HELOU v MULLIGAN PTY LIMITED

LOWER COURT District Court JURISDICTION : LOWER COURT DC 10926/01 FILE NUMBER(S) : LOWER COURT Puckeridge DCJ JUDICIAL OFFICER :

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40262/2002 DC 10926/01

MASON P SHELLER JA DAVIES AJA

The appellant Helou was a director and shareholder of Belmore Meats Prestons Pty Ltd. At the time of its entry into a Deed of Arrangement on 13 September 2001, Belmore Meats still owed the respondent P D Mulligan

$107,304.98 which was due to be paid by 22 June 2001 for meat supplied and delivered. The respondent sued the appellant pursuant to his personal guarantee for "payment of all and any monies due and payable" by Belmore to the respondent.

At trial before Puckeridge DCJ in the District Court, Helou contended that the money ceased to be "due and payable" from 13 September 2001 because P D Mulligan was a creditor bound by the Deed which, in accordance with the Corporations Act 2001, established a moratorium period for commencing or continuing any proceedings or enforcement process against the company without leave of the court.

In the District Court, Puckeridge DCJ held that the Deed of Arrangement did not release the rights of the creditor against any guarantor and therefore P D Mulligan was entitled to proceed against Helou on the basis of his personal guarantee.

The appellant accepted this reasoning, but argued before the Court of Appeal that the guarantee had ceased to engage the principal debt because that debt was no longer "payable" in the sense that there was no immediate obligation to pay after the company entered into the Deed of Arrangement.

HELD: Mason P (Sheller JA and Davies AJA agreeing) dismissing the appeal,

1. The Deed of Arrangement did not cause Belmore's due and payable debts to P D Mulligan to be no longer due and payable. [27- 30]

(a) The Deed of Arrangement merely suspended the types of enforcement proceedings that could otherwise have been taken against Belmore and prevented the respondent as a creditor from exercising procedural rights without first obtaining leave of the court. [27], [30] (b) The Deed's conversion of creditors' enforcement rights into rights to prove and to participate in a Pooled Fund does not extinguish the subsisting relationship of debtor and creditor: Jowitt v Callaghan (1938) 38 SR(NSW) 512 at 519 per Jordan CJ, cf McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 480 per Dixon J [28], [35]

2. The function of a guarantee is to give the creditor a right to go against a third party in the event of the principal debtor's inability to pay. Therefore, the very purpose of a guarantee would be frustrated if it ceased to operate according to its terms merely because the debtor had become bankrupt, gone into liquidation, or had entered into a scheme of arrangement. [31]

(a) Courts construe guarantees in context and are reluctant to adopt a construction which would defeat the plain intention of the parties in this regard: Guthrie v Motor Credits Ltd (1963) 37 ALJR 167 at 168; Quainoo v New Zealand Breweries Ltd [1991] 1 NZLR 161; Commercial Banking Co of Sydney Limited v Gaty [1978] 2 NSWLR 271 [31] - [34]

3. It is not possible to distinguish the appellant's position from the line of cases that establish that bankruptcy, winding up or entry into a scheme of arrangement do not release or discharge a guarantor ( Jowitt v Callaghan (1938) SR(NSW) 512; Hill v Anderson Meat Industries Ltd [1971] 1 NSWLR 868 (Street J), [1972] 2 NSWLR 704 (CA); Gan v Sanders (1994) 15 ACSR 298; In the matter of Care Builders Pty Ltd (1997) 23 ACSR 754; Ehrenfeld v Oriana Nominees Pty Ltd [1999] WASCA 222). [36] ***************

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40262/2002 DC 10926/01

MASON P SHELLER JA DAVIES AJA

JUDGMENT 1 MASON P: At issue is the appellant's liability under a guarantee that he gave the respondent for his company's trading debts. He contends that no moneys were "due and payable" by the principal debtor on the date when proceedings were commenced against him, because of the impact of a scheme of arrangement which bound the company's creditors, including the respondent.

Facts 2 In May-June 2001 the respondent sold and delivered meat to Belmore Meats Prestons Pty Limited (Belmore). The total price was $127,304.98 and the money was due to be paid by 22 June 2001 at the latest. Belmore paid only $20,000 of the debt before entering into a Deed of Company Arrangement on 13 September 2001 (the Deed). 3 The appellant was a director and shareholder of Belmore. He was sued to judgment in the District Court pursuant to a written guarantee that he gave the respondent on 21 July 1999 in consideration of credit terms being given to Belmore. 4 The guarantee was in the following terms (emphasis added): In consideration of [THE RESPONDENT] ("the Supplier") having agreed at my/our request to supply goods from time to time to [BELMORE] ("the Customer") I/we unconditionally and irrevocably hereby agree to personally guarantee payment of all and any monies due and payable by the Customer to the Supplier in respect of the goods sold. I/we acknowledge that the Supplier may at any time in its absolute discretion and without giving any notice whatsoever to me/us refuse further credit or supplies of goods to the Customer and that the Supplier may grant any indulgence that it may think fit to the Customer without discharging or impairing my/our liability under this guarantee. 5 On 9 October 2001 the respondent demanded payment under the guarantee. It commenced proceedings on 1 November 2001. 6 The appellant admits the sale and delivery of the goods and that $107,304.98 became due and payable by Belmore on 22 June 2001 at the latest. 7 He contends, however, that the money ceased to be "payable", within the terms of the guarantee, on 13 September 2001. This was by virtue of the combined operation of the Deed and the Corporations Act 2001 which gave effect to the moratorium scheme of arrangement stipulated in the Deed and in related documents executed the same day. 8 The Deed purports to take effect in accordance with the Corporations Law and refers to various provisions in that enactment. In fact, the Corporations Act had become the operative provision at the relevant time. The pertinent sections of the Corporations Law and the Corporations Act (the Act) correspond and nothing turns on the inappropriate references to the former legislation in the Deed (see esp s1401 of the Act). 9 Belmore ceased trading as a meat wholesaler on about 9 July 2001. An Administrator (Mr M J Green) was appointed on the appellant's resolution. 10 On 30 August 2001, at a meeting convened by the Administrator pursuant to s439A of the Act, Belmore's creditors resolved that the company enter into a deed of company arrangement and that the Administrator be appointed administrator of that deed. The respondent was one of the creditors voting in favour of that resolution. 11 The Administrator prepared the Deed in accordance with s444A and Belmore executed it in accordance with s444B. 12 The parties to the Deed are the Administrator, Belmore (described therein as "the Company") and the appellant. In the events which happened the Deed became a Deed of Company Arrangement pursuant to s444B(6) on 13 September 2001. The Deed bound Belmore, its officers and members (s444G). It also bound the respondent as a creditor of Belmore as at 3 August 2001 (see s444D(1) and cl 13.1 of the Deed). 13 The Deed contemplates the establishment of a "Pooled Fund" into which was to be paid the realized assets of Belmore and of a related company, formerly known as Prestons Meats Pty Ltd (Prestons). The appellant was also required to pay a $40,000 "Contribution" into the Pooled Fund. This has been done. 14 Separate Deeds were also executed on 13 September 2001, by Prestons (the Prestons Deed) and by various parties in relationship to the management of the Pooled Fund (the Pooled Fund Deed). 15 The Deed made provision for proofs of debt (cl 13) and for the payment of a dividend out of the Pooled Fund with respect to "Admitted Claims". The appellant was precluded from becoming an admitted creditor (cl 6.2). Clause 13.1 incorporated by reference Subdivisions A, B and E of Division 6 of Part 5.6 of the Corporations Law. Subdivisions A and B deal with the admission to proof and the computation of debts and claims. The combined operation of these contractual and statutory provisions meant that debts and claims against Belmore as at 3 August 2001 (the "Appointment Date": see cll 1.2 and 13.1) were provable in the scheme, subject to the general law governing claims provable in a winding up (see generally A R Keay, McPherson: The Law of Company Liquidation 4th ed, 1999, chapter 12). 16 Clause 10 of the Deed established a moratorium period in the following terms: 10.1 On and from the Commencement Date neither the Company, nor any officer or shareholder of the Company nor any Creditor may in relation to any claim:- (1) commence or continue with any application for an order for the winding up of the Company; (2) commence or continue with any proceedings against the Company; (3) exercise or purport to exercise any right of set off against the Company: (4) commence or continue any enforcement proceedings in relation to the property of the Company; or (5) commence or continue with any proceedings to enforce any charge, mortgage or other encumbrance held by it over any part of the property of the Company. 17 This stipulation for a moratorium period was further underpinned and qualified in one respect by s444E which provides:

Protection of company's property from persons bound by deed (1) Until a deed of company arrangement terminates, this section applies to a person bound by the deed. (2) The person cannot: (a) make an application for an order to wind up the company; or (b) proceed with such an application made before the deed became binding on the person. (3) The person cannot: (a) begin or proceed with a proceeding against the company or in relation to any of its property; or (b) begin or proceed with enforcement process in relation to property of the company; except: (c) with the leave of the Court; and (d) in accordance with such terms (if any) as the Court imposes. (4) In subsection (3): property , in relation to the company, includes property used or occupied by, or in the possession of, the company. 18 The qualification to the literal terms of cl 10 is that s444E(3)(c) enables the court to give a creditor leave to bring proceedings or enforcement process against the company. 19 These provisions as to proof, admission of claims and the right (with leave) to bring enforcement proceedings show the limited and procedural nature of the moratorium effected by the scheme. 20 By the date of the trial (20 March 2002) no dividend had yet been paid under the scheme. At that stage, the estimated dividend was between 30 and 36 cents in the dollar. The Deed provides that Belmore will be released from all claims when the final instalment of any dividend is paid (cl 11. See also s444H). The appellant places no reliance on this provision.

Decision below 21 The defendant at trial accepted that $107,304.98 was owing by Belmore to the plaintiff. However, he submitted that this sum was no longer "due and payable" within the terms of the guarantee by virtue of the Deed. 22 Puckeridge DCJ referred to s444H of the Act, which provides: A deed of company arrangement releases the company from a debt only in so far as: (a) the deed provides for the release; and (b) the creditor concerned is bound by the deed.

He observed that there was "no evidence before the Court" that the plaintiff creditor was bound by the Deed. This may have been literally true, but s444D(1) of the Act had that effect as regards Belmore's debt. 23 His Honour next held that the Deed did not release the rights of the creditor against any guarantor. Reference was made to Hill v Anderson Meat Industries Ltd [1972] 2 NSWLR 704, Gan v Sanders (1994) 15 ACSR 298 and Commercial Banking Co of Sydney Limited v Gaty [1978] 2 NSWLR 271. 24 His Honour concluded: Despite the differences between s444H of the Corporations Act and s181 of the Companies Act, this Court I consider is constrained to follow the previous decisions of the Court to find that the plaintiff is entitled to proceed against the guarantor despite the existence of the scheme of arrangement as contained in exhibit B.

Submissions on appeal analysed 25 The appellant does not contend that the guarantee was discharged by force of the scheme effected as between the respondent and Belmore. In this regard, he acknowledges the authority of the line of cases establishing that a winding up, bankruptcy or scheme that even extinguishes a principal debt is not to be equated with the release or discharge of the principal debtor by act of the creditor (Jowitt v Callaghan (1938) 38 SR(NSW) 512; Hill v Anderson Meat Industries Ltd [1971] 1 NSWLR 868 (Street J), [1972] 2 NSWLR 704 (CA); Gan v Sanders (1994) 15 ACSR 298; In the matter of Carey Builders Pty Ltd (1997) 23 ACSR 754; Ehrenfeld v Oriana Nominees Pty Ltd [1999] WASCA 222). 26 The appellant seeks to raise what is said to be an anterior question. It is submitted that the guarantee had ceased to engage the principal debt because that debt was no longer "payable" when the proceedings were commenced. To use the language of Rich J in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 467, "the groundwork of the accessory obligation [had] disappeared". The particular steps in this argument are as follows:

1. The respondent's cause of action against the guarantor had to exist as at 1 November 2001, when the proceedings were commenced ( Baldry v Jackson [1976] 2 NSWLR 415 at 417). I agree.

2. For money to be "payable", in a context where that word is used in distinction to "due" or "owing", there must generally be an immediate obligation to pay ( Macquarie Dictionary) . In the expression "due and payable", "payable" means required to be immediately or presently paid ( Peacock v Commonwealth Trading Bank of Australia [1979] 2 NSWLR 412 at 416; Deputy Commissioner of Taxation v Peacock [1980] 2 NSWLR 130 at 134, 138, 141; Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1 at 15). Again, I agree with this proposition.

3. Belmore's debt was both due and payable between 22 June 2001 (at the latest) and 13 September 2001 when the scheme took effect. But the effect of the scheme was that the debt then ceased to be payable within the language of the guarantee. I do not agree with the latter statement, for the reasons which follow. 27 The scheme of arrangement prevented the respondent from exercising the procedural rights stipulated in cl 11, save that legal proceedings and enforcement process could still be brought with leave of the court (cf s444E(3)(c) supra). But it did not render debts that had become due and payable no longer due and payable. 28 In essence, creditors' enforcement rights were converted by the scheme into rights to prove and to participate in the Pooled Fund. (If and when a final dividend instalment is paid the debt will be discharged and released (cl 11 and s444H), but that time has not yet arrived.) The right to prove is a "special legal machinery" (Jowitt at 519 per Jordan CJ), but the relationship of debtor and creditor subsists (ibid). 29 Debts need not be presently due and payable for them to be provable (see s553). If they are "future" debts (ibid), in the sense that they are not payable at the relevant date, they are still provable subject to a statutory discount for accelerated "payment" (see s554B and Keay, op cit p544). 30 Belmore's debt was not a future debt at the Appointment Date (3 August 2001). By then it had become both due and payable. Unlike some guarantees, the present guarantee did not require the debt to remain due and payable or due and owing (contrast Perrott v Newton King Ltd [1933] NZLR 1131. See also O'Donovan and Phillips, The Modern Contract of Guarantee 3rd ed 1996 p317.). The scheme did not make the debt cease to be payable in the sense that Belmore was no longer obliged to discharge it "immediately" or "presently" as per the cases relied upon by the appellant. The debt remained both due and payable and it was provable accordingly. The Deed merely suspended the types of enforcement proceedings stipulated in cl 10. 31 The function of a guarantee is to give the creditor a right to go against a third party in the event of the principal debtor's inability to pay. It would therefore frustrate its very purpose if it ceased to operate according to its terms merely because the debtor had become bankrupt, or gone into liquidation or entered into a scheme of arrangement. Not surprisingly, courts construe guarantees in context and are reluctant to adopt a construction which would defeat the plain intention of the parties in this regard (see, for example Guthrie v Motor Credits Ltd (1963) 37 ALJR 167 at 168 and Quainoo v New Zealand Breweries Ltd [1991] 1 NZLR 161, upon which the respondent relied). 32 Quainoo illustrates the linkage between this general approach to the construction of guarantees and the principles I have discussed about the right to prove in a fund. As the New Zealand Court of Appeal pointed out (at 171), adjudication of bankruptcy: … does not mean that the bankrupt's indebtedness has come to an end. Rather, it changes the means by which the creditors can recover payment and it conditionally limits the amount they can recover …. Similar considerations apply to a winding up order. We see no reason to think that in these circumstances a debt may "remain owing", … but is not "due" even if but for the bankruptcy or winding up it would be due - as here, when demand was made. Just as there are circumstances in which it may be appropriate to describe a debt as owing but not yet due, so there are other circumstances in which the two words mean exactly the same. A debt for which the time for payment has passed is both due and owing. If that is the position in which it stands, there is no reason to strain the meaning of the words of a guarantee so as to enable a guarantor of the debt to escape liability upon the principal debtor being adjudicated bankrupt or being wound up. It was surely just such a situation that the guarantee was designed to include. As we have explained, there is no authority that requires this Court to take a different view, and to adopt a construction of this guarantee which would defeat the plain intention of the parties. 33 Similar in effect is the decision of Lee J in Commercial Banking Co of Sydney Limited v Gaty, one of the cases relied upon by Puckeridge DCJ. The defendants had guaranteed payment by a company to the bank of moneys then or thereafter owing by the company to the bank. When the bank sought to enforce the guarantee the defendants claimed that it was not enforceable because the company had been placed under official management in accordance with the Companies Act 1961. Section 203B(1) of that Act prevented any action or proceeding being brought, except with the leave of the Court, until the company ceased to be under official management. Creditors were entitled to prove their debts and the official manager was required to deal with the available assets of the company in accordance with a statutory scheme (see s208(5) of the Companies Act 1961). 34 Lee J said (at 275-6): The creditor can no longer enforce his rights by action at law, without the leave of the Court, but he can prove his debt before the official manager and require that the official manager observe the provisions of s208(5). I am unable to see that any valid distinction can be made between the position of a creditor in a bankruptcy or winding up or composition or scheme within a winding up; or in a scheme of arrangement under s181 such as was dealt with in Hill v Anderson Meat Industries Ltd by Street J. In each case the obligation of the debtor to pay, although no longer enforceable by the creditor personally against the debtor, is superseded by rights in the creditor against the assets or moneys, as the case may be, of the debtor, and that situation in each case is brought about by the operation of the statute. In my opinion, the rule that bankruptcy, or liquidation, or compositions or scheme within bankruptcy or liquidation, does not discharge a guarantor, can be applied by analogy to the situation here in just the same way that it was applied to a scheme of arrangement under s181 in Hill v Anderson Meat Industries Ltd . 35 To the extent that the scheme operated to suspend Belmore's personal liability to make immediate payment to the respondent, this was for the purpose of transforming the creditor's rights against Belmore into rights against or in respect of the assets in the Pooled Fund. The scheme is therefore aimed at the continuance of the creditor's just claim to receive immediate payment and not at its defeasance (cf McDonald at 480 per Dixon J). 36 I have already indicated that the appellant seeks to distinguish the line of cases that establish that bankruptcy, winding up or entry into a scheme of arrangement do not release or discharge a guarantor. But the principles upon which those cases proceed strike equally at the construction point raised by the appellant. They turn upon the nature and purpose of a right to prove in a fund and they give effect to the obvious basis upon which such right is given. It is no part of such right that it should be turned into a ground for defeating or qualifying the contractual obligations of a guarantor under a guarantee intended to operate in the very event of insolvency. 37 The appeal should be dismissed with costs. 38 SHELLER JA: I agree with Mason P. 39 DAVIES AJA: I agree with Mason P.

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