+61 2 9560 3388
Company Law News, July/August 2010
A warning to all directors who act as guarantors for company debts and then resign as director.
Dwyer v Craft Printing Pty Ltd[2009] NSWCA 405
This decision concerned the operation of the Fair Trading Act (NSW) in relation to a guarantee given by a company director.
In his capacity as a director, the appellant entered into a guarantee in respect of his company’s account with one of its suppliers. Subsequently, another company of which the appellant was a director took over the business of the first company. The director argued that from this point onwards it was the second company that traded with the supplier, and that the supplier was sent a letter explaining this situation. The supplier denied having received such a letter. Ultimately, the first company was wound up voluntarily and the second went into administration. The supplier commenced debt recovery action against the appellant under the guarantee, for the debts that had arisen before the first company was wound up. It also instituted proceedings against the appellant in relation to the post-liquidation debts of the first company, on the basis that he was guilty of misleading and deceptive and unconscionable conduct in failing to advise the supplier of the winding up of the first company.
At trial, the supplier was successful on all claims.
The Court of Appeal subsequently found that the appellant had engaged in misleading and deceptive conduct. Here, the Court rejected the appellant’s contention that his “silence” surrounding the liquidation of the first company stemmed from mere inadvertence, which was a defence under the Act. The Court held that all the circumstances surrounding the case suggested that there was a “reasonable expectation” that the appellant, as a director and guarantor of the first company, would disclose the liquidation of the first company to the supplier.
This case serves as a warning to all guarantors to disclose changes in the identity or legal status of companies for which guarantees are given. Directors must ensure that they properly notify creditors of all changes to protect their position once they resign.
The court has recently considered its power of discretion in deciding to allow a voluntary administration to proceed once an application to wind up a company has been filed.
Deputy Commissioner of Taxation v WPS Motorsport Pty Limited[2009] FCA 476
This case considered the question of whether or not a company’s entrance into voluntary administration after an application for winding up in insolvency has been made by a creditor would be sufficient to stop the winding up application from proceeding.
On 30 March 2009, the DCT applied for the winding up of WPS for its deemed insolvency flowing from failure to comply with a statutory demand. Subsequent to this application for a winding up order being made, an administrator was appointed under s436A of the Corporations Act by resolution of WPS directors on 30 April 2009, the day before the application was to be heard. It fell to the Court to determine, having regard to s 440A(2) of the Act, whether or not it was in the interests of WPS’ creditors that the company continue under administration rather than being wound up.
The assets of WPS were put at roughly $100,000. The company owed the ATO some $1,000,000. The company’s unsecured debts totaled more than $6,195,000. There were also two significant directors’ loans.
The directors proposed to put a Deed of Company Arrangement to a meeting of company creditors. It was proposed that the company would “…pay into the Deed Fund an amount sufficient to pay all participating creditors 6 cents in the dollar in three installments…”
The Court noted that the evidence brought for the company was very “sparse”, and often ambiguous. There had been discussions between a company director, Mr. Atkinson and a Mr. Di Petta concerning the latter’s apparent interest in acquiring WPS, owing to the “value in the WPS brand” and the company’s position as a possible base for the building of a successful V8 Supercar racing team.
The company had omitted from its schedule of assets several important items, including an estimate of the value of the WPS brand, and the value of certain leases and licenses.
The Court reiterated its discretion to adjourn the winding up application even if it was found that the continuation of the company’s administration would not be in the best interests of the creditors. The Court considered the judgment of Campbell J in Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd [2003] NSWSC 47, where it was said:
“…Ultimately what the court needs to do is to be persuaded. The amount of proof which can result in persuasion differs with the circumstances in which litigation comes before the court. It is common enough, in applications under s 440A, for an administrator to need to seek an adjournment very soon after his or her appointment, at a time when he or she knows very little about the affairs of the company. In that sort of situation, comparatively little material might be needed to justify a short adjournment. As time goes on, however, and the occasion that there has been for the collecting of evidence increases, so the amount of material which might need to be put before the court before it is persuaded, will increase.”
The observations of Hamilton J in Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830 were also endorsed, to the extent that his Honour noted in that case:
“The sole consideration posited as the criterion for the Court's decision in s 440A(2) is the interests of the company's creditors. …. In general terms, that will be difficult to do unless there is a good case that there will be a greater or more accelerated return from the course contended for. …Where there are advantages in either course, in general terms it may well be the proper course to give such adjournment as will allow the creditors themselves to vote upon the proposal and determine which course they prefer.”
As to the issue of the “relation-back day”, the Court here stated that:
“In this instance, were a winding up to be ordered by the Court, the effect of s 513A in the circumstances is that, because the company was under administration, the winding up would be taken to have begun or commenced on the s 513C day in relation to the administration: see s 513A(b). The s 513C day, in relation to the administration of the company, would, in this instance, be the day on which the administration began: see s 513C(b). The effect of the company being in administration then is to affect the day which is the relation-back day. That effect has already occurred.”
The Court found that, on the very limited evidence at hand, there was “…very little prospect indeed of a return to creditors” were liquidation of the company to be ordered and the likely return to creditors of six cents in the dollar under the proposed deed of company arrangement was “better than nothing”. However, on the very scant evidence, the Court was unable to accept that there was any substance to WPS’ proposed deed of company arrangement. The company had not demonstrated sufficient assets to make this a reality. The court was not satisfied that it was in the best interests of the creditors that the company be allowed to continue under administration. The company was said to be “spectacularly insolvent” and was wound up as such, in the absence of any public interest in allowing it to continue trading under administration.
Forum Law has a strong background in insolvency having acted for external administrators and for company officers and we welcome your enquiries concerning trading your company in difficult times or defending claims from external administrators.