Re Behan, D.

[1995] FCA 564

CATCHWORDS

BANKRUPTCY - Bankruptcy notice issued on basis of judgment debt obtained against company director guaranteeing debt of company - whether company administration operates to stay execution of judgment debt - whether bankruptcy proceedings involve enforcement of guarantee - merger of rights under guarantee with judgment - s440J Corporations Law.

Corporations Law: ss436A, 440D, 440F, 440G, 440J.
Bankruptcy Act 1966: (Cth) s44(1)(g)

Ex parte Fewings; In re Sneyd (1883) 25 ChD 338; applied.
In Re European Central Railway Company; Ex parte Oriental Financial Corporation [1876] 4 ChD 33; applied.
In Re Jenkins (1889) 15 VLR 271; approved.
McDonald v Scobie [1980] QdR 477; approved.
Wren v Mahoney (1972) 126 CLR 212; referred to.
Bayne v Blake (1909) 9 CLR 360; discussed.

RE DARRELL BEHAN; EX PARTE PIONEER CONCRETE (QLD) PTY LTD

No QN 777 of 1995

CORAM:  HILL J
PLACE:  BRISBANE
DATED:  3 AUGUST 1995

IN THE FEDERAL COURT OF AUSTRALIA     )
GENERAL DIVISION  )

BANKRUPTCY DISTRICT OF THE           )  No. QN 777 of 1995
STATE OF QUEENSLAND                  )

RE:DARRELL BEHAN

Debtor

EX PARTE:PIONEER CONCRETE (QLD) PTY LTD

Creditor

CORAM:    HILL J
PLACE:    BRISBANE
DATED:    3 AUGUST 1995

MINUTES OF ORDER

THE COURT ORDERS THAT:

(1)The application be dismissed.

(2)The debtor pay the creditor's costs of the application.

Note:Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

IN THE FEDERAL COURT OF AUSTRALIA     )
GENERAL DIVISION  )

BANKRUPTCY DISTRICT OF THE           )  No. QN 777 of 1995
STATE OF QUEENSLAND                  )

RE:DARRELL BEHAN

Debtor

EX PARTE:PIONEER CONCRETE (QLD) PTY LTD

Creditor

CORAM:    HILL J
PLACE:    BRISBANE
DATED:    3 AUGUST 1995

REASONS FOR JUDGMENT

Mr Behan ("the debtor") applies to set aside a bankruptcy notice dated 13 June 1995 issued at the request of Pioneer Concrete (Qld) Pty Ltd ("the creditor").

The debtor is a director of Casino Developments Pty Ltd ("the Company") and by a deed of guarantee dated 24 April 1994 guaranteed the creditor the due and punctual payment of all moneys at that date or thereafter owing by the Company as if the principal debtor.  The guarantee was expressed specifically as not being discharged in the event of, inter alia, the liquidation of the Company.

The creditor commenced proceedings against the debtor in the District Court at Brisbane alleging moneys owing under the guarantee in respect of non-payment by the Company for goods supplied to the Company by the creditor.  On 28 April 1995 the creditor obtained a default judgment against
the debtor in the sum of $41,139.95, together with $585.50 for costs.

On 22 May 1995 administrators were appointed by the directors of the company pursuant to the provisions of s436A of the Corporations Law ("the Law"). That administration, which began on that day, continued until 7 July 1995 when a deed of company arrangement in respect of the company was executed: s435C of the Law.

On 13 June 1995 a bankruptcy notice was issued against the debtor.  That notice was served upon the debtor on 16 June 1995.  It was based on the default judgment obtained by the creditor.

It is the submission of the debtor that the bankruptcy notice should be set aside because both at the time the bankruptcy notice issued and at the time of service, the judgment upon which the bankruptcy notice was founded, was by force of s440J of the Law, stayed. The short point at issue between the parties is whether s440J of the Law had this effect.

Section 440J forms part of a group of sections providing for a voluntary scheme of administration for companies in financial difficulties.  Provision is made for the appointment of an administrator whose task it is to take control of the company's business, property and affairs, to conduct an investigation, inter alia, into the financial circumstances of the company and to determine whether it would be in the interests of creditors for a deed of company arrangement to be entered into or for the company to be wound up. The administrator reports ultimately to the creditors, setting out the views arrived at and creditors may then resolve, pursuant to s439C of the Law, either to execute a deed of company arrangement, to terminate the administration or to wind up the company. In any of these three events the administration then comes to an end.

Section 440J is contained in Division 6 of Part 5.3A of the Law, concerned, as the heading to that Division indicates, with the protection of the company's property during administration. Thus s440D operates during the administration to prohibit either proceedings in a court against the company or proceedings in relation to any of the property of the company from being begun or proceeded with other than with the written consent of the administrator or the leave of the court. Section 440F then prohibits any enforcement process in relation to the property of the company being begun or proceeded with except with the leave of the court or in accordance with such terms as the court imposes. Section 440G deals specifically with the prevention of execution against a company in administration.

It is in this context that s440J then provides as follows:

"(1)During the administration of a company:

(a)a guarantee of a liability of the company cannot be enforced, as against:

(i)a director of the company who is a natural person; or

(ii)a spouse, de facto spouse or relative of such a director; and

(b)without limiting paragraph (a), a proceeding in relation to such a guarantee cannot be begun against such a director, spouse, de facto spouse or relative;

except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

(2)While subsection (1) prevents a person ("the creditor") from:

(a)enforcing as against another person ("the guarantor") a guarantee of a liability of a company; or

(b)beginning a proceeding against another person ("the guarantor") in relation to such a guarantee;

section 1323 applies in relation to the creditor and the guarantor as if:

(c)a civil proceeding against the guarantor had begun under this Law; and

(d)the creditor were the only person of a kind referred to in that section as an aggrieved person.

(3)The effect that section 1323 has because of a particular application of subsection (2) is additional to, and does not prejudice, the effect the section otherwise has.

(4)In this section:

"guarantee" in relation to a liability of a company, includes a relevant agreement (as defined in section 9) because of which a person other than the company has incurred, or may incur, whether jointly with the company or otherwise, a liability in respect of the liability of the company;

"liability" means a debt, liability or other obligation."

It is the submission on behalf of the debtor that the steps taken by the creditor in seeking to issue a bankruptcy notice involved an enforcement of the guarantee. It was not put that s440J was inconsistent with the provisions of the Bankruptcy Act 1966 (Cth) ("the Act") for that argument would lead only to the invalidity of s440J of the Law, having regard to s109 of the Constitution. Rather, in terms of s44(1)(g) of the Act, it was submitted that once the company was placed in administration, s440J of the Law had the effect, while that administration continued, of staying the judgment which the creditor had obtained.

The solicitor for the debtor disclaimed reliance upon s440J(1)(b) of the Law. Particularly it was not submitted that bankruptcy could in any sense be regarded as "a proceeding in relation to" the guarantee, no matter how wide the words "in relation to" might reach.  The argument turned solely upon s440J(1)(a).
         Some assistance may be obtained from the Explanatory Memorandum accompanying the Bill which ultimately became No 210 of 1992, whereby s440J was inserted and to which the solicitor for the debtor referred.  The Memorandum states:

"529. It is anticipated that the directors of companies who have personally guaranteed the obligations of a company will be discouraged from appointing an administrator to the company if, immediately upon the appointment, that guarantee became enforceable.  To remove this perceived impediment to the early appointment of an administrator to a company in financial difficulties, proposed section 440J aims to impose a `stay' on any enforcement action under a guarantee against a director or a spouse, de facto spouse or relative of a director, while a company is under administration, except with the leave of the Court (proposed subsection (1)).

530.During the operation of the `stay', a creditor will not, however, be prevented from applying the Court for orders to preserve the assets of the director during the administration (proposed subsection (2))."

It might be noted that the policy referred to in the Explanatory Memorandum would not appear to extend to positively encourage a director against whom a judgment had been obtained for a guarantee debt to ensure that an administrator is appointed so as to obtain a moratorium against that judgment.  If anything, the policy was directed to the case where the appointment of an administrator would trigger liability under the guarantee arising.  However, regard to policy must obviously give way to the proper construction of the language which the legislature has used if there be a conflict.

It will have been noted that there is a substantial difference in wording between s440J of the Law on the one hand and sections like ss440D, 440F and 471B of the Law on the other. Section 440J(1)(b) merely prohibits the commencement of a proceeding (the word used is "begun") rather than using the formula contained in the other sections, to which reference has been made, of a proceeding being "begun or proceeded with".  Nor, when s440J(1)(a) refers to "enforcement" does s440J refer to enforcement against or in relation to the property of the corporation.  It is concerned only with the commencement of proceedings in relation to a guarantee or the enforcement of the guarantee itself.

It is not necessary to consider what steps may be characterised as steps involving enforcement of a guarantee. Given that the reference to enforcement of the guarantee in s440J(1)(a) precedes the reference to commencement of proceedings in s440J(1)(b), enforcement may well refer to a step taken prior to proceedings being commenced. The making of a demand under the guarantee on any view would involve the enforcement of a guarantee. However, in my view, the words used in s440J(1)(a) should not on any view be construed as referring to steps which may be taken by a judgment debtor to obtain execution of the property of the judgment debtor to enforce the judgment debt itself.

Once a judgment is obtained it is trite law that a debt as and from the date of a judgment merges in the judgment: Ex parte Fewings, In Re Sneyd (1883) 25 ChD 338 at 355; In Re European Central Railway Company; Ex parte Oriental Financial Corporation [1876] 4 ChD 33; In Re Jenkins (1889) 15 VLR 271 and McDonald v Scobie [1980] QdR 477. Thus once judgment was obtained by the creditor, no question of enforcing the guarantee arose because the rights under the guarantee merged into the judgment and the rights of the parties thereafter flowed from that judgment. Once this is accepted it follows, as a matter of construction of s440J of the Law, that that section in no way operates to stay execution of the judgment, although had judgment not been entered subsec(1)(a) may perhaps (contrary to the implication which may arise from the temporal order of ss440J(1)(a) and (b)) have prevented the company from taking further steps in proceedings which had been commenced prior to the commencement of the administration. It is, however, not necessary to decide in the present case whether s440J(1)(a) extends so far.

It is not to the point, in my view, that the Law of Bankruptcy treats, at least for most purposes, a judgment as no more than evidence of a debt so that, in an appropriate case, a Court of Bankruptcy may go behind a judgment to see whether there was in fact a real debt due and owing: Wren v Mahoney (1972) 126 CLR 212. This may be the significance of the comment made by Griffiths CJ in Bayne v Blake (1909) 9 CLR 360 at 363 where the learned Chief Justice doubted whether, for the purposes of a petitioning creditor's debt in insolvency proceedings, there was any merger of the debt in a judgment. In the context of the particular case, the comment was quite understandable. But be that as it may, the relevance of merger lies not in the applicability or otherwise of the doctrine of merger in insolvency proceedings but rather in assisting in the proper construction of s440J of the Law. For it is only if that section works a stay of execution for general law purposes that it could have any relevance in the context of insolvency. In my view, for the reasons given, it does not.

The application must be dismissed and the debtor pay the creditor's costs of it.

I certify that this and the
preceding eight (8) pages
are a true copy of the Reasons
for Judgment herein of his Honour
Justice Hill.

Associate:

Date:  3 August 1995

Solicitor for               J Conomos of James Conomos

for Judgement Debtor:       

Counsel and Solicitors      DOJ North instructed by

for Creditor:               Clayton Utz

Date of Hearing:            1 August 1995

Date Judgment Delivered:         3 August 1995