Reported Decision : (2003) 45 ACSR 413 New South Wales Supreme Court CITATION : National Australia Bank v King [2003] NSWSC 525 HEARING DATE(S) : 13/06/03 JUDGMENT DATE : 18 June 2003 JURISDICTION: Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Direction that notice of application be given to administrator. Application adjourned. CATCHWORDS : CORPORATIONS - voluntary administration - certain debts of company guaranteed by directors - application by creditor for leave to enforce guarantees - legislative purpose of embargo on enforcement of directors' guarantees during voluntary administration considered - need for administrator to have opportunity to make submissions LEGISLATION CITED : Corporations Act 2001 (Cth) BBC Hardware Ltd v GT Homes Pty Ltd [1997] 2 QdR 123 Re Behan; Ex parte Pioneer Concrete (Qld) Pty Ltd (1995) 17 ACSR 725 CASES CITED : Mead Corporation v Carbonless Papers (Australia) Pty Ltd [2002] WASC 268 Stegbar Pty Ltd v Mayfield (1993) 13 ACSR 354 Thomas v Bradnam's Windows & Doors Pty Ltd [1999] QCA 487 Wallabah Pty Ltd v Navillo Pty Ltd (1997) 23 ACSR 444 National Australia Bank Limited - Plaintiff PARTIES : Anthony Patrick King - First Defendant Peter James King - Second Defendant FILE NUMBER(S) : SC 2341/03 COUNSEL : Mr J Stoljar - Plaintiff Mr I Prider, Solicitor - Defendants SOLICITORS : Mallesons Stephen Jaques - Plaintiff Mr I Prider - Defendants IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J WEDNESDAY, 18 JUNE 2003 2341/03 – NATIONAL AUSTRALIA BANK LIMITED v ANTHONY PATRICK KING & ANOR JUDGMENT 1 The plaintiff, National Australia Bank Limited, is a creditor of each of seventeen companies known collectively as "the King bus companies" which conduct passenger transportation businesses in various parts of northern New South Wales. The directors of those companies are the present defendants, Anthony Patrick King and Peter James King. 2 The plaintiff says that the defendants are guarantors of financial obligations owed by the King bus companies to the plaintiff. The guarantees are said to have been created by a deed dated 3 October 2001. On 3 April 2003, the plaintiff demanded payment by the defendants of $146,999,741.96 under those guarantees, that being the total of the moneys said by the plaintiff to be then due by the King bus companies under the obligations claimed by it to be the subject of the guarantees. 3 On 8 April 2003 (that is, five days after demand was made upon the defendants under the guarantees), the King bus companies became subject to administration under Part 5.3A of the Corporations Act 2001 (Cth). This resulted, of course, from actions taken by the directors, being the present defendants. On the same day, the plaintiff appointed receivers and managers of the assets and undertaking of each of two of the King bus companies. On the following day, 9 April 2003, corresponding appointments were made by the plaintiff in relation to the remaining King bus companies. 4 The application with which I am currently dealing is an application by the plaintiff for leave to enforce against the defendants the guarantees said to have been given by them in respect of indebtedness of the King bus companies by the deed of 3 October 2003. The need for such leave arises from s.440J(1) of the Corporations Act: "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, de facto 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, de facto spouse or relative; except with the leave of the Court and in accordance with such terms (if any) as the Court imposes." 5 It may be noted at once that s.440J(1) is distinguishable from other provisions imposing embargos or moratoria during Part 5.3A administration. Those other provisions have the obvious purpose of preserving the status quo so far as assets and resources of the company itself are concerned. Thus, s.440B precludes the enforcement of a charge on property of the company; s.440C precludes the owner or lessor of property used or occupied by or in the possession of the company taking possession of the property or otherwise recovering it; s.440D precludes commencement or continuation of proceedings in a court against the company or in relation to any of its property; s.440F precludes enforcement processes in relation to property of the company; and s.440G prevents levying of execution and similar processes in relation to property of the company. In each of these cases, the statutory barrier erected by the particular section may be removed by order of the court. The scheme is thus one calculated to prevent outside intervention that could jeopardise the continuation of the company's business during administration – unless the court, in a particular case, determines that such intervention should be allowed. 6 Section 440J(1), by contrast, is not directly concerned with preserving property and resources of the company itself from inroads that might otherwise be made upon them by outside parties. The integrity of the company's business and its ability to function as a going concern are not, of themselves, in any way compromised or prejudiced by the particular kind of enforcement action with which s.440J(1) is concerned, that is, action against a director of the company (or a relative of the director) under a guarantee of a liability of the company. Action of that kind puts at risk the assets of the director or other guarantor. That, viewed alone, does no direct harm to the company. 7 Mr Stoljar of counsel, who appeared for the plaintiff, referred to two cases as indicating the policy s.440J(1) is intended to serve. They are BBC Hardware Ltd v GT Homes Pty Ltd [1997] 2 QdR 123 and Wallabah Pty Ltd v Navillo Pty Ltd (1997) 23 ACSR 444. There are references in the judgments in those cases to earlier judicial observations on the matter, notably those of Williams J in Stegbar Pty Ltd v Mayfield (1993) 13 ACSR 354 and Hill J in Re Behan; Ex parte Pioneer Concrete (Qld) Pty Ltd (1995) 17 ACSR 725. 8 It is appropriate to quote from the judgment in the last mentioned case as to the purpose of the section. Hill J said (at p.727): "Some assistance may be obtained from the Explanatory Memorandum accompanying the Bill which ultimately became No 210 of 1992, whereby s 440J was inserted and to which the solicitor for the debtor referred. The Memorandum states: '529. It is anticipated that the directors of companies who have personally guaranteed the obligations of a company will be discouraged from appointing an administrator to the company if, immediately upon the appointment, that guarantee became enforceable. To remove this perceived impediment to the early appointment of an administrator to a company in financial difficulties, proposed section 440J aims to impose a "stay" on any enforcement action under a guarantee against a director or a spouse, de facto spouse or relative of a director, while a company is under administration, except with the leave of the Court (proposed subsection (1)). 530. During the operation of the "stay", a creditor will not, however, be prevented from applying the Court for orders to preserve the assets of the director during the administration (proposed subsection (2)).' It might be noted that the policy referred to in the Explanatory Memorandum would not appear to extend to positively encourage a director against whom a judgment had been obtained for a guarantee debt to ensure that an administrator is appointed so as to obtain a moratorium against that judgment. If anything, the policy was directed to the case where the appointment of an administrator would trigger liability under the guarantee arising. However, regard to policy must obviously give way to the proper construction of the language which the legislature has used if there be a conflict." 9 Hill J went on to make further observations about the scope and effect of s.440J: "It will have been noted that there is a substantial difference in wording between s 440J of the Law on the one hand and sections like ss 440D 440F and 471B of the Law on the other. Section 440J(1)(b) merely prohibits the commencement of a proceeding (the word used is "begun") rather than using the formula contained in the other sections, to which reference has been made, of a proceeding being "begun or proceeded with". Nor, when s 440J(1)(a) refers to "enforcement" does s 440J refer to enforcement against or in relation to the property of the corporation. It is concerned only with the commencement of proceedings in relation to a guarantee or the enforcement of the guarantee itself. It is not necessary to consider what steps may be characterised as steps involving enforcement of a guarantee. Given that the reference to enforcement of the guarantee in s 440J(1)(a) precedes the reference to commencement of proceedings in s 440J(1)(b), enforcement may well refer to a step taken prior to proceedings being commenced. The making of a demand under the guarantee on any view would involve the enforcement of a guarantee. However, in my view, the words used in s 440J(1)(a) should not on any view be construed as referring to steps which may be taken by a judgment debtor to obtain execution of the property of the judgment debtor to enforce the judgment debt itself. Once a judgment is obtained it is trite law that a debt as and from the date of a judgment merges in the judgment: Ex parte Fewings; Re Sneyd (1883) 25 Ch D 338 at 355; Re European Central Railway Company; Ex parte Oriental Financial Corporation (1876) 4 Ch D 33; Re Jenkins (1889) 15 VLR 271 and McDonald v Scobie [1980] Qd R 477 Thus once judgment was obtained by the creditor, no question of enforcing the guarantee arose because the rights under the guarantee merged into the judgment and the rights of the parties thereafter flowed from that judgment. Once this is accepted it follows, as a matter of construction of s 440J of the Law, that that section in no way operates to stay execution of the judgment, although had judgment not been entered subs (1)(a) may perhaps (contrary to the implication which may arise from the temporal order of ss 440J(1)(a) and (b)) have prevented the company from taking further steps in proceedings which had been commenced prior to the commencement of the administration. It is, however, not necessary to decide in the present case whether s 440J(1)(a) extends so far." 10 It may be accepted that the expressed legislative purpose behind the enactment of s.440J(1) is that stated in paragraph 529 of the explanatory statement referred to in the first of these extracts from the judgment of Hill J. 11 I refer also to Wallabah Pty Ltd v Navillo Pty Ltd (above) which, like all the cases I have mentioned (except Behan) – and also like the later case of Mead Corporation v Carbonless Papers (Australia) Pty Ltd [2002] WASC 268 – involved applications for leave under both s.440D and s.440J, the former being relevant to proceedings against the company based upon the principal debt and the latter to associated moves to enforce a guarantee in respect of that debt. Dealing with the case of a combination of application to enforce against the company itself and application to enforce against a guarantor, Olney J said (at p.446): "In my opinion the following factors are relevant to the exercise of the court's discretion in the matter presently under consideration. (1) The administrators were appointed by the applicant as chargee of the company's property. This was done pursuant to s 436C. This is not a case where a director/guarantor has attempted to forestall action or obtain a moratorium by having an administrator appointed. (2) The applicant is the only secured creditor and indeed is the major creditor. It has by its own action triggered the application of ss 440D and 440J. (3) The guarantor (the second respondent) is a director of the company under administration and disputes both the validity of the guarantee and the amount said to be owing to the applicant by both the company and by himself. It was known to the applicant before the administrators were appointed that there was a dispute as to the liability. (4) The company is no longer trading. (5) The administrator is actively seeking to sell the major asset of the company which is a licensed restaurant business in King's Cross but at this stage it is not trading. (6) The company has limited funds available to the administrators to contest any action that is brought against it. (7) The applicant has not demonstrated that it will or may suffer any disadvantage if leave is refused under either s 440D or s 440J." 12 The point was made by Williams J in Stegbar Pty Ltd v Mayfield (above) and repeated by Thomas J in BBC Hardware Ltd (above) that leave to proceed should not be granted under s.440J unless there is good reason for departing from the presumption underlying the section that the creditor ought not to be able to proceed. In other words (and obviously enough), it is for the creditor to positively show good and cogent reasons why there should be a departure from the state of moratorium that the section imposes. 13 As to this last matter, Mr Stoljar put forward six factors as warranting such a departure in this particular case. I quote from his written outline of submissions (omitting the references to paragraphs of affidavits): " First , very serious concerns have been raised in the evidence filed and served by the plaintiff to date in relation to, among other things, inaccuracies in the materials provided to the plaintiff and missing or non-existent assets held by the King Bros Group: … This evidence was served two months ago. No evidence or even correspondence has been received from the defendants allaying or explaining these concerns. Secondly , the directors have failed to cooperate with the receiver appointed by the plaintiff, including by: a. declining to answer questions or meet with the receiver: …; and b. refusing or failing to supply a report as to affairs under s429A of the Act: … Thirdly , a very large sum of money remains outstanding. Fourthly , no defences to the claims under the guarantees has been foreshadowed or appears likely. Fifthly , adjourning or postponing enforcement proceedings will cause the plaintiff unnecessary legal costs and increased interest on outstanding monies. Sixthly , the policy considerations adverted to in the reported cases are not applicable here, since the facts of the present case are outside those contemplated by the policy." 14 In referring to the legislative policy, this sixth point draws attention to the policy stated in the explanatory memorandum accompanying the Bill for the Act that eventually became the Corporate Law Reform Act 1992 (Cth). The relevant part of the memorandum (para 529) is, as I have said, set out in the first of the above extracts from the judgment of Hill J in Re Behan and referred to also in certain of the other cases. The legislature was clearly concerned with the possibility that, in the common case where directors and their family members have guaranteed debts of the company, directors might fear that appointment of an administrator could adversely affect guarantors by precipitating claims under the guarantees with the result that the directors may be disinclined to appoint an administrator in circumstances where, as an objective matter, such an appointment is needed. It was considered desirable to remove that factor from the directors' thinking (or, at least, to reduce its proportions) by means of a legislative assurance that any repercussions of that kind could be visited upon such guarantors during administration unless the court had given appropriate leave. 15 But it would, to my mind, be wrong to apply s.440J(1) by reference solely to the one purpose stated in the explanatory memorandum. The section exists as part of a body of provisions intended to ensure that administration takes an orderly course enabling creditors to make, at the second meeting, an informed decision as to where their interests lie. One possibility, in any administration, is that a deed of company arrangement will be proposed. Directors and members of their families are often parties to such deeds. A deed may have the effect that debts owed by the company to certain creditors are, in whole or in part, released: s.444H. Were such a release to occur in respect of a guaranteed debt, there would be a question whether or not the guarantor remained liable for the debt in full. The answer, in a particular case, may have a bearing on the willingness of guaranteeing directors to consider resort to a deed of company arrangement. 16 I mention this purely hypothetical possibility not because the evidence before me suggests that it has a bearing in this case but to emphasise what I consider a deficiency in the material before the court. As the evidence and submissions stand, it is assumed that the question whether leave should be granted under s.440J(1) is entirely one between the creditor and the guaranteeing directors and that no one else has any interest in the matter. The King bus companies are not parties to the proceedings initiated by the plaintiff under the section. Nor were they given notice that would have enabled their administrator to attend when the matter came before me. 17 The fact that s.440J(1) exists to ensure what one might term the smooth progress of voluntary administration in a particular case must mean that the administrator has a clear and direct interest in the question whether leave should be granted under the section. I would go further and say that it would be quite undesirable and probably dangerous to attempt to deal with the question of s.440J(1) leave without having heard (or at least ensured an opportunity for the expression of) the administrator's views on the question whether grant of such leave would have any adverse impact upon the due and orderly conduct of the administration and the furthering of the purpose that, in accordance with s.435A, voluntary administration is intended to serve, being the purpose of enabling a company to be administered in a way that maximises the chance that the company, or as much as possible of its business, will continue in existence or, if that is not possible, to obtain a better return for creditors than would result from an immediate winding up. 18 I therefore propose to take the course that was taken by the Queensland Court of Appeal in Thomas v Bradnam's Windows & Doors Pty Ltd [1999] QCA 487. That course is described in the opening paragraph of the judgment of de Jersey CJ: "When this matter came before the Court last week it was adjourned pending service on the administrators so that their submissions as to a grant of leave to enforce the guarantee might be ascertained. The administrators have now been given ample notice of today's hearing. They have raised no matter contrary to a grant of leave. Significantly they have not suggested that the judgment against the guarantor directors, the appellants, could adversely affect the administration of the company." 19 It may be that, in the end, the considerations referred to by Mr Stoljar will be found to warrant grant of the leave the plaintiff seeks. The fact that the plaintiff had, by serving demands, taken steps towards enforcing the guarantees before the directors appointed an administrator is, in view of the expressed legislative purpose, a very relevant consideration in favour of the plaintiff's case. But the attitude of the administrator to the application (or the fact that the administrator, being fully informed, does not wish to express an attitude) will also be a very relevant consideration. I therefore direct that the plaintiff furnish to the administrator of each company to which the present application relates, not later than Friday 20 June 2003, a copy of the originating process and supporting affidavits and a copy of these reasons. The plaintiff's application for leave under s.440J(1) is stood over to 10 am on Friday 27 June 2003 before me in the Corporations List. ********** Last Modified: 06/18/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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