Proposed Insolvency Law Reforms – What is the impact on the enforcement of Personal Guarantees that guarantees a company’s performance of its obligations

On 23 October 2020 we published an article about the “Extension of Insolvency Protections” and the potential impact of those insolvency protections on Company Directors.  This furthers that “conversation” and requires readers to “stop holding their breath”.

The “Insolvency Protections” under the Coronavirus Economic Response Package Omnibus Act 2020 (Cth) (Omnibus Act) did not give relief to directors who have given personal guarantees, guaranteeing the performance of the company’s obligations including to creditors of the Company to whom they guaranteed the payment of company’s debts.

Often, a director’s spouse or other family members or friends have also given such personal guarantees.

Creditors can enforce the terms of personal guarantees, without restriction because the Commonwealth Government did not “stay” or put a “hold on” the enforcement of guarantees against directors, and their spouses and relatives under the Omnibus Act.  Therefore, guarantors’ personal assets are arguably at greater risk because creditors are trammelled by the Omnibus Act.   

The Commonwealth Government also recently announced the proposed Insolvency Law reform to the Corporations Act 2001 (Cth) (Act) under the Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 (Cth) (Reform Bill).

A question relevant to directors (and their spouses and relatives) is how, if at all, the Reform Bill impacts on creditor’s rights to enforce personal guarantees given by directors or their spouses or relatives?

The Act prevents a creditor during the administration of a company enforcing a personal guarantee against a director, or any spouse or relative who has also given a personal guarantee without the Supreme Court or the Federal Court of Australia’s permission.

Under the Act, a spouse includes a de-facto and a relative includes a spouse, parent, child or a brother or sister of a director of the company.

Under the Reform Bill and the proposed restructuring reforms directors and their spouses and relatives will have the same protections as above described during the restructuring of a company.

The “temporary stay” on the enforcement of personal guarantees begins on the date of the company’s appointment of the “small business restructuring practitioner”.

There are no similar protections for directors or their spouses or relatives during the liquidation of a company and there are no proposed protections for directors or their spouses and relatives in the new proposed simplified liquidation process as set out in the Reform Bill.

Despite the protections currently offered to directors and their spouses or relatives under the Act and the proposed Reform Bill, directors must continue to be mindful of their and their spouses and relatives potential personal exposure and risk under existing and any new personal guarantees.

Therefore, directors should act now to develop a clear, thorough, achievable and forward looking restructuring plan to protect their personal interests (and the interests of their spouses and relatives) including by, if necessary, utilising the “temporary stay” on the enforcement of personal guarantees under the Act and the Reform Bill.

Directors should not leave it too late to make apparently difficult decisions about the future of their company and its business, at least to prevent inclusion in the expected “tsunami” of administrations and liquidations expected to arrive during early 2021.

At Kott Gunning we have an experienced and knowledgeable team that can assist companies, directors and their spouses and relatives protect their future.

Emma Leys – Partner –

Peter Mariotto – Special Counsel –

The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.