Hawkins v The Bank of China

This matter concerned an application for special leave to appeal to the High Court of Australia. The applicant, David Kingsley Adams, sought to appeal a decision concerning the construction of section 556 of the Companies Code, which is substantially similar to section 592 of the Corporations Law. The respondent was the Bank of China.

The central legal issue before the High Court was whether an all-moneys guarantee, with no defined amount or limitation, constituted a contingent liability or a contingent debt at the time of its execution. The applicant argued that a distinction should be drawn between these two concepts, submitting that at the time of execution, a contingent liability arose, and it was only upon default by the lender that a contingent debt came into existence. This distinction was considered relevant for the purposes of section 556 of the Companies Code, which requires directors to consider the reasonableness of incurring an obligation.

The applicant's primary legal argument was that a director must be able to exercise their mind as to the reasonableness of incurring an obligation. They contended that for an open-ended guarantee, it was impossible at the time of execution to quantify the extent of the liability, and therefore, it was not a debt in the ordinary commercial sense. The applicant submitted that the Chief Justice in the court below had recognised this difficulty, noting that at the time of executing such a guarantee, the liability would not normally be shown as a debt. The applicant's position was that the relevant time for consideration under section 556 was the time of execution, at which point only a contingent liability, not a debt, had been established.