“Can’t get no double satisfaction”: Guarantor seeks to rely on rule against double satisfaction to reduce liability to creditor

This week’s TGIF considers James v Australia and New Zealand Banking Group Ltd [2018] NSWCA 41 in which a guarantor unsuccessfully sought to rely on the rule against double satisfaction to reduce his liability to a creditor.

WHAT HAPPENED?

Mr James, a winemaker, gave four guarantees to the Bank in respect of debts owed by various companies associated with him.

In August 2013, the Bank appointed receivers over those companies and commenced proceedings against Mr James to recover under the guarantees. The Bank was successful in those proceedings and obtained judgment against Mr James for $13.9 million in May 2014 (the Guarantee Judgment).

Thereafter, between June 2014 and November 2014, the receivers realised secured assets of the company and made distributions to the Bank totalling $2.2 million.

In February 2016, Mr James commenced proceedings against the Bank and the receivers claiming damages for loss. In particular, Mr James alleged that:

• the receivers had realised the companies’ assets at significant undervalue in breach of their duties under s 420A of the Corporations Act 2001 (Cth); and
• he was entitled to have the amount of the loss suffered by the companies brought to account to reduce the balance payable by him under the Guarantee Judgment.

In October 2016, those proceedings were summarily dismissed with the primary judge concluding that any rights under the guarantee had ‘merged’ in the Guarantee Judgment precluding Mr James from making such allegations.

The primary judge also rejected the proposition that a guarantor against whom judgment was entered could contend in later proceedings that his liability under the guarantee, and as a judgment debtor, had been discharged by subsequent events.

Mr James appealed.

WHAT WERE THE ISSUES ON APPEAL?

Mr James raised three grounds on appeal:

• The Guarantee Judgment was not a bar to his claim as his allegations were based on events (being the actions of the receivers) which occurred after that judgment had been entered.
• He was entitled to have his liability reduced under the guarantee where s 420A had been breached.
• The rule against double satisfaction of judgments applied to prevent the Bank from enforcing the Guarantee Judgment.

The rule against double satisfaction of judgments, or ‘double recovery’, prevents a judgment creditor recovering from a judgment debtor an amount in excess of its loss. For example, a judgment creditor, having obtained judgment against a guarantor for the full amount due from the principal, cannot then enforce the judgment against the guarantor if the net proceeds from the power of sale satisfy the whole of the liability.

Mr James argued that this rule extended to notional, hypothetical amounts that a judgment creditor could have recovered but for a breach of duty in failing to realise the secured assets for market value.

THE DECISION

The gravamen of the appeal was the double satisfaction point and, unfortunately for Mr James, the Court of Appeal could not identify any authority to support the proposition he advanced.

The reasons of Macfarlan JA made plain that the rule against double satisfaction applies to “actual” receipts and does not extend further to include hypothetical recoveries. Such a finding, in his Honour’s view, would risk undermining the effect of a final judgment.

Macfarlan JA also observed that once the Guarantee Judgment was entered, Mr James’ rights as a guarantor ceased to have existence and he could not then claim that the judgment creditor [the Bank] should have obtained payment of the Guarantee Judgment by realising securities in a different way.

So far as s 420A was concerned, his Honour agreed with the reasons of Leeming JA and Sackville AJA that the section did not assist Mr James.

Agreeing with the reasoning of Bryson J in GE Capital Australia v Davis[1], their Honours concurred that there was no basis for the view that s 420A operates to confer a right to recover damages or any other right or remedy on guarantors.

Notwithstanding this, their Honours observed that a remedy may be available to a guarantor, under the general law, if the principal creditor breaches its duty on realisation of the principal debtor’s secured assets.

Such an entitlement will depend on the terms of the guarantee and, as in the present case, whether judgment has been entered against the guarantor. Once that occurs, guarantor rights ‘cease to have independent existence’ and the availability of the rule against double recovery will depend on “actual receipts”.

The appeal was dismissed with costs.

COMMENT

This decision is a useful reminder to financial institutions of the application of the principle of double satisfaction / double recovery and the purpose of s 420A. The section is not designed to confer rights on third parties to enforce that obligation. Rather, it establishes a ‘norm of conduct’ which enhances the duty of receivers when selling property and ensures the protection afforded to a corporation.

Further, it is worth noting that Leeming JA and Sackville AJA confirmed that a guarantor’s entitlement is ordinarily subject to the terms of the guarantee. Whilst not expressing a final view on the issue, their Honours expressed some reservation at terms which would confine a guarantor’s rights to circumstances where there had been a fraudulent exercise of the power of sale.

In noting the general principle that a guarantor may “bargain away his right to complain of the act which occasions the deficiency”, their Honours considered, in obiter, that there was some force in the submission that attempting to contract out of the protection afforded by s 420A would be inconsistent with the terms of the provision.