indemnity) whilst it is in administration would require leave under section 440D of the Act.

This information is intended to provide a general summary only and should not be relied on as a substitute for legal advice.

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