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31 May 2017

Personal guarantee debt caught by PIA


3 min

Even when the debt arose after the PIA!

How effective is a Personal Insolvency Agreement (PIA) to extinguish all debtor liabilities—including contingent liabilities where the debtor provides a personal guarantee?  This was recently considered in the Supreme Court decision: Gray v Oz North Food & Liquor Wholesalers (NT) Pty Ltd [2016] SASC 165.

In this case, a personal guarantee for the supply of goods to a company, was signed by the debtor in November 2010.  Some two years later, the debtor executed a PIA under Part X of the Bankruptcy Act 1966.

A PIA is a formal agreement that sets out how the debtor will satisfy their creditor debts.  Once approved and executed it forms a binding deed.  The PIA proposal can contain almost any lawful term and condition.  At a minimum, it provides for monies to be repaid over time, and in some cases the sale of assets.  It also usually contains a moratorium (or freeze) from creditor’s claims for the agreement’s term, and payment sum that is usually less than the full amount in full satisfaction of creditor claims.

In the Gray case, after the PIA was executed, the supplier provided goods to the company, in April and May 2012 (i.e. after the execution of the PIA), demanded payment, and then sought recovery from the debtor’s personal guarantee which was signed prior to the execution of the PIA.

The supplier obtained judgment, in the Magistrates Court, against the debtor.

The debtor appealed to the Supreme Court of South Australia and argued that the PIA he executed extinguished all his liabilities, including the contingent liability under the personal guarantee—even though the goods were supplied after the PIA was executed.  The supplier counter-argued that the personal guarantee was revokable and therefore there was no continuing obligation after the PIA’s execution.

Justice Stanley of the Supreme Court considered that the PIA caught all present and contingent liabilities.  Such contingent liabilities included the personal guarantee, as the obligation was created before the PIA and therefore became a continuing obligation.  Even though the supplier could have revoked the guarantee, it did not do so prior to supplying the goods that created the debt under the guarantee.

Critically, this decision confirms how effectively PIAs extinguish all liabilities, including contingent liabilities incurred prior to commencement of the PIA.

While this may provide some comfort for debtors in getting sufficient relief from debt, suppliers must become vigilant.  If their customers enter a formal insolvency process, they should review their supply agreements and, if necessary, seek a new personal guarantee from the debtor before supplying further goods.

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