22 Nov 2016

HHG INSOLVENCY UPDATE: DIRECTORS BEWARE RE GUARANTEES AND COMPANY ADMINISTRATION

Directors who are guarantors may consider one reason to place their struggling or insolvent company into external administration is the benefit of avoiding, at least temporarily, being personally liable for the company’s debts under the guarantee, pursuant to s440J of the Corporations Act 2001 . (The director has a reprieve while the administration continues, but if the creditors or the administrators place the company into liquidation, the director-guarantor’s amnesty ends).

Some may be unaware that the director-guarantor’s amnesty operates if the company is already under administration by the time a creditor seeks to enforce the guarantee, but the situation is different if the creditor takes enforcement action against the director-guarantor before the administrator is appointed.

In that case, the director-guarantor will still be liable to pay out under the guarantee according to the NSW Supreme Court in Mizuho Bank Ltd v Mark Anthony Ackroyd [2016] NSWSC 1148.  This is because s440J of the Corporations Act 2001 does not affect claims commenced before the administrators’ appointment.

This is very important to remember especially if you are a sole or minority director and guarantor trying to prop up a company in financial difficulty using your own money.  In that case, consider the effect of s440D of the Corporations Act.  Under s440D, you will not be able to sue the company under administration for an indemnity (basically, all your money back) or a contribution (basically, some of your money back) if you have had to pay out the company’s debts under the guarantee.

So you may lose all recourse against the struggling company and have to foot all of its bills by yourself if you place it under administration before seeking a contribution from the company toward the debts that you have guaranteed.  Consider, though, that where the law requires or it otherwise appears to be in the best interest of members as a whole, that the company be placed into external administration, and you as director decide against doing so, to preserve your personal rights, as guarantor, of indemnity against the company, this may represent a conflict of interest.  You may then become liable and face penalties for breaching your duties as a director.

This area of the law can leave director-guarantors personally exposed in ways that are often unanticipated.  Directors should, independently of the company itself, always seek specialist legal advice before deciding whether or not to appoint an external administrator. Any lawyer or insolvency practitioner advising the company is professionally not allowed to consider the interests of the individual director-guarantor because of the conflict of interest that arises.

This is general information only, and does not constitute specific legal advice. If you would like further information in relation to this matter or other legal matters please contact our office on Freecall 1800 609 945 or email us now.

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