Irrevocable and Continuing Guarantees v the Bankruptcy Act
All debts and liabilities, present and future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy; s 82(1) of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”) [emphasis added]. Such debts and liabilities are provable debts; s 5(1) of the Bankruptcy Act.
What would you say if:
1. A director of a company you are dealing with becomes bankrupt (“Bankruptcy”);
2. Prior to the Bankruptcy, the director provided you with an irrevocable and continuing guarantee;
a. As to the irrevocable aspect, meaning that he/ she cannot unilaterally revoke it at any time;
b. As to the continuing aspect, meaning that it is in respect of the purchase and delivery of goods by the company from time to time;
3. The Bankruptcy is annulled (s 73(1) of the Bankruptcy Act) (“the Annulment”);
4. The company then purchases and has delivered goods (e.g. post-Bankruptcy). The company does not pay and subsequently goes into administration and liquidation;
5. You then claim against the director pursuant to the guarantee;
6. The director does not pay.
Can you take action against the director pursuant to the guarantee? Or is the “debt” only provable in the Bankruptcy/ the Annulment?
The answer is you need to prove in the Bankruptcy/ the Annulment. This is because the obligation (the irrevocable guarantee) was incurred before the date of the Bankruptcy.
The answer would be the opposite if this type of guarantee was revocable (see below). In that case, recent authority from the Full Court of the Supreme Court of South Australia is to the effect that the relevant “obligation” is only incurred at the time of the relevant purchase and delivery of the goods and therefore the debt is not provable; Darwin Food Pty Ltd v Gray [2018] SASFC 84 per Kouarkis CJ, Blue and Hinton JJ.
Gavin Parsons and Associates recently successfully argued a case on behalf of a director, relying on the above authority. That was, that as the director in that case had provided an irrevocable and continuing guarantee, the sequestration order obtained by the trade creditor was liable to be set aside (which it was, by consent).
In summary:
1. If you are pursuing a director, in respect to a guarantee, who has been bankrupt or subject to a relevant bankruptcy event (including a Part X), you need to carefully review the contents of the specific guarantee (or engage our firm to do so);
2. Subject to a range of other factors (outside the scope of this article), if the guarantee is irrevocable and continuing, you may be prohibited from taking fresh enforcement or other action against the director and instead may need to prove in the relevant bankruptcy administration (even if the ‘liabilities’, e.g. the order and acceptance of purchases of goods, arose after the date of the bankruptcy);
3. However, if the relevant guarantee is revocable and continuing, then you are (again, subject to a range of factors outside the scope of this article), able to take fresh enforcement or other action against the director outside of the relevant bankruptcy administration. This is because a revocable and continuing guarantee means that the director can revoke at any time and therefore the obligation is only incurred after: (a) an order is placed; (b) the supplier accepts the order; and (c) the director does not revoke the guarantee before the occurrence of the first two circumstances; Darwin v Gray above, per Kourakis CJ at [3].
If you want revocable and continuing guarantees in your business, and also want to protect against the risk that a guarantor may revoke the guarantee after the date of bankruptcy, you should ensure that you have terms in the main contract with the principal debtor that set out that you can refuse to complete a purchase and delivery where there has been a revocation of the guarantee.
Gavin Parsons and Associates can assist you with any questions you have regarding these matters. Please contact us today on (02) 9262 4471.