Supreme Court New South Wales Medium Neutral Citation: Mizuho Bank Ltd -v- Mark Anthony Ackroyd [2016] NSWSC 1148 Hearing dates: 29 July 2016 Decision date: 19 August 2016 Jurisdiction: Equity - Commercial List Before: Hammerschlag J Decision: Motion for stay of proceedings filed on 26 July 2016 dismissed Catchwords: CORPORATIONS – Corporations Act 2001 (Cth) – s 440J(1) provides that during the administration of a company a guarantee of a liability of the company cannot be enforced as against a director of the company who is a natural person and that a proceeding in relation to such a guarantee cannot be begun against such a director, except with the leave of the Court – proceedings on a guarantee given by a director were begun before the administration – whether s 440J(1) applies to such proceedings – HELD the section does not apply Legislation Cited: Corporations Act 2001 (Cth) Motor Traffic Act 1909 (NSW) Public Trustee Act 1978 (Qld) Cases Cited: Bank of Western Australia Limited v Clift (2010) 80 ACSR 163; [2010] QSC 366 Coates Hire Operations v McNaughton (2006) 58 ACSR 518 Di Carlo v Kashani-Malaki (2013) 2 Qd R 17 Fraser v Deputy Commissioner of Taxation (1996) 69 FCR 99 Hanson & Younghan Pty Ltd [1987] VR 615 Holt v AEG Electric Co [1918] 1 Ch 320 Mudginberri Station Pty Ltd v Langhorne (1985) 7 FCR 482 Muirfield Properties Pty Ltd v Hanson & Younghan Pty National Australia Bank v King (2003) 45 ACSR 413 R v Bates [1982] 2 NSWLR 894 Re Behan Ex parte Pioneer Concrete (Qld) Pty Ltd (1995) 17 ACSR 725 Shergold v Tanner (2002) 209 CLR 126 Wade v New South Wales Rutile Mining Co Pty Ltd (1969) 121 CLR 177 Wallabah Pty Ltd v Navillo (1997) 23 ACSR 444 Category: Principal judgment Parties: Mizuho Bank Ltd - Plaintiff/Respondent Mark Anthony Ackroyd - Defendant/Applicant Representation: Counsel: G. Ng - Plaintiff/Respondent A. Stewart SC with T. March - Defendant/Applicant Solicitors: Ashurst - Plaintiff/Respondent Thynne + Macartney - Defendant/Applicant File Number(s): 2016/178533 Judgment 1. HIS HONOUR: The plaintiff bank lent National Plant & Equipment Pty Ltd (the company) a significant sum of money. As at 9 June 2016, the company owed it $44,481,375.87. The defendant has at all material times been a director of the company. He guaranteed the company's obligations to the plaintiff to an amount not exceeding $20,040,000, plus accrued interest and costs. 2. On 10 June 2016, the plaintiff begun proceedings against the defendant on his guarantee by suing out a summons, supported by a commercial list statement, seeking judgment against him for $20,281,169.31. 3. On 14 July 2016, under s 436A of the Corporations Act 2001 (Cth) (the Act), the company appointed administrators. References beneath to sections are to sections of the Act, unless the context requires otherwise. 4. Section 440J provides: 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 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. (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. 1. No leave of the Court has been given under s 440J(1) to the plaintiff to proceed against the defendant. 2. As his first line of defence, the defendant argues that the plaintiff needs the Court's leave to continue the proceedings because by them, it is, contrary to s 440J(1)(a), enforcing a guarantee of a liability of the company. 3. The plaintiff argues that the section has no application to proceedings begun before the administration commenced. In the alternative, should the section apply, the plaintiff seeks leave to proceed. 4. The defendant intends to cross claim against the company for quia timet relief for exoneration or for indemnity from the company as its guarantor. To do this, under s 440D(1) (which is set out later), he needs either the written consent of the administrators or the leave of the Court. He has filed a motion for leave. However, the administrator's position on giving consent is not yet known and that motion is not ready to proceed. 5. By motion filed on 26 July 2017, the defendant seeks a stay of these proceedings. Although, strictly, no motion is required because if s 440J(1) applies, the proceedings simply cannot be furthered without leave, the motion is an appropriate vehicle for determination of the significant question whether the section applies to a proceeding begun before the administration. 6. The answer to that question depends on whether, where s 440J(1)(a) refers to a guarantee of a liability of a company not being "enforced", this means or includes furthering proceedings (in relation to a guarantee), which were begun before the administration. 7. In my opinion, it does not. 8. Mr A Stewart SC, with Mr T March of counsel, appeared for the defendant applicant on the motion. Mr G Ng of counsel appeared for the plaintiff respondent on the motion. 9. The only decision directly in point to which the Court was referred is Bank of Western Australia Limited v Clift (2010) 80 ACSR 163; [2010] QSC 366 (Clift). There, in an unopposed application for summary judgment by a bank against a guarantor of a company in administration, the proceedings had begun before the appointment of an administrator. Wilson J held that the continuation of the proceedings did not amount to the enforcement of a guarantee liability within the meaning of the section. 10. Her Honour relied, in particular, upon R v Bates [1982] 2 NSWLR 894, in which the Court of Criminal Appeal considered s 2C of the Motor Traffic Act 1909 (NSW), which provided that the provisions of that Act and regulations relating to the regulation and control of drivers and of motor vehicles upon public streets shall be enforced by the Commissioner of Police and members of the Police force. At [895] Samuels JA (with whom Cantor and Enderby JJ agreed) said: …I would harbour considerable doubt, as a matter ofgrammar or syntax, whether the word "enforced" extends to cover theinstitution of proceedings for breach of a provision of a statute. The relevantmeaning assigned in the Shorter Oxford English Dictionary is that to enforcemeans "to compel observance of". That is, I think, its ordinary meaning andthat is the meaning which, in the absence of any indications to the contrary,should be attributed to the word in s 2c. 1. Her Honour also referred to Holt v AEG Electric Co [1918] 1 Ch 320, in which her Honour observed that a distinction was drawn between establishing a liability or right on the one hand, and enforcing it on the other, and Fraser v Deputy Commissioner of Taxation (1996) 69 FCR 99, in which her Honour observed that the Full Federal Court drew a distinction between enforcing remedies, including extra curial remedies, and the institution of legal proceedings and their continuance up to judgment. 2. Her Honour made reference to the Explanatory Memorandum accompanying the introduction of s 440J(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. Her Honour did, however, point out that the section has been held to apply not only where the appointment of an administrator would actually trigger liability under a guarantee: see Wallabah Pty Ltd v Navillo (1997) 23 ACSR 444. 3. Her Honour drew attention to the fact that s 440J(1) differs from other provisions of the Act such as ss 440D, 440F and 471B, by which proceedings may not be begun or proceeded with. 4. Her Honour observed that there is a temporal sequence in which subsections (a) and (b) of s 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 within the prohibition. 5. The defendant submits that I should not follow Clift because it is clearly wrong. The observation was made that Clift went off unopposed and that her Honour did not have the benefit of submissions from a contradictor. 6. The defendant submits that, contrary to her Honour's view, the ordinary meaning of 'enforce', in the context of a liability under a guarantee, includes both the bringing and furthering of legal proceedings against a guarantor. He submits that R v Bates is not pertinent because it concerned a different statute and a different context. He submits that her Honour read down the ordinary meaning of 'enforce', contrary to the express words in s 440J(1)(b), "without limiting paragraph (a)". 7. The defendant submits that the distinction between s 440J(1) and other sections which (in the context of restricting legal proceedings) include the words "proceeded with", is insignificant because those other sections are directly concerned with legal proceedings where a relevant distinction is to be drawn between starting and continuing, whereas s 440J(1) is concerned with the concept of enforcement, which inevitably includes both starting and continuing the relevant process. Attention was drawn to the fact that s 441B (which deals with enforcement of security interests before administration) makes a distinction between the enforcement of security interests, which begin before administration, and those which begin after administration has commenced. He submits that if the legislature intended to draw a similar distinction in s 440J(1), it would have said so. 8. He submits that her Honour's conclusion does not serve the broad purpose of Pt 5.3A of the Act, to ensure that administration takes an orderly course, because if proceedings against a director on a guarantee can be prosecuted during an administration, it is inevitable that the director would seek recourse against the company for exoneration or indemnity. He also submits that it would be unjust for the guarantor to have to pay the creditor whilst not being allowed to pursue the debtor. 9. I consider the conclusion in Clift to be correct. There are both textual and contextual considerations which support this conclusion. 10. It is apt to observe two things at the outset. First, there is no dispute that by commencing these proceedings the plaintiff regularly invoked the jurisdiction of this Court. It is well established that a statute is not to be interpreted as limiting the jurisdiction of the Court, unless it clearly and unmistakeably does it. The Courts will interpret a provision affecting jurisdiction so as to have the minimal effect on it: Wade v New South Wales Rutile Mining Co Pty Ltd (1969) 121 CLR 177 at 181; Shergold v Tanner (2002) 209 CLR 126; Di Carlo v Kashani-Malaki (2013) 2 Qd R 17 at 26. Second, it is also well established that absent a clear intention to do so, a statute will not be construed so as to deprive a party of its common law rights: Muirfield Properties Pty Ltd v Hanson & Younghan Pty Ltd [1987] VR 615 at 621; Mudginberri Station Pty Ltd v Langhorne (1985) 7 FCR 482 at 490. If the defendant is correct, the plaintiff is deprived, albeit perhaps only transiently, of its right to sue to vindicate its chose in action. 11. I turn then to the proper construction of s 440J(1) in its context. 12. Part 5.3A of the Act extends from s 435A to s 451D. It is entitled "Administration of a company's affairs with a view to executing a deed of company arrangement". Section 435A describes the object of the Part as being to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence, or if it is not possible for the company or its business to continue in existence, or results in a better return for the company's creditors and members than would result from an immediate winding up of the company. 13. The policies underlying Pt 5.3A are to maximise the chances of the beleaguered company staying alive and to maximise return. To this end, the Part contains provisions which restrict the exercise of rights and the bringing or proceeding with proceedings against the company. These provisions include s 440B(1), which restricts the exercise of third party rights in property of the company or property used or occupied by or in the possession of the company, except with the administrator's written consent or the leave of the Court. They include ss 440D and 440F which are respectively in the following terms: 440D Stay of proceedings (1) During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except: (a) with the administrator's written consent; or (b) with the leave of the Court and in accordance with such terms (if any) as the Court imposes. 440F Suspension of enforcement process During the administration of a company, no enforcement process in relation to property of the company can be begun or proceeded with, except: (a) with the leave of the Court; and (b) in accordance with such terms (if any) as the Court imposes. 1. These restrictions are aimed at preserving the company's position to afford time to facilitate the achievement of the underlying policy. They give the administrator time to assess and report on the company without the distraction of proceedings; they put a brake on legal and associated costs, allowing time for the development of proposals which might preserve the value of the company as a going concern; they give the creditors time to consider their position for the purposes of the creditors' meeting and may prevent a creditor from obtaining some advantage over other creditors or potential creditors. In National Australia Bank v King (2003) 45 ACSR 413 at 417, Barrett J (as his Honour then was) observed that s 440J(1) fits into this 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. 2. However, in Coates Hire Operations v McNaughton (2006) 58 ACSR 518 (Coates) at [8] his Honour observed the following with respect to s 440J(1): 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. 1. His Honour cited the explanation for s 440J(1), given by Hill J in Re Behan Ex parte Pioneer Concrete (Qld) Pty Ltd (1995) 17 ACSR 725 (Behan) at 727–8 that: 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: 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)). 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. 1. The defendant's submission is that where s 440J(1)(a) refers to enforcement, this includes both beginning and proceeding with curial proceedings on the guarantee. A difficulty standing in the way of this submission is that if it is correct, there is no logical or rational reason to specifically embargo the beginning of proceedings in s 440J(1)(b) (as distinct from continuing them). Another is that there is no rational reason why the legislature would provide specifically for beginning proceedings, but leave continuing them to be covered by a general term. To my mind, the specific inclusion of the embargo against beginning proceedings indicates that continuing them is not embargoed. 2. I reject the submission that little significance is to be attached to the difference in wording between sections which refer only to proceedings being begun, as opposed to being begun and continued. The distinction is one of substance and its importance was observed by Hill J in Behan at 727–8 (in a passage cited with approval by Barrett J in Coates at 520). Enforcement can, and often will, entail a process which, like proceedings, can be begun and continued. Section 440F refers to "enforcement process". 3. The opening words of s 440J(1)(b) "without limiting paragraph (a)" are intended to avoid a reading down of s 440J(1)(a), but they also do not expand it. Additionally, the only way, it seems, the inclusion in s 440J(1)(b) of an express inhibition on beginning proceedings could have been read as limiting the concept of enforcement in s 440J(1)(a) is if it were to be treated as representing a category of enforcement (i.e. legal proceedings) by reference to which the general concept could be limited. The opening words of s 440J(1)(b) are an indication, and are consistent with the notion that legal proceedings are not to be considered as enforcement. 4. In Di Carlo v Kashani-Malaki the Queensland Court of Appeal considered, although in a different context, the distinction between bringing an action on the one hand, and prosecuting or maintaining it on the other. Section 95(1)(b) of the Public Trustee Act 1978 (Qld) provided that during the time when the public trustee was manager of a prisoner's estate, the prisoner shall be incapable, except with the consent in writing of the public trustee…"of bringing or defending any action of a property nature or for the recovery of any debt or damage". Subsection (2) of the section provided that if the Court became aware that an action had been brought or defended in contravention of subsection 1(b), the prisoner could take no further steps in the action without the written consent of the public trustee. At [13]–[15] Muir JA, with whom Fraser and Gotterson JJA agreed, considered that the expression "bring any action" was not apt to encompass prosecuting or maintaining an action, but to the commencement of a proceeding or the instituting of a defence to one. 5. Section 440J(2) applies while subsection (1) prevents 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 1. The terminology used indicates a clear distinction between 'enforcing' and 'beginning' a proceeding. If s 440J(1) was to be read, because of s 440J(1)(b), as including continuing a proceeding within the concept of enforcing, s 440J(2)(b) is superfluous. 2. In Coates, Barrett J identified the legislative intention behind s 440J(1)(b) as being to remove an inhibition on directors from appointing an administrator because personal guarantees might then be enforced. In a case where proceedings have already begun, the occasion for any such inhibition will have passed. If continuing proceedings were to be inhibited by the appointment of an administrator, the legislative intention might well be subverted by encouraging director guarantors to appoint an administrator to protect their own personal position, see: Behan at 727. 3. In Behan – cited by Barrett J in Coates at [7] – Hill J referred to the settled law that once judgment is obtained, the underlying debt merges in it. Hill J pointed out that once judgment is obtained by the creditor, no question of enforcing the guarantee arises because the rights under the guarantee merge into the judgment and the rights of the parties thereafter flow from the judgment and that it follows, that as a matter of construction, s 440J(1) in no way operates to stay execution of the judgment because one is no longer concerned with enforcement of a liability under a guarantee. 4. If the defendant's construction is correct, s 440J(1) will stop the continuation of proceedings on a guarantee, but will not stop execution of a judgment on the guarantee already obtained against the director guarantor. There does not seem to be any sensible reason for such a distinction. 5. I reject the submission that it is inevitable that a director sued on a guarantee will seek recourse against the company for exoneration or indemnity. There may well be no utility in such a course. After all, under s 436A, the directors may appoint an administrator only if in their opinion the company is insolvent, or is likely to become insolvent at some future time. If, however, a director did seek recourse, his or her position is protected by the ability to obtain leave from the Court to bring or maintain such a claim under s 440D(1). Proceedings against a guarantor do not have a direct effect on the administration as do proceedings against the company or the administrators, and the policy considerations which favour a moratorium on the latter do not apply to the former. 6. Section 440J(1) does not, in its terms and context, evince an intention, let alone a clear one, to confine the jurisdiction of the Court with respect to proceedings regularly instituted before the administration, or to limit the ability of a creditor already suing to continue to do so to vindicate an accrued chose in action. Rather, it evinces an intention that this not be the case. 7. The motion is dismissed. I will hear the parties on costs should this be necessary and on the further conduct of the proceedings. ************ Amendments 22 August 2016 - Amendment to clause 41 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. Decision last updated: 22 August 2016