Pascoe, Janine --- "Women Who Guarantee Company Debts: Wife or Director?" [2003] DeakinLawRw 2; (2003) 8(1) Deakin Law Review 13
[*] The author would like to thank the anonymous referee for the valuable feedback on a number of aspects of the first version of this paper.
[**] Senior Lecturer, Department of Business Law and Taxation, Monash University.
[1] [1939] HCA 3; (1939) 63 CLR 649 (‘Yerkey’).
[2] [1998] HCA 48; (1998) 194 CLR 395 (‘Garcia’).
[3] See, eg, Gregg v Tasmanian Trustees Ltd [1997] FCA 128; (1997) 143 ALR 328; European Asian of Australia Ltd v Kurland (1985) 8 NSWLR 192; Akins v National Australia Bank Ltd (1994) 34 NSWLR 155; National Australia Bank Ltd v Garcia (1996) 39 NSWLR 577; Teachers Health Investments Pty Ltd v Wynne (1996) NSW Conv R 55-785; Miles v Shell Company of Australia (1998) 156 ALR 133; Commonwealth Bank of Australia v Cohen (1988) ASC 55-681.
[4] Berna Collier, 'Confusion Now Hath Made This Masterpiece!: The Present Uncertainty Surrounding the Rule in Yerkey v Jones' (1997) 25 Australian Business Law Review 190; Stephen Kapnoullas, 'Enforcing Security Against Married Women: Has the Rule in Yerkey v Jones survived Amadio?' (1996) 4 Current Commercial Law 118; Clement Shum, 'Protection of Married Women as Guarantors' (1996) 14 Australian Bar Review 229; Lee Aitken, 'Wife as Surety: The End of Yerkey v Jones?' (1995) Law Society Journal 3; George Williams, 'Equitable Principles for the Protection of Vulnerable Guarantors: Is the Principle in Yerkey v Jones Still Needed?' (1994) 8 Journal of Contract Law 67.
[5] See, eg, Warburton v Whiteley (1989) NSW Conv R 55-453.
[6] Section 180(1) Corporations Act 2001 (Cth) and its predecessor, s 232(4) Corporations Law. Leading case law includes Daniels v Anderson (1995) 37 NSWLR 438 and Sheahan v Verco (2001) SASR 109.
[7] Corporations Act 2001 (Cth) s 129.
[8] One of the reasons given for the introduction of the First Corporate Law Simplification Act 1995 (Cth) which amended the Corporations Law to allow proprietary companies to have only one member and one director was to reduce the introduction of sexually transmitted debt (‘STD’). See Attorney General’s Press release, 104/95, 9 December 1995.
[9] Defined by the Australian Law Reform Commission (‘ALRC’) as ‘ the transfer of responsibility for a debt incurred by a party to his/her partner in circumstances in which the fact of the relationship, as distinct from an appreciation of the reality of the responsibility for the debt, is the predominant factor in the partner accepting liability’, Equality before the Law: Women’s Equality (Part II) Report No 69, 1994 [13.4].
[10] This could be because of a mistaken belief that two directors are required or because the husband is precluded by a disability such as bankruptcy, from being a company director. See, eg, Commonwealth Bank of Australia v Cohen (1988) ASC 55-681 and Brueckner v Satellite Group (Ultimo) Pty Ltd, [2002] NSWSC 378(Unreported, Supreme Court of New South Wales, Campbell J, 23 May 2002) <http://austlii.edu.au/cases/nsw/Supreme_ct/1998/378.html> (copy on file with author) where the wives were directors, but the husbands were not, due to their bankruptcy. Riley states that in many cases the two director company is retained because of ‘sheer inertia’: Joellen Riley, ‘Should the Lender know if the Directors are Sleeping together?’ (1999) 13 Commercial Law Quarterly 22, 25. Commonly both spouses are directors of family companies because of the taxation advantages such as income splitting.
[11] See Dianne Otto, ‘A Barren Future: Equity’s Conscience and Women’s Equality’ [1992] MelbULawRw 19; (1992) 18 Melbourne University Law Review 808, 809. Otto noted that while equity is capable of acknowledging systemic or structural equality ‘The historical focus of Equity’s concern with equality has been on achieving a proportionate and formal equality between parties to legally regulated transactions’.
[12] Streeton wrote, ‘The subordinate position of women generally justifies the retention of a doctrine which provides additional protection for women.’ (‘Feminist Perspectives on the Law of Insolvency’ in Julie Dodds Streeton and Rosemary Langford, Aspects of Real Property and Insolvency Law, Adelaide Law Review Research paper. No 6, University of Adelaide 1994, 78). Duggan pointed out that ‘It is a hollow kind of liberalism that insists on formal equality between the sexes when in fact differences between them are routinely observable in terms of endowments, opportunities, bargaining power and the like.’ (Anthony Duggan, ‘Till Debt us Do Part’[1997] SydLawRw 12; , (1997) 19 Sydney Law Review 220, 225). Similarly, Howell concluded, ‘The Yerkey v Jones principle may be anachronistic and patronising. On the other hand, in practice it has helped many women.’ (Nicola Howell, ‘Sexually Transmitted Debt: Where Emotion Meets the Law’ (1998) 2 Consumer Rights Journal, <http://home.vicnet.au/fcrc/crj> (copy on file with author.)
[13] (1939) CLR 649, 655.
[14]Ibid 664.
[15] Ibid 677.
[16] Ibid 674.
[17] [1998] HCA 48; (1998) 194 CLR 395, 404.
[18] Ibid.
[19] Ibid 422.
[20] Michael Elliot and Stephen Trebilcock, ‘The Limits of Legal Paternalism: Intra Familial Arrangements and Gatekeeper Responsibilities’ in P. Benson (ed) The Theory of Contract Law (Cambridge University Press, 2000).
[21] See above n 12.
[22] Carol Bacchi, ‘Do Women Need Equal Treatment or Different Treatment?’ (1992) 8 Australian Journal of Law and Society 80; Marcia Neave, ‘From Difference to Sameness-Law and Women’s Work’ (1992) Melbourne University Law Review 768; Jenny Morgan, ‘Equality Rights in the Australian Context: A Feminist Assessment’ in Phillip Alston (ed), Towards an Australian Bill of Rights (1994).
[23] Margaret Thornton, ‘Feminist jurisprudence: Illusion or Reality’ (1986) 3 Australian Journal of Law and Society 5.
[24] Thornton, ibid; Miranda Kaye, ‘Equity’s Treatment of Sexually Transmitted Debt’ (1997) 5 Feminist Legal Studies 35.
[25] Above n 23, 7.
[26] Mika Oldham, ‘Neither a lender nor a borrower be-the life of O’Brien’ (1995) 7 Child and Family Law Quarterly 104.
[27] Duggan, above, n 12, 225.
[28] Above n 23, 21.
[29] Kristie Dunn, ‘Yakking Giants: Equality Discourse in the High Court’ [2000] MelbULawRw 16; (2000) 24 Melbourne University Law Review 427, 430.
[30] Ibid.
[31] Dunn cites, in particular, the work of feminist writer Deborah Rhode, Speaking of Sex: The Denial of Gender Inequality, Harvard University Press, 1997. Ibid 439.
[32] Towards a Feminist Theory of the State, Harvard University Press, 1989.
[33] Although she does acknowledge that it may have a tendency to portray women as victims. See above, n 30, 443.
[34] Paula Baron, ‘The Free Exercise of her Will: Women and Emotionally Transmitted Debt’ (1995) 13 Law in Context 23; Miranda Kaye, ‘Equity’s Treatment of Sexually Transmitted Debt’ (1997) 1 Feminist Legal Studies 35; Nicola Howell, ‘Sexually Transmitted Debt’ (1994) 4 Australian Feminist Law Journal 93.
[35] Belinda Fehlberg, Sexually Transmitted Debt; Surety Experience and English Law (Clarendon Press Oxford, 1997); Supriya Singh, ‘For Love not Money: Women Information and the Family Business’ (Consumer Advocacy and Financial Counselling Association of Victoria, Melbourne, 1995). For a survey of relevant statistical and qualitative studies undertaken prior to the mid 1990s see ALRC Equality Before the Law, Report No 69, 1994, (Part 1) Chapter 2 - Gender Inequality. Equality before the Law: Women’s Equality (Part II).
[36] Kaye, above n 35, 41.
[37] Peters v Commonwealth Bank of Australia (1992) ASC 56-135.
[38] Teachers Health Investments v Wynne (1996) NSW Conv R 55-785.
[39] Gough v Commonwealth Bank of Australia (1994) ASC 56-270.
[40] Warburton v Whiteley (1989) NSW ConvR 55-453.
[41] European Asian Ltd v Kurland (1985) 8 NSWLR 192.
[42] The Australian Law Reform Commission noted particular cultural factors relevant to women of non-English speaking backgrounds: Multiculturalism: Consumer Contracts, Discussion Paper No 49, 1991, 11-12. The Discussion Paper noted that women who originate from cultures where oral communication is the major means of transferring information attach little significance to the written document.
[43] Belinda Fehlberg, ‘Women in Family Companies: English and Australian Experiences’ (1997) 15 Companies and Securities Law Journal 348.
[44] Ibid 360.
[45] Australian Bureau of Statistics, Australian Women’s Yearbook, 1997, 71-2.
[46] ALRC, Equality Before the Law, Report No 69, 1994, (Part 1) Chapter 2, Gender Inequality.
[47] Peter MacDonald (ed), Settling Up: Property and Income Distribution on Divorce in Australia, Prentice Hall of Australia, Melbourne, 1986.
[48] See, eg, Commonwealth Bank of Australia v Ridout Nominees Pty Ltd [2000] WASC 37 (Unreported, Supreme Court of Western Australia, Wheeler J, 28 February 2000)
<http://austlii.edu.au/cases/wa/WASC/2000/37.html> (copy on file with author); Cranfield Pty Ltd v Commonwealth Bank of Australia [1998] VSC 140 (Unreported, Supreme Court of Victoria, Mandie J, 20 November 1998) <http://austlii.edu.au/cases/vic/VSC/1998/140.html> (copy on file with author).
[49] Women’s Legal Service Network, Submission to the Family Law Branch, Law and Legal Assistance Division, Attorney-General’s Department, in response to ‘Property and Family Law-Options for Change’, July 7 1999. (see <http://www.windowonwomen.gov.au> )
[50] Australian Bureau of Statistics, Report on Australian Social Trends, 1999.
[51] Australian Bureau of Statistics, 2002, Schools Australia Cat. No 4221.0.
[52]Department of Education, Training and Youth Affairs, 2001, ‘Students 2001-Selected Higher Education Statistics’ ( <http://www.dest.gov.au/highered/statistics> ).
[53] Department of Education, Science and Training, 2001 Award Course Completions, 2000, Table 63 ( <http://www.dest.gov.au> ).
[54] Kerry Carrington and Angela Pratt, How Far Have We Come? Gender Disparities in the Higher Education System, Current Issues Brief No 31, 2002-3, Commonwealth Parliamentary Library ( <http://www.aph.gov.au/library/pubs> ).
[55] Grania Sheehan and Jody Hughes, ‘Division of Matrimonial Property in Australia’, Research Paper No 25, March 2001, ( <http://www.aifsorg.au/insitute/pubs> ).
[56] Since the earlier study by MacDonald, above n 48.
[57] Bruce Smyth and Ruth Weston, ‘Financial Living Standards after Divorce: A recent snapshot’, Research Paper No 23, December 2000 ( <http://www.aifs.org.au/insitute/pubs> ).
[58] See Duggan, above n 12.
[59] Dunn, above n 30, 457.
[60] See the pertinent comments of Wheeler J in Commonwealth Bank of Australia v Ridout Nominees Pty Ltd [2000] WASC 37 [80], who observed that the wife had a considerable amount of business acumen. In his view merely because the lender deals with one person (i.e. the husband) as the public face of the company, it does not necessarily follow that others (i.e. the wife) have no interest, understanding of or role to play in the company.
[61] Above n 30, 429.
[62] See the guarantee provisions in clause 28 of the revised Code of Banking Practice, which comes fully into effect in August 2003. These provide for enhanced pre-contractual disclosure, particularly in relation to the risks involved and the financial position of the principal debtor. The new Code’s disclosure provisions are absolute and not dependent on the consent of the principal debtor.
[63] See the analysis by Stephen Cretney, ‘The Little Woman and the Big Bad Bank’ (1992) 108 Law Quarterly Review 354.
[64] Above n 35, 96.
[65] Above, n 30, 429.
[66] [1993] UKHL 6; [1994] 1 AC 180, 185-6. Very similar views were also expressed by Blanchard J delivering the judgment of the New Zealand Court of Appeal in Wilkinson v ASB Bank Ltd [1998] 1 NZLR 674, 689.
[67][2001] UKHL 44; [2002] 2 AC 773, 801.
[68] A survey of 5000 businesses commissioned by Price Waterhouse and the Commonwealth Bank was referred to in ‘Succession troubles ahead’ (1995) 11 Company Director 20. The report found that 47% of the family businesses have 2 shareholders, 32.6% have between 3 and 5, 9.2% have between 6 and 10 and the remaining 4.4% have more than 10 shareholders, ranging from 11 to 7500. The report also found that family-owned businesses account for 83% of all businesses and employ approximately 50% of the private sector workforce. Of that 83%, 79.9% are proprietary companies.
[69] Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395, 425.
[71] Armstrong v Commonwealth Bank of Australia [1999] NSWSC 588(Unreported, Supreme Court of New South Wales, Armstrong J, 17 June 1999) <http://austlii.edu.au/cases/nsw/supreme_ct/1999/588.html> (copy on file with author).
[72] [1998] HCA 48; (1998) 194 CLR 395, 404.
[73] The authors of Ford’ s Principles of Corporations Law (11th ed 2003)[4.140] note the judicial acceptance of the notion that a company is a legal fiction.
[74] [1990] HCA 32; (1990) 170 CLR 146, 154-55 (Mason CJ), 179-80 (Brennan J).
[75] See, eg, Warburton v Whiteley (1989) NSW ConvR 55-453.
[76] Unreported, Supreme Court of Western Australia, Ng M, 6 December 1990, <http://www.butterworthsonline.com> BC9001005> (copy on file with author).
[77] [1897] AC 222.
[78] Unreported, Supreme Court of New South Wales, Cole J, 2 October 1991 <http://www.butterworthsonline.com> BC9101526 (copy on file with author).
[79] Neither of these cases referred, for example, to the New South Wales Court of Appeal’s decision in Warburton v Whiteley (1989) NSW Conv R 55-453 which accepted that the Yerkey principle applied to guarantees of loans to companies which could be regarded as the alter ego of the husband.
[80] Similarly, few commentators have considered the importance of the interaction of equitable doctrine and company law principles. See, for example, Joellen Riley, ‘Should the lender know if the Directors are Sleeping together?’ (1999) 13 Commercial Law Quarterly 22; John Davies, ‘Though Times Have Changed the Equity Remains’ Gadens Lawyers website ( <http://www.gadens.com.au/public/publications> ).
[82] Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1; Industrial Equity Ltd v Blackburn [1977] HCA 59; (1977) 137 CLR 567.
[83] [1987] AC 22,31.
[84] With all leading textbooks describing it as a leading company law case. See, eg, Ford, Austin & Ramsay, Ford’s Principles of Corporations Law (11th ed, 2003) [14.140]-[150]; Lipton & Herzberg, Understanding Company Law (11th ed, 2003) pp 34-40;Tomasic, Jackson & Woellner, Corporations Law-Principles Policy and Process (4th ed, 2002) [3.7]-[3.9].
[85] See Frank Easterbrook and Daniel Fischel, ‘Limited Liability and the Corporation’ (1985) University of Chicago Law Review 89.
[86] Corporate Groups Final Report, Companies and Securities Advisory Committee (‘CASAC’) May 2000.
[87] Gilford Motor Co Ltd v Horne [1933] Ch 935; Smith, Stone & Knight Ltd v Birmingham Corporation
[88] Personal liability arises, for example, where directors have engaged in insolvent trading in breach of the duty under s 588G or have allowed a dividend to be paid otherwise than out of profits in breach of s 254T.
[89] Briggs v James Hardie & Co Pty Ltd (1989) 16 NSWLR 549 (Rogers AJA).
[90] Commonwealth Bank of Australia v Ridout Nominees Pty Ltd [2000] WASC 37 [56] and [60].
[91] See, eg, Hobart Bridge Co Ltd v Federal Commissioner of Taxation [1951] HCA 33; (1951) 82 CLR 372, 385 (Kitto J); Morgan v 45 Fleurs Avenue Pty Ltd (1986) 10 ACLR 692, 694-5 (Young J); Tate Access Floors Inc v Boswell [1991] Ch 512, 513 (Browne-Wilkinson VC).
[92]Ford, Austin & Ramsay, Ford’s Principles of Corporations Law (11th ed, 2003) [4.420].
[93] [1856] EngR 470; (1856) 119 ER 886. The extent of the common law rule and its exceptions was discussed by the High Court in Northside Developments Pty Ltd v Registrar-General [1990] HCA 32; (1990) 8 ACLC 611, 621-622.
[94] Company and Securities (Miscellaneous Provisions) Act 1983, operational 1 January 1984.
[95] For a general discussion of these provisions see Larelle Law and Janine Pascoe, ‘Financiers and Corporate Borrowers’ (2000) (1) Australian Journal of Corporate Law 219.
[96] Philip Lipton’s monograph, The Authority of Agents and Officers to act for a Company: Legal Principles, Centre for Corporate Law and Securities Regulation, University of Melbourne 1996, 51, suggests that this would be preferable.
[97] Robyn Carroll, ‘Proper Performance of Duties by Company Officers: The Statutory Assumption in s 164(3)(f) of the Corporations Law’ (1995) 69 Australian Law Journal 200.
[98] Larelle Chapple and Phillip Lipton, Corporate Authority and Dealings With Officers and Agents, Centre for Corporate Law and Securities Regulation, University of Melbourne, 2002, 85-86.
[99] As in force on 1 November 2000.
[101] Dimity Kingsford-Smith, ‘Interpreting the Corporations Law-Purpose Practical Reasoning and the Public Interest’ [1999] SydLawRw 7; (1999) 21 Sydney Law Review 161.
[102] Explanatory Memorandum, Companies and Securities legislation (Miscellaneous Amendments) Act 1985 [188].
[103] (1995) 37 NSWLR 438, 503.
[104] Commonwealth Bank of Australia v Friedrich (1991) 9 ACLC 946 (Tadgell J).
[105] 11th ed, 2003 [20.140].
[106] Sheahan v Verco [2001] SASC 91; (2001) 79 SASR 109.
[107] Explanatory Memorandum accompanying the Corporate Law Reform Bill 1992, [39] (discussing s 232(4) the predecessor to s 180(1)).
[108] Above n 10,24.
[109] Due to the interpretation given to s 168(4) Corporations Law, the differently worded predecessor to s 128. The differences are discussed in Chapple and Lipton’s monograph, above, n 98.
[110] Above n 81, 24.
[111] Percival v Wright [1902] UKLawRpCh 125; [1902] 2 Ch 421.
[112] [1976] HCA 7; (1976) 137 CLR 1, 5-6.
[113] [2000] HCA 43; (2000) 201 CLR 603, 636 – 637. (Gaudron, McHugh, Gummow and Hayne JJ in a joint judgment, Callinan J concurring in a separate judgment).
[114] Under s 1324 of the Corporations Act 2001 (Cth) which gives standing to a person (such as a creditor) whose interests have been, would be or are affected by the conduct. See also Allen v Atalay (1993) 12 ACLC 7. Creditors may also bring direct action under s 588M of the Corporations Act.
[115] [1997] 1 All ER 114.
[116] Contra, Peta Spender, ‘Resurrecting Mrs Salomon’ (1999) 27 Federal Law Review 217, 239 who argues that the Winkworth case relies ‘on the same fictitious consent and spurious standards of conduct which were the hallmarks of the Australian passive directors cases’.
[117] In regard to s 588G see Metropolitan Fire Systems Pty Ltd v Miller (1997) 23 ACSR 699; Tourprint International Pty Ltd v Bott (1999) 17 ACLC 1543, Sheahan v Verco (2001) SASR 109. In regard to the predecessor provisions see 3M Australia Pty Ltd v Kemish (1986) 4 ACLC 185.
[118] Section 556 of the former Companies Codes and s 592 (2) of the former Corporations Law.
[120] (1992) 8 ACLC 827. Approved on appeal by the Victorian Supreme Court, Appeal Division in Morley v Statewide Tobacco Services Ltd [1993] VicRp 32; [1993] 1 VR 423.
[121] (1992) 8 ACLC 827, 832.
[123] Ibid 955.
[124] (1992) 10 ACLC 1437, 1479.
[125] [1999] TASSC 27 [10] (Unreported, Supreme Court of Tasmania, Slicer J, 16 March 1999) <http://austlii.edu.au/cases/tas/supreme_ct/1999/27.html> (copy on file with author).
[126] [2003] NSWCA 91; (2003) 52 ATR 526.
[127] [2001] NSWSC 621; (2001) 19 ACLC 1513.
[128] (1999) 17 ACLC 1543, 1556, the court referring to the Australian Law Reform Commission’s General Insolvency Inquiry, Report No 45 (the Harmer Report).
[129] Julie Cassidy, ‘Sexually Transmitted Debts: The Scope of Defences to Directors’ Liability for Insolvent Trading’ (2002) 20 Companies and Securities Law Journal 372, 388.
[130] Ibid 386.
[131] See the Explanatory Memorandum accompanying the Corporate Law Reform Bill 1992 [39] and case law discussed above.
[132] [2003] NSWCA 91; (2003) 52 ATR 526, 539-50.
[133] Ibid 556.
[134] The higher standards imposed upon directors, in terms of their general duty of care, had their genesis in the 1989 Report on Company Directors Duties by the Senate Select Committee on Legal and Constitutional Affairs (the ‘Cooney Committee’).
[136] Explanatory Memorandum to the Corporate Law Reform Act 1992, [84]–[86].
[137][2001] SASC 91; (2001) 79 SASR 109.
[138] Ibid 126-29.
[139] Australian Bankers’ Association, Code of Banking Practice, August 2002. The new Code can be obtained from the website ( <http://www.bankers.asn.au> ).
[140] Richard Viney, RTV Consulting Pty Ltd, Review of the Code of Banking Practice, Final Report, October 2001, p 59.
[141] Clause 2.2.
[142] See, in particular, clause 28(4)(a)-(d) which sets out detailed requirements for pre-contractual notices regarding recommendations for advice, warnings about the risks involved and disclosure concerning demands, excesses and overdrawing in relation to any facility the principal debtor has with the bank. This information must be provided in plain language. Disclosure is now an absolute obligation, not conditional upon the consent of the debtor.
[143] Clauses 7, 8 and 9.
[144] Provisions relevant to guarantees supporting business debts include s 7 Contracts Review Act 1980 (NSW) and s 51AC Trade Practices Act 1974 (Cth).
[145] Departing from the recommendation of the Independent Reviewer of the Code. See Richard Viney, RTV Consulting Pty Ltd, Review of the Code of Banking Practice, Final Report, October 2001, p 59.
[146] Note that there are parallel Credit Union and Building Society Codes of Conduct, which have at the time of writing, not been updated to incorporate changes made to the Banking Code. These Codes have not been included in the above discussion as they regulate domestic, rather than business financial transactions.
[147] Good Relations, High Risks: financial transactions between family and friends, Report of the Expert Group on Family Financial Vulnerability (1996) 50. See also the New South Wales Law Reform Commission, Issues Paper 17 (2000) 72, Guaranteeing Someone Else’s Debts which was also critical of the lack of global coverage of industry codes of practice.
[148] [1983] HCA 14; (1983) 151 CLR 447, 481.
[149] Ibid, 481.
[150] (1995) 184 CLR 102.
[150] Esanda Finance Corporation v Tong (1997) 41 NSWLR 482.
[151] [1996] VicRp 91; [1996] 2 VR 638.
[152] [1996] VicRp 91; [1996] 2 VR 638, 644 (Phillips JA, with whom Brooking and Tadgell agreed).
[153] [2003] NSWCA 91; (2003) 52 ATR 526.
[154] Ibid 556.