13
Feb 2017

Don’t take it personally: Bankruptcy and Guarantees

The law surrounding whether amounts which become payable under personal guarantees following a guarantor’s bankruptcy have been brought into question in a recent decision of the Full Court of the Supreme Court of South Australia in Oz North Food & Liquor Wholesalers (NT) Pty Limited v Gray [2017] SASCFC 1.

Mr Gray was the director of Omnyx Pty Limited (Omnyx) and had provided a personal guarantee in favour of Oz North Food & Liquor Wholesalers (NT) Pty Limited (Oz North) with respect to debts incurred by Omnyx under a supply / credit arrangement between it and Oz North.  After providing the guarantee, Mr Gray entered into a Personal Insolvency Agreement (PIA) under part X of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act).  At the time that Mr Gray entered into his PIA, he was not indebted to Oz North as goods had not yet been ordered by Omnyx from Oz North.

At first instance, a magistrate found Mr Gray liable to pay Oz North $100,000 under the guarantee and rejected the proposition that Mr Gray’s liability under the guarantee was a provable debt under the PIA.  That decision was subject of an appeal to the Supreme Court of South Australia (Gray v Oz North Food & Liquor Wholesalers (NT) Pty Limited [2016] SASC 165) where it was held that the orders made by the Magistrate be set aside and that:

  • The guarantee constituted a continuing guarantee which, unless revoked, remained a standing offer accepted by Oz North in supplying goods;
  • As at the date of entering into the PIA, the contingent liability under the guarantee had occurred and the value of the liability could be calculated;
  • The debt due to Oz North under the guarantee was provable under the Bankruptcy Act.

On appeal to the Full Court of the Supreme Court of South Australia, leave was granted to Oz North to appeal the earlier Supreme Court decision.  The Full Court held, in granting leave to appeal that:

Mr Gray could only be said to be contingently indebted on the bankruptcy day on the basis that Omnyx might, after he had entered into the Part X agreement, make further orders. The difficulty with that construction is that the authorities are clear that until Omnyx placed its order Mr Gray could revoke the guarantee he made to Oz North Food. It necessarily follows that Mr Gray was not under a continuing legal obligation on which the contingency of the company making an order could operate. It is therefore arguable that only on the subsequent ordering of goods by Omnyx did Mr Gray become indebted to Oz North Food subject only to the contingency of non-payment by Omnyx… 

The purpose of the Bankruptcy Act is arguably not reason enough to take a contrary approach because on bankruptcy a guarantor can revoke the guarantee and prevent it applying to debts not paid on future ordered goods. A guarantor like Mr Gray does not need the assistance of a bankruptcy scheme to extricate himself from the possibility of future indebtedness.

This is yet to be authoritatively decided. That reason alone warrants a grant of leave.

Stay tuned for a further update following the appeal.