On 19 August 2016, in Mizuho Bank Ltd -v- Mark Anthony Ackroyd [2016] NSWSC 1148, Hammerschlag J considered the operation of section 440J of the Corporations Act 2001 (Cth), which 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… except with the leave of the Court …”
Proceedings had been begun by a creditor against the guarantor of a debtor company on a guarantee, and the next month, the debtor company appointed an administrator: [2]-[3].
The guarantor argued that no leave of the court had been granted for the creditor to proceed against the guarantor under section 440J, and that such leave was required in order to enforce a guarantee of a liability of a company in administration: [6].
The creditor argued that the section had no application to proceedings begun before the administration commenced. Alternatively, it sought leave to proceed in the event it was wrong: [7]. It argued that, consistently with an earlier Queensland case (Bank of Western Australia Limited v Clift (2010) 80 ACSR 163; [2010] QSC 366), that the continuation of proceedings begun before the commencement of the administration did not not amount to the enforcement of a guaranteed liability within the meaning of the section, and hence, did not prevent the creditor continuing those guarantee proceedings: [13]-[15].
As noted by his Honour at [15], in Clift, Wilson J had held that there was a distinction between:
- “establishing a liability or right on the one hand, and enforcing it on the other”: (Holt v AEG Electric Co [1918] 1 Ch 320); and
- “enforcing remedies, including extra curial remedies, and the institution of legal proceedings and their continuance up to judgment”: (Fraser v Deputy Commissioner of Taxation (1996) 69 FCR 99).
The guarantor argued that the finding in Clift was unopposed, and was clearly wrong. He argued that 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.”: [19]-[20].
Hammerschlag J agreed with the approach in Clift: [23], holding at [31]:
“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.”
His Honour held at [33]:
“…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.”
His Honour observed at [39]:
“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.”