Fire in the house: Interest guaranteed despite extinguishment of debt under deed of company arrangement

The Victorian Court of Appeal has affirmed that whilst a company’s debts can be released to some extent under a DOCA, that section 444J of the Corporations Act 2001 (Cth) (Act) expressly provides for a creditor’s rights under a guarantee or indemnity.

The Court found that the ultimate page of AOL’s trading account credit terms, which provided that the directors acknowledged the agreement to guarantee and indemnify the trading terms, constituted a guarantee and that the respondent, Mr Giddings who was the director for Timber, had a contractual obligation to pay interest owing under the guarantee.

Background 

The respondent in the application, Mr Giddings was a director and secretary of AOL. Upon application to Timber for a trading account in or around 2010, Mr Giddings signed credit terms (the Credit Terms) which relevantly provided:

• Invoices would be issued on 30 day terms and that 16% interest on unpaid sums would be payable on any unpaid sums, accruing from the date of payment.
• The form asked if the AOL directors were prepare to sign directors guarantees – Mr Giddings circled the word ‘no’ in relation to this question.
• An acknowledgment that “We, being directors or proprietors, acknowledge the agreement to guarantee & indemnify and agree to your trading terms”, which was signed by Mr Giddings.

By October 2016, AOL had approximately $300,000 in outstanding fees owing to Timber and on 7 December 2016, Timber issued a statutory demand for payment. On 31 January 2017, AOL was placed into voluntary administration and a DOCA was entered into on 24 October 2017.

Following deregistration of the AOL in May 2018, Timber commenced proceedings to enforce the guarantee under the Credit Terms. The County Court of Victoria found in the first instance, that Mr Giddings had not provided any guarantees due to the fact that he had not circled ‘yes’ in relation to the question asking whether directors would be prepared to sign a guarantee, but that if he had signed a guarantee that only interest would be enforceable as the remaining debt was extinguished by virtue of section 444J of the Act.

Timber appealed this decision, on the basis that (a) it considered the execution of the acknowledgments to be a binding guarantee; (b) the circling the word ‘no’ in relation to the directors guarantee question, did not sufficiently displace that guarantee; and (c) it considered Mr Giddings liable to discharge AOL’s obligations to pay the interest on the moneys outstanding for which the DOCA had been entered into. The Victorian Court of appeal found that the combined effect of the application and Credit Terms was that Mr Giddings had guaranteed the payment of interest, at the rate of 16 per cent per annum, on all moneys due and unpaid after 30 days of delivery, to be charged daily until actual payment.

The Court found that this was consistent with s 444H of the Act, on the basis that whilst the DOCA may have release the Company from all claims for principal by creditors on the termination of the deed, that AOL’s obligation to pay interest remained unaffected by the release in the DOCA.

Whilst Mr Giddings acknowledged that interest may be payable, he argued that the effect of the release under the DOCA, was that after 24 October 2017, there was no money due and as such, interest on the sum of $0 was nothing.

The Court of Appeal rejected this argument and determined that section 444J of the Act provided that the release of a company’s debt “does not affect the creditor’s rights under a guarantee or indemnity”. As a result, the Court found that “such a result is precisely what [the provision] makes clear does not occur” and that this was an established principle at common law.

The Court found that Mr Giddings execution of the Credit Terms constituted his provision of a binding and enforceable guarantee, and that under the Credit Terms he had a contractual obligation to pay interest owing under the guarantee, which was unaffected by the underlying debt under the DOCA being extinguished.

Key takeaway 

This case importantly demonstrates that section 444J of the Act can be utilised to enforce a creditor’s rights for interest under a guarantee or indemnity, where the principle debt has been extinguished provided there is an intention exhibited by a director to be bound by a guarantee or indemnity.

If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here.

Authored by:
Freda Zacharia, Senior Associate