Caveats To Secure A Director’s Guarantee Of A Company In Administration by TurksLegal

Caveats To Secure A Director’s Guarantee Of A Company In Administration By Paul Anderson | June 2011 Area of Expertise | Business & Property

Summary A recent Supreme Court decision considers whether the extension of a caveat securing a director’s guarantee relating to a company in administration requires the leave of the Court.

Who Does This Impact? Insolvency practitioners and providers of trade credit.

What Action Should Be Taken? Persons lodging caveats should be aware of the need to obtain leave in the circumstances specified.

The recent Supreme Court decision of Waco Kwikform Limited v Jabbour raises some interesting questions involving caveats where a party to the transaction is under voluntary administration.

Facts To a point the facts were not unusual. On 14 October 2008 the defendant signed a guarantee and indemnity with the plaintiff in respect of goods and services supplied to a business conducted by Jabbour Construction Management Pty Ltd (‘the Company’). The defendant was a director of the Company. On or about 26 July 2010, the plaintiff lodged a caveat over two parcels of land owned by the defendant, one of which he owned outright and the other he owned in common with several other persons. The caveat claimed an ‘equitable interest as chargee to the extent of the interest held by the defendant pursuant to the Instrument set out below’, ie the guarantee. The amount of the debt was $28,714.90. On 5 October 2010 voluntary administrators were appointed to the Company. On 26 October 2010, a lapsing notice in respect of the caveat was served on the plaintiff who then applied to the Court for an order extending the operation of the caveat.

Questions A number of questions were raised in the course of the litigation but the important ones for present purposes were as follows: 1. Did the plaintiff require leave under Section 440J of the Corporations Act 2001 to bring the proceeding? 2. If so, could leave be given retrospectively? 3. If so, should retrospective leave be given to the plaintiff to bring the proceeding? 4. Did the charge in the guarantee and indemnity create an interest in the land or only in the proceeds of sale of the land?

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Caveats To Secure A Director’s Guarantee Of A Company In Administration by Paul Anderson

Legislation Section 440J (1) of the Corporations Act 2001 is in the following terms:

During the administration of a company:

(a) a guarantee of a liability of the company cannot be enforced, as against;

(i) A director of the company who is a natural person; or

(ii) A spouse or relative of such a director; and

(b) without limiting paragraph (a), a proceeding in relation to such a guarantee cannot be begun against such a director, spouse or relative; except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.’

Question 1 White, J held that the application for an order to extend the operation of the caveat is not a step by way of enforcement of the defendant’s guarantee of the liability of a company in administration within the meaning of Section 440J (1) (a). If the order is made, it will preserve the status quo but will not, by itself, result in enforcement of the charge. The position should be contrasted with proceedings brought to sue the defendant for a debt on the guarantee. However, leave to bring the proceedings was required pursuant to Section 440J (1) (b). The present application was a proceeding ‘in relation to’ a guarantee of a liability by a company in administration given by its director. The words ‘in relation to’ are wide and are satisfied by the existence of a relationship or connection between the guarantee and the proceeding. As the charge secures the liability of the defendant under the guarantee, and as the proceeding is brought to seek to preserve the charge against possible loss of priority, the proceeding has the necessary relationship to the guarantee.

Question 2 It was clear from previous authorities that leave can be given retrospectively.

Question 3 Should leave be given retrospectively? The administrators of the Company had been given notice of the proceedings and indicated that they did not wish to be heard. The critical matters to be considered were as follows:

• The plaintiff could be materially damaged if leave was refused. The caveat would lapse and the plaintiff would be at risk of losing priority to a third party.

• The grant of retrospective leave would not be counter to the principal legislative policy underlying Section 440J. That policy was described by Barrett, J in another case of Coates Hire Operations Pty Ltd v McNaughton in the following terms:

The legislative intention, clearly enough, was to remove any inhibition that directors might be thought to face in considering dispassionately whether voluntary administration should be imposed, being an inhibition arising from an apprehension that, if they appointed an administrator, they might be subjected to attempts to enforce personal guarantees given by them in respect of the company’s obligations.

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Caveats To Secure A Director’s Guarantee Of A Company In Administration by Paul Anderson

• Extension of the caveat was not a step of enforcement of the charge or guarantee. It is no more than the preservation of the status quo which existed before commencement of the administration.

• The administrators did not suggest that the grant of retrospective leave would interfere with the due and orderly progress of the administration.

On balance the Court held that leave should be given retrospectively.

Question 4 Did the charge in the guarantee and indemnity create an interest in the land or only in the proceeds of sale of the land? If the charge applies only to the proceeds of sale, it will not confer a caveatable interest. However, the wording of the relevant guarantee and indemnity referred to a charge of the defendant’s beneficial interest in land as well as personal property. In short, it was not only a charge over the proceeds of sale. Following the offer of the usual undertaking as to damages, the Judge determined that the balance of convenience favoured extending the caveat.

Form of summons The only substantive relief sought in the summons was for relief under Section 440J and an order for the extension of the operation of the caveat. The Court has said several times that the summons should also include a claim for final relief. White, J’s comment on this issue was in the following terms: One can envisage cases where there may be no dispute about the interest claimed by the caveator and the caveator might have no need to seek any relief other than an order for extension of the caveat. In such a case, I respectfully doubt whether it would be necessary for the summons to include a claim for final relief. But, in the present case, the defendant has made it clear that he contests the enforceability of the charge.

However, the failure to claim final relief was not fatal to the making of an order for extension of the caveat. It was enough that the plaintiff gave an undertaking to file a further amended summons seeking to ‘validate’ the claim for principal relief.

Conclusion The case highlights the extra steps to be taken when seeking to extend a caveat if the caveat has been granted by a director of a company in administration. In short, it will be necessary to seek leave pursuant to section 440J (1) (b) of the Corporations Act 2001 and a claim for principal relief should also be included in the summons.

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