Guarantor gets reprieve

Litigation: 23 March 2019

A landmark decision in the Supreme Court of Victoria on 9 April 2014 demonstrated that banks do not always have it their own way when recovering from guarantors. 

In Perpetual Nominees Ltd v McGoldrick and Ors, McGoldrick sought to defend the claim brought against him under a guarantee he had given for borrowings made by his company from Perpetual.

McGoldrick's complaint was in respect of the sale of land at Ringwood which had been valued at $10,000,000 at the time Perpetual made its loan. Indeed the site had been valued by the Valuer General at $7,000,000.

Pursuant to a discredited sales process the land was ultimately sold for $3,000,000. McGoldrick was understandably upset and accordingly sought to defend when Perpetual sued him for the short fall.

Perpetual, perhaps significantly, did not follow the usual steps of appointing a receiver and manager to sell the land on its behalf pursuant to the powers it held under its securities. Rather it elected to implement the relatively seldom used procedure under s436(C) of the Corporations Act of appointing administrators to McGoldrick's company. Of course this then lead to the administrators becoming liquidators of the company following the initial creditors meeting. The liquidators appointed real estate agents based in New South Wales to sell the Ringwood land, one of McGoldrick's complaints..

In order for McGoldrick to set up a damages claim by way of set off against Perpetual, he had to be able to establish that the liquidators were acting as Perpetual's agent. 

Perpetual argued the somewhat unrealistic proposition that the administrators had become liquidators by operation of law and not by reason of anything which they had done or omitted to do.

Nevertheless, Judd J held there was sufficient to justify a finding that the liquidator was the agent of Perpetual having regard to the fact that Perpetual would well have known that by appointing administrators that those administrators would by virtue of the Act ultimately become liquidators. It was thus arguable, he said, that this was sufficient to constitute the liquidators the agent of Perpetual.

The case arose on an application by Perpetual for summary judgement against the McGoldrick. The court held that the justice of the case required that there be a trial of all the issues and accordingly dismissed the application for summary judgement. The matter will now proceed to trial.

The case demonstrates that it is by no means certain that lenders can avoid responsibility for their "receiversactions through implementing the alternative procedure of appointing their chosen accountant as an administrator under s436(C) of the Corporations Act.