Director Caught On The Chopping Block - Confirmation That Guarantor Liability Not Affected By DOCA

In the recent case of TW Timber Treatment Pty Ltd v Giddings [2022] VSCA 147, the Victorian Court of Appeal considered the question of whether a guarantor director could be liable for ongoing interest charges when the underlying guaranteed debt had been extinguished pursuant to the operation of a deed of company arrangement (DOCA). 

The case revolved around a claim by TW Timber Treatment Pty Ltd (Timber) that the director of the deregistered company Aarons Outdoor Living Pty Ltd (AOL) had guaranteed the debt owed by AOL to Timber, and that the director was liable for interest charges that had accrued after underlying AOL debt had been extinguished by a DOCA.

The claim failed at first instance when a Judge of the Victorian County Court found that the director had not given a binding and enforceable guarantee.  The Victorian Court of Appeal was therefore required to consider both whether a guarantee had been given, as well as whether the guarantor’s liability included interest accruing after the extinguishment of the guaranteed debt.

Background

Timber supplied outdoor timber products to AOL for the purposes of AOL’s business of manufacturing and selling outdoor living products.  Mr Aaron Lyall Giddings was at all relevant times the director and company secretary of AOL.

In around October 2010, AOL made a request to open a new trading account on credit terms with Timber, and on 15 October 2010 Timber sent a 5-page application form to AOL for completion by AOL.  The form was duly completed by AOL and returned to Timber.

The following matters should be noted in relation to the form completed by AOL:

• the credit terms provided that invoices would be issued on 30-day terms, and if invoiced amounts were not paid by the due date then interest would accrue on the unpaid amount at 16% per annum from the due date until the actual date of payment;
• in the section requiring the names and addresses of the directors of AOL, the only name and address entered were those of Mr Giddings;
• the form contained a question asking whether the director(s) of AOL were prepared to “sign the directors guarantee? Yes No”, and the word “No” was circled; 
• however, the form contained a number of pages containing “Acknowledgements and Agreements” which included language to the effect that “the directors” by signing the form acknowledged and entered into a guarantee in respect of AOL’s liabilities under the trading account.  The form also included a section expressly providing for execution by “the guarantors” along with the words “We, being directors or proprietors” acknowledge the agreement to guarantee & indemnify and agree to your trading terms”.  All of these pages and sections were signed by Mr Giddings.  

Following the return of the form, Timber supplied timber products to AOL between October 2010 and November 2016.  By November 2016, AOL owed Timber approximately $300,000.  On 1 December 2016 Timber’s solicitors issued demands to AOL, and on 7 December 2016 Timber issued a statutory demand against AOL. 

AOL was placed into voluntary administration on 31 January 2017.  The creditors of AOL resolved to approve AOL entering into a DOCA, which it did on 17 March 2017.  Timber received a dividend payment under the DOCA leaving an outstanding debt of just over $280,000.  The DOCA was subsequently effectuated on 24 October 2017 and AOL was deregistered in May 2018.

Timber then commenced proceedings against Mr Giddings to enforce the guarantee.

Decision at first instance

The matter was first heard by a judicial registrar who dismissed Timber’s claim.  The proceeding was then moved before a Judge of the County Court of Victoria who reviewed the decision of the judicial registrar by way of a hearing de novo.

The Judge found that Mr Giddings had not provided a guarantee having regard to the fact that AOL had circled the word “No” in relation to the question of whether AOL’s director agreed to provide a guarantee, and that (in relation to the other parts of the form) Mr Giddings had been required to sign the form as the director of AOL regardless of whether or not he was providing a guarantee.

However, the Judge did find that if there had been an enforceable guarantee then Mr Giddings would have been liable for interest accruing after the AOL was extinguished as section 444J of the Corporations Act 2001 (Cth) (Act) expressly provides that the release of a debt pursuant to a DOCA does not affect the creditor’s rights under a guarantee or indemnity.

Both parties then appealed to the Victorian Court of Appeal.

The Appeal

The Court of Appeal (comprising McLeish, T Forrest and Macaulay JJA) dealt first with the question of whether Mr Giddings had provided a guarantee, and found that the form contained “overwhelming” objective indicators that Mr Giddings had intended to provide a guarantee.

Amongst these indicators was the fact that the form had contained an express section for execution by the guarantor, that the wording of this section could permit no other interpretation, and that Mr Giddings had signed this section without qualification.

The Court of Appeal did not consider that the circling of the word “No” in relation to the question of whether the director of AOL intended to provide a guarantee was sufficient to displace the effect of Mr Giddings’ other signatures throughout the form.

As to the question of Mr Giddings’ liability for interest accruing after the AOL debt was extinguished upon effectuation of the AOL DOCA on 24 October 2017, the Court of Appeal held that:

• section 444J of the Act clearly provides that the release of the AOL debt did not affect Timber’s rights against Mr Giddings under the guarantee;
• while the historical common law cases in this area appear to provide that the question of whether a guarantor can continue to accrue liability after discharge of the principal debtor’s liability depends on the wording and proper construction of the guarantee, section 444J was introduced for the specific purpose of improving certainty in this area, and for putting it beyond doubt that the release of the underlying debt does not discharge the liability of the guarantor;
• as a result, the release of the AOL debt could not and did not affect the claim against Mr Giddings pursuant to the operation of section 444J; and
• further, even if regard was to be had to the wording of the guarantee, the guarantee in this case was of AOL’s obligations under the credit contract, which included an obligation to pay any outstanding invoiced amounts along with interest accruing “until the actual date of payment”.  This was different to a guarantee of just “any amounts due by Timber”.

The Court of Appeal therefore granted the appeal on the existence of the guarantee in finding that Mr Giddings had provided a binding and enforceable guarantee, and dismissed Mr Giddings’ cross appeal in finding that Mr Giddings was liable for interest that had accrued after the underlying AOL debt was extinguished by the AOL DOCA.

Lavan comments

This case provides a useful and practical illustration of how section 444J of the Act operates in relation to claims against guarantors where the underlying debt has been extinguished by a DOCA.

If you have any questions about the impact of a DOCA on a guarantee, the experienced Lavan team is ready to help.