Reported Decision : 58 ACSR 518 (2006) 24 ACLC 765 New South Wales Supreme Court CITATION : Coates Hire Operations Pty Ltd v McNaughton [2006] NSWSC 841 HEARING DATE(S) : 17/08/06 JUDGMENT DATE : 17 August 2006 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Barrett J EX TEMPORE JUDGMENT DATE : 08/17/2006 DECISION : Leave granted under s.440J CATCHWORDS : CORPORATIONS - voluntary administration - enforcement of guarantee given by director of company - need for court's leave for enforcement during administration - where enforcement proceeding commenced one day before end of administration LEGISLATION CITED : Corporations Act 2001 (Cth), Part 5.3A, ss.235C(1)(b), 440J Emanuele v Australian Securities Commission (1997) 188 CLR 114 CASES CITED : National Australia Bank Limited v King (2003) 45 ACSR 413 Re Behan; Ex Parte Pioneer Concrete (Qld) Pty Ltd (1995) 17 ACSR 725 PARTIES : Coates Hire Operations Pty Limited - Plaintiff Alexander John McNaughton - Defendant FILE NUMBER(S) : SC 2716/06 COUNSEL : Mr M. Orlov - Plaintiff SOLICITORS : Warren McKeon Dickson - Plaintiff IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J THURSDAY 17 AUGUST 2006 2716/06 COATES HIRE OPERATIONS PTY LTD v ALEXANDER JOHN McNAUGHTON JUDGMENT 1 I have before me a claim for an order granting leave under s.440J(1) of the Corporations Act 2001 (Cth). Section 440J is in these terms: " Administration not to trigger liability of director or relative under guarantee of company's liability (1) 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. (2) While subsection (1) prevents a person ( the creditor ) from: (a) enforcing as against another person ( the guarantor ) a guarantee of a liability of a company; or (b) beginning a proceeding against another person ( the guarantor ) in relation to such a guarantee; section 1323 applies in relation to the creditor and the guarantor as if: (c) a civil proceeding against the guarantor had begun under this Act; and (d) the creditor were the only person of a kind referred to in that section as an aggrieved person. Note: Under section 1323 the Court can make a range of orders to ensure that a person can meet the person's liabilities. (3) The effect that section 1323 has because of a particular application of subsection (2) is additional to, and does not prejudice, the effect the section otherwise has. (4) In this section: 'guarantee' , in relation to a liability of a company, includes a relevant agreement (as defined in section 9) because of which a person other than the company has incurred, or may incur, whether jointly with the company or otherwise, a liability in respect of the liability of the company. 'liability' means a debt, liability or other obligation." 2 The plaintiff claims to be a creditor of Sear Constructions Pty Ltd. It also claims to hold a guarantee of the obligations of that company from the defendant, Mr McNaughton, the sole director of the company. Proceedings upon the guarantee were commenced by the plaintiff against the defendant in the District Court by a statement of liquidated claim filed on 11 May 2005. At that time, however, Sear Constructions was subject to voluntary administration under Part 5.3A of the Corporations Act - although it must be said at once that the voluntary administration was in its final stages. In fact, the creditors had, on 22 April 2005, resolved that the company should execute a deed of company arrangement. That deed was executed on 12 May 2005, that is to say, the day immediately after that on which the District Court proceedings were commenced. 3 By force of s.435C(1)(b), the voluntary administration ended on 12 May 2005 when the deed of company arrangement was executed. At that point the embargo imposed by s.440J ceased to apply. This is because of the opening words of s.440J(1): "During the administration of a company..." 4 The effect of s.440J is that a guarantee given by a director in respect of an obligation of the company cannot be enforced against the director while the administration subsists. But the prohibition upon enforcement ceases once the administration has ended. It follows that, if the proceedings in the District Court that were in fact commenced on the 11 May 2005 had been commenced instead on 13 May 2005, the s.440J embargo would never have intruded. 5 The present application was initiated by originating process filed on 15 May 2006. There is therefore an application for an order granting leave under s.440J nunc pro tunc in such a way as to rectify the position by obtaining now the leave that, strictly speaking, should have been obtained before the statement of liquidated claim was filed in the District Court on 11 May 2005. 6 The purpose of s.440J was explained by Hill J in Re Behan; Ex Parte Pioneer Concrete (Qld) Pty Ltd (1995) 17 ACSR 725 at pp.727 to 728 where his Honour referred to the explanatory memorandum accompanying the Bill by which the 1993 insolvency reforms were effected: "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 s 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." 7 Hill J went on to make further observations about the scope and effect of s 440J (at p.728): "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 Co; Ex parte Oriental Financial Corp (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." 8 The legislative intention, clearly enough, was to remove any inhibition that directors might be thought to face in considering dispassionately the question 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. 9 In National Australia Bank Limited v King (2003) 45 ACSR 413 at p.417, I expressed the opinion that, while s.440J must be approached by reference to the stated legislative purpose, it is to be remembered that 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. In that case, I considered it important that the court have before it an expression of the administrator's attitude to the application for leave under s 440J(1) or, at least, that the court should see that the administrator had had an opportunity to inform the court of the administrator's position on the matter. 10 In this instance, of course, there is no longer any administration under Part 5.3A and no longer any administrator in office – although an administrator of the deed of company arrangement is in office. The purposes for which the administration was put in place – essentially, to allow time for an assessment of the company's position and the making of a decision by creditors as to the best way forward - have been fulfilled. 11 The plaintiff has, however, taken steps to ensure that the administrator of the deed of company arrangement is aware of this application. The plaintiff has also taken steps to ensure that the deed administrator has had an opportunity to place before the court any matters considered by the deed administrator to be relevant. Correspondence with the deed administrator makes it clear that he wishes to take no part in the proceeding. 12 Nor has the defendant director (guarantor) sought to make submissions today. He has been represented by solicitors in the past but their agent, Mr James, informed the court this morning that he had no instructions to appear for the plaintiff. He was excused. 13 I should add that, in my opinion, any effect that the deed of company arrangement may have in relation to the liability of the defendant as guarantor is not something that is relevant to the present application. If raised at all, that matter will appropriately be raised in the District Court proceedings in which the plaintiff seeks to enforce the guarantee. The only factors about which this Court needs to be concerned on the present application are those going to orderly progress and protection of the Part 5.3A administration. As that administration has ended – and, indeed, ended on the day immediately after the guarantee enforcement proceedings were commenced - no matter of concern arises which should stand in the way of the grant of the leave sought. 14 I should add that I am satisfied that it is open to the court to make a grant of leave retrospectively in the way the plaintiff seeks. Considerations of the kind that produced such a conclusion in Emanuele v Australian Securities Commission (1997) 188 CLR 114 apply equally to s.440J(1), in my opinion. 15 I therefore make order 1 in the originating process. [Counsel addressed on costs]. 16 It remains to deal with the question of costs. It is submitted on behalf of the plaintiff not only that costs should follow the event but also that the plaintiff's costs should be assessed on the indemnity basis. 17 In that respect, it is pointed out that, in the pre-trial phase of this application, the defendant participated actively and the court made directions for the filing of evidence by both parties and indeed for the filing of written submissions by both parties. The latter orders were made as recently as 26 June 2006. I am informed from the bar table that a substantial affidavit was served by the defendant and that counsel for the plaintiff came here today in the expectation that that affidavit would be read. 18 The defendant obviously approached the hearing date in a way that showed to the plaintiff that there would be opposition. The plaintiff came here today expecting opposition. As things have turned out, there was no opposition and, having regard to the circumstances to which I have referred, one might have expected that the defendant would allow the matter to be dealt with on a consent basis. I am satisfied that the hearing could have been avoided if the defendant had taken a realistic attitude to the matter, with the result that it is appropriate that costs be assessed on the indemnity basis. 19 I order that the defendant pay the plaintiff's costs of the proceedings, such costs to be assessed on the indemnity basis. ********** 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. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.