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Pascoe, Janine --- "Women Who Guarantee Company Debts: Wife or Director?" [2003] DeakinLawRw 2; (2003) 8(1) Deakin Law Review 13

WOMEN WHO GUARANTEE COMPANY DEBTS: WIFE ORDIRECTOR?[*]

Janine Pascoe[**]



I. INTRODUCTION-THE PROTECTION VERSUS LIABILITY CONUNDRUM

The highest form of protection available to married women guarantors, including those who are directors of the companies whose debts they guarantee, is the so-called ‘special wives’ equity’. Dixon J in the High Court case of Yerkey v Jones[1] articulated the principles in 1939. Basically the rule applies where a wife gives a guarantee to secure her husband’s debts and her consent is obtained by some wrongdoing-for example, misrepresentation or undue influence-or without an adequate understanding of the nature and effect of the transaction. The special equity applies if the wife is a volunteer who derives no substantial benefit from the guarantee.

In 1998 the High Court in Garcia v National Australia Bank Ltd [2] reaffirmed the existence of the special equity despite previous sustained criticism by courts[3] and commentators[4] of its continued application. Significantly, the High Court accepted previous authority[5] allowing the wives’ equity to apply in cases where the wife guarantees the debts of a company which is in effect the alter ego of the husband, and of which she is a director and shareholder. The contradictory aspects of the surety’s role as both wife and company director has created a conundrum which can be explained in the following way. On the one hand, special rules have been developed which recognise the vulnerability of married women who for no benefit to themselves act as a surety for their husbands’ debts. The law has traditionally recognised their vulnerability and displayed a special ‘tenderness’ towards them. The importance of the marital relationship as the basis for this special treatment was emphasised in Garcia. On the other hand, if the surety is a director of the company whose debts she is guaranteeing a whole set of different rules interact with these equitable principles. A creditor later faced with a challenge to a guarantee may initially have been presented with a woman who was known to be a company director and who appeared to be competent in that role. The woman may have appeared to have a proper understanding of the transaction and to be an articulate, responsible company officer. Indeed, the Corporations Act 2001 (Cth), as well as important case law,[6] sets out standards required of all company officers, whether they have an active role in the company or not. Further, the Act entitles the creditor to make a number of assumptions about the validity of the transaction and the role, authority and conduct of the director.[7] None of this will avail the creditor, however, if the director can rely on the special equity.

The surety is therefore subject to two sets of legal principles which do not necessarily interact well together. This incompatibility was recognised as one of the reasons for the introduction of one-person proprietary companies.[8] However, it is futile to suggest that problems of sexually transmitted debt[9] will completely disappear as a result of this change to the law, although with the passage of time it is likely that there will be more one-person companies operating small businesses and therefore a reduction in these cases coming before the courts. For various reasons two director proprietary companies with husband and wife as co-directors are still commonplace and therefore cases have continued to come before the courts since Garcia.[10] This paper goes to the heart of the protection/liability conundrum-the contradictory roles assumed by a woman who is both a wife and a company director. Part II analyses the rationale and support for special treatment for women guarantors and assesses whether the support for the special rule is justified. Part III considers the liability which a woman undertakes in her role as a company director. Thus the paper considers the private and public spheres in which women guarantors simultaneously transact. The clash of values involved in the private/public dichotomy has been an issue of concern for feminist legal writers. The High Court in Garcia strongly affirmed the principle of special protection for married women guarantors, thus accepting the ascendancy of the private over the public. The Court preferred to play down Mrs Garcia’s role as a director of the borrowing company. It is indisputable that women directors are subject to duties and liabilities under company law principles, whether these have been given scant attention by the courts in special equity cases or not. These company law rules represent the ‘public sphere’. They are universal, gender neutral and fit within the model of ‘formal equality’. [11] Like the rule providing protection, these company law rules are also underpinned by policy. The two sets of rules do not sit well together. As this paper demonstrates, while protection is needed liability also exists.

II. PROTECTION AND TENDERNESS - THE GUARANTOR AS A VULNERABLE WIFE

A Rationale for protection

There needs to be some good rationale for the existence of a gender-specific legal rule providing protection to only one class of guarantor. The majority in Garcia articulated what they regarded as defensible policy reasons for the law’s tenderness towards married women who provide guarantees to secure their partner’s business debts. They argued that where marital bonds exist, so also do opportunities for abuse or pressure arising from the wife’s trust and confidence in her husband so far as matters of business and finance are concerned. However, the ‘protectionist’ argument is certainly not clear-cut. First, High Court authority differs as to the rationale for the special protection provided to married women. Secondly, there is a dissonance in the feminist jurisprudence on the appropriate legal response to the problems faced by women sureties. Should reform in this area be based on a gender-neutral form of treatment and if not, how can a ‘special protection’ approach be accommodated in a paradigm of equality which is based on an ideal of non-discrimination?

A number of respected legal commentators have supported the ‘special protection’ approach embodied in Yerkey v Jones.[12] Thirdly, while these commentators have argued the case for special protection very well, they have in the main, compartmentalised the rule, by considering the surety as a wife simpliciter, rather than looking at the duality of her role as both wife and director. This, with respect, was also a shortcoming of the High Court’s decision in Garcia. This part of the paper looks at why the law has held that there is a need for special protection for surety wives and the approach in the feminist literature to the adoption of a rule singling out women for special protection.

B The High Court

According to Latham CJ in Yerkey v Jones the relief sought by Mrs Jones relied upon the application of a special rule which ‘survived the release of married women from incapacity by the Married Women’s Property Acts’.[13] It was:

[A] rather vague and indefinite survival from the days when a married woman was almost incapable in law and when the courts of equity gave her special protection in relation to transactions affecting her separate property.[14]

Dixon J agreed that this was the jurisprudential basis of the special equity. His Honour’s detailed judgment also traced the rule back to the protection of married women’s property from their husbands. He examined the history of married women’s capacity to deal with their equitable estate and the ‘watchfulness’ of equity with respect to gifts between husband and wife. He regarded the Married Women’s Property Acts, by giving women separate legal estate over all of their property, as operating to give a general application to presumptions and rules of equity governing dealings by a married woman for the benefit of her husband.[15] Those dealings did not give rise to a presumption of undue influence and indeed the recognition of the full legal capacity of married women meant that they were free to bestow their property upon their husbands as well as upon a stranger. Nevertheless, his Honour observed that at the same time ‘courts of equity examine every such transaction between husband and wife with an anxious watchfulness and dread of undue influence’.[16]

Therefore the justification in Yerkey for special protection arose from the need to protect the wife’s separate estate from the possibility of the husband exerting undue influence or abusing his position and taking unfair advantage of his wife.

The majority in Garcia did not analyse the rationale for the rule in the same way as the High Court in 1939. In their consideration of the rationale for the special equity, Gaudron, McHugh, Gummow and Hayne JJ found justification for the rule in the notion of ‘trust and confidence, in the ordinary sense of those words, between marriage partners’.[17] In the majority’s view, it was this particular aspect of the marriage relationship which provided the rationale for the special equity, not the fact of disparities of power within the marriage, nor the inferior economic position of women in general. The majority recognised that these gender inequalities existed, but that the basis of the marriage relationship is such that one party, often the wife, will leave many of the business judgments to the other. The majority regarded this as a natural concomitant of the marital relationship and argued that it was to be expected that less than perfect explanations may be given by one party to the other without the ‘slightest hint of bad faith’.[18] The jurisprudential basis for the assertion that the rationale for special protection lies in the trust and confidence which spouses repose in each other is unclear. Kirby J correctly pointed out[19] that the rationale for the rule in Yerkey, clearly expressed by Dixon J and acknowledged by Latham CJ, was the protection of married women’s property from their husbands.

Others have taken a similar view to the majority in Garcia of the role of intra-family dynamics in predisposing women to trust their partners in situations where their financial interests may be at risk. Trebilcock and Elliot’s work[20] in attributing a ‘gatekeeper’ function to financiers is in accord with the majority’s analysis of the rationale for special protection. They suggest that there are good reasons why family members trust each other and enter into improvident transactions without requiring adequate explanations.

C Academic Commentary - the ‘equal treatment’ model versus the ‘special treatment’ model

Many academic commentators have explained why women may be especially vulnerable to sexually transmitted debt and require special protection by the law. [21] They argue and support the case for special treatment very well. However, in doing so they have had to resolve the problem of how a special rule for women guarantors can advance the quest for equality and not be regarded as demeaning and discriminatory in itself.

This issue of whether the recognition of the rights of women within the current legal framework is best advanced by disregarding gender differences and applying rules of formal equality or by recognising women’s differences and thereby applying rules which allow for special treatment has been the subject of discussion in feminist legal literature.[22] The equal treatment approach has, in the words of Margaret Thornton, ‘been the first goal of feminist law reform in the Western world’.[23] But the approach has not necessarily served the interests of women very well. Some feminist legal commentators[24] have drawn on the insightful work of psychologist Carol Gilligan who contrasts the male and female responses to problem solving by referring to the ‘different voices’ with which men and women speak. One voice speaks about equality, reciprocality, fairness, rights; one voice speaks about connection, not hurting, care and response.

Clear evidence emerging from the voluminous case law in this area shows that women value their private relationships to a greater extent than men. Feminist commentators have recognised these two different kinds of worlds, the ‘public world’ and the ‘private world’. The public world, in the legal sense, has always been associated with universal norms which are objective, rational and abstract. These norms underlie the ‘equal treatment’ model and derive from a male dominated culture. On the other hand, the ‘private world’, which underlies the ‘special treatment’ approach is family and female oriented. It is associated with particular and personalised norms, which are relationship based. Writing 12 years before the High Court affirmed special protection for women guarantors Thornton observed that:

Women are necessarily rendered marginal to the operation of the law by virtue of assignation to the private sphere of particularity. This asymmetry between public and private spheres therefore constitutes an insurmountable impediment to law reform, for it involves a failure to grapple with the inequities of women’s domestic lives which drastically affect their public sphere participation.[25]

More recently, Oldham stated that ‘the public and private rarely confront each other so starkly as in [STD] cases’.[26] Duggan, writing before the High Court delivered its judgment in Garcia, agreed, remarking that:

[T] he case for special protection rests not on the case that women are inherently less competent than men, but on the proposition that women are disadvantaged by the dynamics of family relationships when it comes to the disposal of family assets. 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. Dixon J’s judgment may not have been technical correct, but as a matter of policy it comes pretty close to the mark. [27]

Margaret Thornton writes of the difficulties inherent in the ‘equal treatment’ approach which is a product of a liberal legal tradition which promotes equality as the norm to be achieved in legal discourse. She concludes that there is a falsity underlying this model.[28] Like other commentators she questions the assumptions of universalism, equality and neutrality underlying the ‘equal treatment’ model. The formal equality model, she argues with both force and logic, ignores the structural gender inequalities which still exist. There is certainly evidence to support this systemic inequality in bargaining power which exists in the guarantee context. This can be highlighted by reference to the common factors attributable to many of the guarantee cases.

Dunn’s recent analysis of the various legal responses to the problem of sexually transmitted is useful. She suggests that the reasoning of the protagonists in the key debate in legal feminist theory, namely the debate about whether equality means treating women the same as or differently from men, is fundamentally flawed. In doing so she provides[29] a scathing yet logical critique of both the ‘equal treatment’ approach and the ‘special treatment’ approach, exemplified in Garcia by the majority judgment and Kirby J’s judgment respectively. She highlights the deficiencies in both the majority’s justification for the retention of the gender-specific rule in Yerkey and the gender-neutral approach of the Kirby J. She says:

[A]ny understanding of sexually transmitted debt that does not recognise the relevance of structural gender inequality, particularly with respect to married women, falls back on stereotypical assumptions of women’s differences at the expense of a more complex understanding of the gendered nature of the problem.[30]

Dunn argues that the case for formal gender equality, argued by Kirby J is based on the denial of substantive gender inequality[31] whereas the majority’s case for a protective gender-based rule is flawed in its assessment that such a rule can be justified in terms of the ‘trust and confidence’ between married couples. She believes that both cases are flawed in their failure to consider continuing underlying economic and social inequalities which disadvantage women. Dunn argues her case well. For example, the majority’s ‘trust and confidence’ reasoning does in fact appear to be based on unsubstantiated ‘stock stories or stereotypes’ about gender roles in marriage. While appearing to portray marriage as a partnership of equals, the majority provided no evidence for their conclusion that ‘women often leave the business decisions to their husbands’. Kirby J, holding that it is necessary to avoid gender stereotypes, also concluded that men make the business decisions and their wives are willing to follow their advice without bringing an independent voice to bear. Dunn’s logical response is that both of these approaches are simplistic and avoid the complex issues of underlying structural gender inequality which predispose women to react in certain ways when they are asked to undertake surety obligations. She points to the body of statistical and qualitative evidence which was compiled during the 1980s and 1990s which highlights the persisting gendered disparities of economic power and of other areas of decision making. Dunn expresses a preference for the approach of feminist author Catharine Mackinnon[32] which looks to the outcomes for women in adopting certain principles, rather than categorising the approach as gender-neutral or gender-specific.[33] The question to be asked is whether a particular approach serves to maintain or release women from a subordinate position. This acknowledges the social and economic context of women’s present position. It is therefore useful to examine some of the evidence supporting the continuation of entrenched gender differences.

D Structural inequality-reasons for special protection

Under the formal equality model courts implicitly assume that women no longer have a subservient and unequal role in financial transactions. This is not borne out by the profile of the typical guarantor spouse which has emerged from the cases. It is apparent that entrenched structural inequalities still exit between the sexes. There are important reasons for protection of vulnerable guarantors, whether under a gender specific rule or otherwise. The more lenient approach of the law in recent times to claims for granting relief under the special wives’ equity can perhaps be viewed as an appropriate response to women’s vulnerability in financial transactions which arises from the continuation of patterns of structured gendered inequality. The arguments for and against a specific rule for married women have now been overtaken by the decision in Garcia, and it is evident from the post Garcia cases that many of the married women seeking to resist enforcement of guarantees still conform to the profile graphically outlined in previous case law. In the business guarantee context guarantor wives face some strikingly similar problems time after time. These include:

Limited business skills, knowledge and experience;
Limited involvement in the husband's business affairs;
Limited education levels, which in most cases do not include accounting, business or legal skills;
Different cultural values;
Marital problems; and
Difficulty in understanding legal and business documents.

Many of these factors were identified in the academic commentary prior to Garcia. Several important qualitative reviews[34] of the case law as well as empirical studies[35] confirmed that the combination of economic inequality and emotional dependence in many marriages contributed to the vulnerability of married women sureties. The studies indicated that women were particularly vulnerable upon divorce and that the desire to keep the marriage on foot and avoid the adverse financial repercussion of its breakdown is an underlying imperative in the decisions of many women to undertake surety obligations which they are not necessarily comfortable with.

Despite the advances of women in society, these studies indicated that traditional gender roles were observed in the marriages of many of the women who were the victims of sexually transmitted debt. A disquietening feature in many of the marriages was that the women’s disadvantaged educational and business backgrounds translated into a situation of financial dependency, thereby increasing their vulnerability to control and abuse. In her review of English surety cases Kaye points out that abuse can extend to both physical and emotional abuse as well as economic deprivation.[36] A similar pattern emerged in Baron’s review of the Australian pre Garcia cases. While those cases provided evidence of physical[37] and emotional abuse, economic dependency[38], minimal educational opportunities[39] and broken work patterns[40], there were other cases in which educated women[41] were also held to be vulnerable. A typical example was Mrs Garcia, who was a professional woman experienced in business and in dealing with financiers. She was, however, subject to condescending and deprecatory remarks regarding her business skills by her husband and to subtle bullying tactics.

That educated women and those with business experience can also remain passive figures in their husband’s businesses and be subject to emotional dependency has been attributed to the fact that women’s reasoning is different to men’s. As noted above, it is claimed that women speak with a different voice, one that is family and relationship centred. This is a particularly relevant observation for those women of different ethnic and cultural backgrounds.[42] The empirical studies undertaken by Singh and Fehlberg in the 1990s investigated the division of power between couples in business, particularly in relation to financial decisions. The studies showed that regardless of their educational levels, women saw themselves as providing a support role for their husbands’ businesses. The women emphasised that their role on paper (as director or secretary) did not conform to their position in reality. The women had never considered exercising their formal rights as directors and some were even unsure of the office they held or the exact extent of their shareholding. Fehlberg, commenting about the studies, pointed out that:

These findings challenge the accuracy of assumptions identified in the case law ...to the effect that legal rights are known, readily acted upon, and translated into remedies or practical benefits. They underline the problem that, for women’s positions in family businesses to be understood, judges must be more prepared to look beyond formal positions held within family businesses.[43]

The empirical studies showed that even where the women actively participated in the family businesses, this did not actually translate into real power over the conduct of the business. Their work was in the main confined to clerical, cleaning, bookkeeping and receptionist work and they consistently described themselves as playing a support role.[44]

Australian statistical data[45] reinforced the portrayal of women as economically disadvantaged by virtue of their roles as carers. Reported employment trends in 1996 showed that in 65% of families with children under the age of 10 years, women are either not in paid employment or work part-time. Even where in full-time employment, they lacked wage parity with men, earning 83.9% of men’s wages. The dramatic drop in workforce participation rates by women of prime childbearing age (25-34) in the statistics indicates that broken working patterns were still a common feature of many women’s lives in the 1990s. Women still earned less than men, were concentrated in part-time and low paid employment and their broken work patterns clearly meant they would have lower, if any, superannuation entitlements. The Australian Law Reform Commission’s in depth study of gender equality[46] provided further quantitative evidence showing that women in the 1990s were poorer than men, earned less, were less likely to be in the paid workforce and more likely to fall back on social welfare as an institutionalised form of disadvantage. The Commission drew on the findings of a study conducted in 1993 by the Australian Institute of Family Studies (‘AIFS’) [47] and concluded that women’s standard of living and income declined more rapidly than men’s after separation

It is important to note that this stereotypical picture is still emerging in more recent cases. Those cases, however, present a contradictory picture of many women who, as well as being disadvantaged in economic, educational and emotional terms, are also capable, intelligent, astute and sometimes more aware of their responsibilities than can be divulged for the purpose of success in their cases brought under the equitable principle in Yerkey v Jones.[48]

E Post Garcia empirical evidence into gender equality

Does the pattern of structural gendered inequality as statistically evidenced and described in the academic literature on surety cases in the 1990s still exist?

There is sufficient empirical and qualitative information available since the High Court’s decision in Garcia, which confirms the continuing existence of economic and social equality evidenced in previous studies. The Women’s Legal Service Network (WLSN) provided a useful summary of recent statistical data in its submission to the Attorney-General’s Department Paper, ‘Property and Family Law-Options for Change’.[49] The WSLN addressed the issue of whether men and women are now more equal in the workforce and therefore property should be divided equally upon marriage breakdown. Studies cited in the submission highlighted women’s continuing disadvantaged status, particularly in relation to workforce participation and earning capacity. This disadvantage is accentuated when women have children. Women still do most of the unpaid household work and childcare.[50] The submission concluded that in the context of family law, reforms based upon a false premise of economic equality between the parties to a marriage will perpetuate unjust outcomes.

The most recent data into women’s education and training shows a complex pattern is emerging whereby the initial employment and educational outcomes for young women have improved dramatically. The following trends have emerged in more recent years:

More young women are in education and training then ever before. In 2001 the retention rate for girls in year 12 was 79 percent compared to 69 per cent for boys.[51]
In 2001 women made up 57 per cent of higher education students commencing an undergraduate qualification, 59 per cent of those completing a Bachelor’s degree and 51 per cent of those completing a post-graduate qualification.[52]
Women made up 70 per cent of those completing courses in the Arts, Social Sciences and Humanities and 15 percent of those completing courses in Engineering and Surveying.[53]

Whether these gains can be maintained in the long term as the pattern of women’s lives develop to embrace marriage and childbearing remain to be seen. A report released in June 2003 by the Commonwealth Parliamentary Library[54] confirms the improved general enrolment patterns for women in the tertiary sector, as well as the enhanced employment and promotion prospects for women academics, yet expresses caution about the trends. The report illustrates that despite recent gains, important gender differences exist. Women are over represented as students in disciplines such as the social sciences which lead to less prestigious and less highly paid jobs than, for example, in engineering and information technology, where they are under-represented.

Unfortunately, two studies recently undertaken under the auspices of the AIFS suggest that it will be long time before these improved ‘entry-level’ outcomes for women will be translated into long-term gains. Sheehan and Hughes’ paper[55] on the division of matrimonial property in Australia indicated that the future needs of former spouses (i.e. wives) were frequently overlook in the distribution of assets. Their paper drew on the empirical data collected by the AIFS 1998 Australian Divorce Transitions Project. Their analysis demonstrated that women continued to be disadvantaged by the existing system of property division upon marriage break-up and that their position had changed little since 1986.[56]This was particularly the case in low-asset marriages, and reflected the constraints imposed by the limited wealth available to a large minority of couples on separation. A pattern emerged whereby women were disadvantaged by the smaller share of non-basic assets allocated them on marriage breakdown, such as business assets and superannuation. Smyth and Weston[57] reported a similar pattern of disadvantage in relation to women’s living standards after divorce. Using the same empirical data as Sheehan and Hughes, they found that two conclusions drawn from the AIFS previous work continued to hold: in general women and children were more likely than men to experience financial hardship after divorce and repartnering remains a key way out of financial difficulties for many divorced women and their children. These studies confirm Duggan’s earlier argument[58] that the risk of family breakdown and the subsequent financial detriment suffered by women is a crucial factor in defining their vulnerability in the surety context. The trust and dependency many women display may result in feeling compelled to into a surety transaction which is clearly not in their interests. They may do so to protect the marriage, but the transaction will work to their disadvantage should the marriage break down

F The Forgotten factor in Feminist Legal Commentary

There is virtually no recognition in the feminist literature of countervailing company law principles which themselves are policy driven and define the roles of women in their capacities as company directors.

It is interesting that in Dunn’s review of the legal responses to sexually transmitted debt, she acknowledges the problem of what is termed ‘false universality’. This relates to the tendency of legal feminist theory to homogenise women, treating them as if their experiences and perspectives are all quite similar. She debunks this myth, noting its tendency to render women uniformly as victims. Indeed women are not all the same. Some fulfil their obligations as company directors adequately. They attempt to inform themselves about their businesses and to obtain business experience. Dunn, who notes that there are many intelligent, articulate women like Mrs Garcia, whose success works against the stereotype of the ignorant wife, acknowledges this. Dunn comes close to recognising the dangers in ignoring the fact that the law requires certain standards of company directors when she concedes that ‘it is a tempting strategy to minimise women’s knowledge and experience of business in the interests of fitting the stereotype of the ignorant wife’.[59] Herein lies the dilemma faced in balancing the special wives’ equity with the rules of company law. As the empirical post Garcia evidence discussed above suggests, there have only been small incremental improvements in the position of women in the last decade. Women’s lives are still greatly affected by broken working patterns, unequal remuneration, the burden of unpaid household work, childcare and the lasting financial impact of marriage breakdown. But that picture is not clear-cut. In terms of education and training the initial outcomes for women are now overtaking the outcomes for men. Individual differences in the background and experience of women must be taken into account, along with the disincentive for women to portray themselves as informed or knowledgeable in the context of surety litigation. The educational and business expertise of women sureties varies greatly. Some women sureties are both very intelligent and astute about their business affairs. Unfortunately, for the purposes of the rule in Yerkey v Jones it actually enhances their case to downplay their business and financial abilities. The law cannot assume that because the husband presents as the public face of the company that he necessarily controls decision making in the company. [60]

1 The reality of economics

The feminist legal literature has overwhelmingly emphasised women’s social and economically disadvantaged status in the surety context. These factors obviously cannot be ignored, but the approach may be too simplistic in its failure to recognise individual differences and that women may be required to exaggerate these factors for the purposes of sustaining their case. Stripping back the corporate veil and viewing women sureties as wives rather than as company directors, allows them to be continually portrayed as victims of power abuse. Although she identifies the tendency of some feminist writers to ‘victimise’ women, Dunn also says, ‘there is a clear power imbalance with respect to the relationship between the creditor and the guarantor’.[61] This is true, but it is a simplistic view. The inequality of bargaining position is not peculiar to women sureties. It also defines the relationship of all other individuals and customers dealing with large financial corporations, who are not necessarily beneficiaries of special protection. Most are disadvantaged by the length, complexity and obscurity of standardised guarantee contracts relied on by lenders and often unduly favourable to them. The stronger commercial position of the creditor relative to the guarantor can be criticised to the extent that the creditor ordinarily possesses greater information about the state of the debtor’s account and the financial risks associated with the guarantee. This imbalance affects all guarantors, not just married women. Procedural reforms in credit regulation and self-regulatory codes are addressing this information asymmetry.[62] Focussing on the obvious power imbalance in a surety transaction results in an unfortunate tendency to pit the parties against each other by assuming a ‘guilty bank versus an innocent guarantor’ paradigm.[63] Howell opines that ‘Creditors use women as insurance policies’.[64] Dunn says:

While the issue is sometimes portrayed as a contest between two innocent parties, the creditor is in fact relying on the guarantor to assume a risk which it does not wish to bear even where it benefits from the interest it earns from the debt.[65]

This view assumes that there is something inherently wrong about creditors asking married women to provide security for the business debts of family companies. As a matter of reality it ignores the practicalities and economic policy issues which the protection of women in these situations discloses. If there is a default in the loan, is it to be expected that the loss should fall on the financial institution and not on the guarantor? In considering this question it is useful first to more logically consider the position of the lending financial institution in managing risk and secondly the judicial recognition given to the useful economic function that lenders play in sustaining small business enterprise in the overall economy. Lenders can only do so on the basis of the kind of security available –not infrequently this is the family home, of which the wife is a registered proprietor. In regard to the first point, certainly banks and other financial institutions like lending money and charging interest. That is obviously their core function and how they make their profit. Lending to businesses involves risk and how that risk is managed is a question for assessment by the lender. Prudent lenders have risk minimisation strategies and must also comply with relevant statutory prudential standards. Taking security is commonly expected by all parties to financing transactions and is in accordance with financial institutions’ obligations to their own shareholders to optimise their profits and minimise the risk of defaulting loans. It is not unusual nor is it specifically exploitative of married women. Financial institutions simply have no place engaging in risky lending practices. Should the lender’s shareholders and, ultimately its customers and the wider community, bear the cost of defaulting loans? This is a complex issue, as is apparent from the nuances in applying the relevant case law, but it is not one which is readily answered by applying a ‘balance of power’ test. In relation to individual transactions, therefore, financial institutions are under no compulsion to lend, but are entitled and in many circumstances ought, if acting properly, to ask for the appropriate security to cover the risk of default. If it is not forthcoming the lender will generally not be concerned to continue with the financing of the business. This leads to a consideration of the second issue –the judicial response to the potential ‘drying up’ of funds to small businesses, which is one of the dangers of being overly solicitous to the position of married women. Lord Browne-Wilkinson in the House of Lords’ decision in Barclays Bank plc v O’Brien pointed out that:

It is easy to allow sympathy for a wife who is threatened with the loss of her home at the suit of a rich bank to obscure an important public interest, viz., the need to ensure that the wealth currently tied up in the matrimonial home does not become economically sterile. If the rights secured to wives by lenders renders vulnerable loans granted on the security of matrimonial homes, institutions will be unwilling to accept such security, thereby reducing the flow of loan capital to business enterprises. It is therefore essential that a law designed to protect the vulnerable does not render the matrimonial home unacceptable as security financial institutions.[66]

Later, in Royal Bank of Scotland v Etridge,[67] Lord Nicholls looked at the issue in more detail. His Lordship said:

The problem considered in O’Brien’s case and raised by the present appeals is of comparatively recent origin. It arises out of the substantial growth in home ownership over the last 30 or 40 years and, as part of that development, the great increase in the number of homes jointly owned by husbands and wives. More than two-thirds of households in the United Kingdom now own their own homes. For most home-owning couples, their homes are their most valuable asset. They must surely be free, if they so wish, to use this asset as a means of raising money, whether for the purpose of the husband’s business or for any other purpose. Their home is their property. The law should not restrict them in their use of it. Bank finance is in fact by far the most important source of capital for small businesses with less than 10 employees. These businesses comprise about 95 percent of all business in the country, responsible for nearly one-third of all employment. Finance raised by second mortgages on the principal’s home is a significant source of the capital for the start-up of small businesses.

A similar pattern of business structure exists in Australia.[68]

Kirby J was the only member of the court in Garcia to discuss the implications of increased transaction costs and disincentives to the provision of capital to small business occurring as a result of the voluminous increase in litigation by married women sureties seeking to resist enforcement of their securities. His Honour accepted the arguments of economic policy articulated in O’Brien, noting that lenders could impose unrealistic standards by an over-protective approach which in his view ‘would be tantamount to a judicial divestiture of a married woman’s capacity to execute a guarantee’.[69]

III. LIABILITY- GUARANTOR AS A COMPANY OFFICER

The failure of most feminist legal commentators to recognise the relevance and significance of the principles of company law in surety cases has contributed to the tendency to assume that most women sureties are disadvantaged and non-comprehending of their responsibilities and to simplify the legal responses into the two models of special and equal treatment, cogently criticised by Dunn. In this regard it is illuminating to return to the concept of ‘false universality’, referred to by Dunn. It is a concept that is relevant in the surety context. Some examples will suffice to show that women guarantors are not always absolute victims. Mrs Garcia, as is well known, ran her own business and together with her husband had been involved in running businesses and obtaining finance over a period of several years. Mrs Ridout[70] may not have had an ostensibly managerial role, but she was clearly deeply involved with the Ridout group of companies over a long period of time and was routinely consulted and participated in decision-making, even though she regarded her husband as the main decision maker. She presented as an alert lady, with a good memory who was able to understand the relevant transactions. Mrs Armstrong,[71] although the subject of bullying tactics, benefited from the corporate structure to the extent of a direct shareholding and convincing her estranged husband to transfer a significant property from the company into her name for doubtful consideration.

A The interaction of the rules of company law and the special wives equity

Following Garcia, a creditor can assume that as a wife the guarantor has reposed trust and confidence in her husband and as a result sometimes ‘with not the lightest hint of bad faith, the explanation of a transaction by one to the other will be imperfect and incomplete, if not simply wrong’.[72] The case law since Garcia has given scant attention to the conflict of equitable and corporate law doctrines. Part 111 of this paper explores the surety transaction from the company law perspective. It looks at the company law rules which apply at the various stages of the surety transaction and the rationale underlying those rules. The analysis will indicate the difficulties in reconciling the two sets of rules and determining the proper scope of equity in commercial transactions.

Traditional company law principles, and modern statutory refinements of these principles set out in the Corporations Act 2001 (Cth), are based on the legal fiction of the company as a separate person.[73] Brennan J in Northside Developments Pty Ltd v Registrar-General[74] pointed out that the existence of the company as a separate legal entity does not mean that it is a sham. The law accepts its separate legal existence for ‘many socially useful purposes’. These obviously include the advancement of business enterprise and commerce, by which risk taking is rewarded by the protection of limited liability. The corollary of this protection is the necessary imposition of prescribed standards of behaviour required of company controllers for the protection of shareholders, creditors and outsiders. Those who obtain the benefits of the company should abide by the rules affecting it.

B The guarantor: wife or director?

When directors approach a lender for company finance should the lender be entitled to consider that it is dealing with a company or with the natural persons behind the company? Is it effectively lending to the husband, as the alter ego of the company? Is the lender taking security from the woman as a wife and not in her capacity as a company director? The majority of pre Garcia cases preferred to go behind the corporate structure and consider the transaction as one entered into by husband and wife, in their natural capacities.[75] These cases asserted that the company was the mere ‘alter ego’ of the husband. This approach was vindicated by the High Court in Garcia and subsequent successful special equity cases where the courts were prepared to lift the corporate veil, regarding the principle debtor and the husband as in fact one.

The 1990 decision of Ng M in National Australia Bank Ltd v Marjory McGann Casting and Modelling Agency Pty Ltd[76] (an application for summary judgment) is unusual because it specifically acknowledged that to equate the husband with the company would be lifting the corporate veil. Master Ng acknowledged the undoubted authority of Salomon v Salomon[77] and the reluctance of Australian courts to lift the corporate veil. On this basis he concluded that the exceptions to Salomon’s case should not be extended to cases where a wife guaranteed debts of a company controlled by her husband. Natwest Australia Bank Ltd v Smith[78] was also a case where the court refused relief under the Yerkey principle on the basis that the debt was that of a company, and not of the husband personally. However, even prior to Garcia most decisions supported the application of the Yerkey principle to company cases, so these cases did not represent the correct legal position[79] regarding the identity of the borrower. The two decisions are noteworthy because very few guarantee cases have even acknowledged or considered these fundamental corporate law principles. Indeed, little recognition has ever been given in cases concerning wives’ guarantees of company debts that the courts are actually engaging in the process of lifting the corporate veil.[80]

Looked at from a company law perspective, however, where a woman director gives a personal guarantee for a company’s debts there is no apparent juridical basis to lift the corporate veil and the lender ought to be able to consider her in her role, as represented to it, as a properly appointed company director providing a guarantee to support the company’s debts.

It is instructive to go back to the core rule in Salomon v Salomon and Co,[81] the authority of which has not been doubted by the High Court.[82] On the question of separate legal entity Halsbury LC said:

Either the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr Salomon. If it was not, there was no person and no thing to be an agent at all; and it is impossible to say at the same time that there s a company and there is not.[83]

It cannot be doubted that this principle remains at the heart of common law corporate regimes.[84] The general approach to separate legal personality which is adopted under company law principles is that the separate identity of the company must be upheld. This stems from the underlying economic rationale for limited liability.[85] Limited liability has been said to achieve various economic goals of which facilitating enterprise, promoting market efficiency, reducing monitoring and compliance costs by investors and encouraging equity diversity are the most significant.[86] In cases which come within particular categories, the veil will be lifted. For example if the company is used to perpetrate fraud or an agency is found to exist.[87] Certain provisions in the Corporations Act 2001(Cth) effect a statutory lifting of the veil,[88] but there is no general principle which explains the circumstances in which the veil will be lifted. [89] The commercial courts in Australia have tended to follow mainstream United Kingdom authority, which is to respect and preserve separate personality. A disappointing aspect of Garcia and other special equity cases is that they have not explicitly recognised that they are making further inroads into the Salomon separate entity principle and the logical consequences of that erosion. One of the most serious consequences arises from the fact that a major argument for lifting the veil in special equity cases turns on the degree of control and dominance exercised by the husband and the passivity of the wife in the affairs of the company. A release from the obligations of the wife as director under an ‘alter ego’ category of judicial veil- lifting may arguably result in ‘passivity’ being seen as desirable, whilst those who engage actively and responsibly in the company’s affairs may be regarded as being punished. The tendency to reinforce already ingrained stereotypes of women as being incapable of properly fulfilling the role of company director is undesirable and will continue as long as the legal assumption continues that it is men who run small family businesses. If women are to be encouraged to take an active role in all kinds of business enterprises they should not be given the message that passivity is desirable and will release them from legal responsibilities undertaken in the interests of the company.

Not all of the economic arguments for limited lability are compelling in the case of small, closely held companies. However, other justifications have been advanced. Harper J in Ridout felt compelled to follow the authority of the High Court in Garcia and declined to consider Mrs Ridout’s potential liability from the standpoint of her position as a director of the various companies in the Ridout group. However, his Honour expressed concerns with this approach and recognised that there are different kinds of impediments to commercial dealings when the veil is lifted in small family companies. He said:

It seems to me that there are principles which would justify taking the view that is not appropriate to look behind the corporation to the natural persons who are its directors for the purpose of considering whether there has been unconscionable conduct... It may be a substantial impediment to reasonable commercial activity if those dealing with the corporation must look behind it to consider the abilities of its directors before dealing with it. Small corporations could be adversely affected if they are not in a position to take action quickly when commercial circumstances require it, because of the need to convince lenders or others that their directors are not under a relevant disability...There is much to be said for the view that those who choose to conduct their affairs through the medium of a corporation, should not, for the purposes of avoiding obligations undertaken by the corporation, be permitted to rely upon characteristics which pertain to them as the natural persons who lie behind the corporation.[90]

Harper J’s observations in Commonwealth Bank v Ridout are in accord with the response of some courts[91] that it may be inequitable for those who adopt the corporate form to later request the courts to look behind it. The authors of Ford’s Principles of Corporations Law sum up the argument that those who choose to incorporate should be consistent about it, in the words ‘They that take the form shall perish by the form’.[92] The general reluctance of the Australian courts to depart from the principle in Salomon’s case and lift the corporate veil promotes what ought to be corporate law’s main goal –certainty and consistency in commercial dealings. As it stands, the present grounds for lifting the corporate veil under common law are vague and imprecise. If another category, that of sexually transmitted debt, is to be added then the courts ought at least to articulate that this is what is being done and to address the dangers it involves.

There are dangers because unfortunately, uncertainty about the parameters and content of legal rules allowing a lifting of the corporate veil imposes substantial costs. When litigation risks cannot be confidently predicted, lenders may be deterred from engaging in economically productive activities such as injecting finance into small businesses, or at the least, will take excessive and frequently costly precautions.

C Executing the Loan and Guarantee Documents

The rules of company law, in this context, run counter to the rules of equity which regard a married woman as vulnerable and in need of special protection. When, for example, Mrs Garcia presented at the bank an ‘intelligent articulate woman’ in her capacity as a director of Citizens Gold Pty Ltd the bank, as a creditor, was entitled to make a number of assumptions about the effect of her signature on the documents, her authority as a director and her role and conduct in the company.

The common law principle from the English case of Royal British Bank v Turquand,[93] referred to as ‘the Indoor Management Rule’, was designed to provide some protection to outsiders transacting with companies. It allowed outsiders to assume that the company had complied with its constitution in carrying out any transactions. The indoor management rule was codified in 1984.[94] The main differences between the common law and the statute were that:

The scope of the rule was specified according to the six assumptions that an outsider dealing with the company could make, see s 68A(3)(a)-(f) Companies Codes;
The exceptions were expressed in terms of either actual knowledge that the assumption was incorrect, or a connection or relationship between the company and the outsider such that the outsider ought to have known that assumption was incorrect, see s 68A(4)(a)(b) Companies Codes;
The outsider was entitled to make the assumptions despite fraud or forgery by the company’s officers, provided the outsider did not have actual knowledge of the fraud or forgery, see s 66D Companies Codes; and
The doctrine of constructive knowledge of the company’s public documents was abolished: see s 68C Companies Codes.

These provisions continued in operation upon the enactment of the Corporations Law in 1991, but since then, the section numbers have been changed, and the content of the sections simplified, on 1 July 1998 with the passing of the Company Law Review Act 1998 (Cth).

The current formulation of the rule appears in ss 128-129 Corporations Act. [95] Section 129 differs slightly from former s 164(3) by adding to and changing the wording of the assumptions that may be made by outsiders. Section 129(1) allows an outsider to assume that the company's constitution (if any), and replaceable rules, have been complied with. This assumption is a statutory enactment of the rule in Turquands’s case. So far as the status of a married woman presenting at the bank in her capacity as a director of the borrowing company, the bank is entitled to assume that as a person shown as a director or company secretary on a search of the public register available from the Australian Securities and Investments Commission she:

was duly appointed (s 129 (2));
had the authority to excercise the powers and perform the duties customarily exercised by that kind of officer or agent of a similar company 129(3); and
had properly performed here duties to the company (s 129(4)).

The scope of s 129(4) is particularly significant in guarantee cases where the director is claiming equitable relief on the basis, inter alia, that she has not participated in the management of the company at all. It is important to note that the statute does not expressly provide that the assumption in s 129(4) or indeed any of the other assumptions are subject to equitable rules. [96] What then is the meaning and content of the assumption of proper performance of duties? No guidance as to its meaning was provided in the Explanatory Memorandum accompanying the Company Law Review Act. Read widely, ‘proper performance of duties’ means not only that the director complied with matters of procedural regulation such as attending meetings and signing relevant documents, but also complied with accepted standards of care with regard to participation in and understanding of the company’s business operations and financial affairs. Whether s 129(4) extends to the assumption of proper performance of directors’ fiduciary duties to the company has been addressed by Carroll, [97] who identifies that ‘duties’ has two potential meanings:

the narrow meaning, that refers to the tasks undertaken by officers as assigned in the constitution or legislation; and
the wide meaning that also includes the fiduciary duties attached to that office.

Carroll concludes that the better view is to adopt the narrow meaning, as it does not extend the ambit of the common law rule. More recently, Chapple and Lipton’s monograph[98] provides good reasons for a broad interpretation of ‘duties’ as including both procedural tasks and general law and statutory duties of good faith and care and diligence.

Whatever the divergence of academic opinion, there are particularly compelling reasons to support the view that the assumption in s 129(4) encompasses the full range of statutory duties in ss 180-184, the general law, and in the insolvency context, the duties to creditors. These reasons lies in the purpose of the provision. The Acts Interpretations Act 1901 (Cth)[99] applies to the Corporations Act.[100] Section 15AA of the Acts Interpretations Act provides that in the interpretation of a provision of an Act a construction that would promote the purpose or object, whether that purpose or object is expressly stated or not, underlying the Act is to be preferred to a construction that would not promote that purpose or object. How to determine the purpose or object is not specified by s 15AA but guidance may be found by referring to extrinsic materials and by considering related provisions in the wider statute. [101] The dominant policy consideration for the enactment of the statutory assumptions is to protect outsiders dealing with the company in good faith.[102] This supports giving the assumption of proper performance of duties a wider ambit. In addition, related provisions to s 129 (4) such as ss 180(1) and 588G, which outline directors’ duty of care and diligence and duty to prevent insolvent trading respectively, corroborate that higher standards and expectations have been imposed upon directors in recent times. This was noted by Sheller and Clarke JJA in Daniels v Anderson,[103] who referred to the legislative pattern of imposing greater responsibilities upon directors which demonstrated that their duty of care was ‘not merely subjective, limited by the director’s knowledge and experience or ignorance or inaction’. Company law principles now require directors to have inquiring minds, to take an active role in their company’s affairs and to be able to understand at least in general terms what the company’s accounts and auditor’s reports show.[104] It is stated in Ford’s Principles of Corporations Law that ‘Persons who cannot read balance sheets should not become company directors’.[105] It is apparent that passivity is now an unacceptable trait for a company director.[106] Section 180 (1) provides that a director should ‘exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation’s circumstances’. The statutory obligation of care and diligence imports an objective test, but also takes into account what is to be expected of a reasonable person in an equivalent position in that type of company.[107]

Clearly, the wider interpretation of the assumption that directors properly perform their duties results in the outside creditor being able to make assumptions regarding the participation and understanding of the guarantor that stand in stark contrast to the assumption of passivity under the equitable rule. At the outset, the creditor could assume that the loan and guarantee documents executed by the wife in her capacity as a director were provided based on her general understanding of the company’s financial position and of the resultant existing need to obtain or extend the flow of funds from the creditor. Given that there is a strong case for giving s 129 (4) the widest possible ambit, the guarantor-wife may be expected to be conducting herself according to the standards appropriate to a director of ordinary competence of that particular type of company. While she is not expected to possess any special skills, lack of basic skills would not satisfy the threshold test for care and diligence in s 180(1). This contrasts with the standard required in special equity cases. Riley states that:

When acting on her own account Mrs Garcia was not only not expected to act with reasonable care and diligence, she was positively expected not to.[108]

If the creditor knows or suspects that the director is not properly performing her duties to the company, then under s 128 it will be precluded form relying on the statutory assumptions. There is some uncertainty as to whether ‘suspect’ under s 128 means actually suspect or in an objective sense means ‘ought reasonably to have suspected’.[109] Whatever view is adopted, in the circumstances where a female spouse with no apparent intellectual or comprehension difficulties attends a bank or other financial institution unaccompanied, in her capacity as a company director it would not be fair to conclude that the bank knows or ought to know that she is in a position of disadvantage. To know or suspect that she is not performing her duties merely because she is the wife of the other director would not be warranted. Of course under the Garcia principles, it would be warranted, because the lender is entitled to assume that the trust and confidence reposed in the husband by the wife accounts for her entering into the transaction without seeking explanations or having any understanding of the company’s circumstances.

D Company Insolvent and Defaults on Loan

The extension of directors’ fiduciary duties to creditors where the company is insolvent or in impending insolvency has been well recognised in recent years and is consistent with the growing trend to impose greater responsibilities upon directors. It is in this context that the courts have issued some of their sternest statements criticising non-participating directors and articulating higher, objective standards of care applying to all directors. It is interesting therefore to contrast the divergent legal responses to the position of married women directors incurring debts when their company is insolvent with their position when providing a personal guarantee as security for a loan to the company of which they are directors and possibly shareholders. The tenderness of the law in the latter situation, excusing the wife from ignorance of her own company’s affairs, contrasts starkly with the liability imposed by the law in the former. The policy rationale justifying the law’s tenderness in special equity cases was explained and analysed in Part II of this paper. As Riley observes,[110] the particular difficulty with resolving the protection/liability conundrum lies in the fact that the lender is dealing with a corporate borrower and is doing so on the strength of representations made by its directors. It extends credit to the company on this basis and then relies on security provided by the wife who has been represented to it as a company director. When the company becomes insolvent she seeks to be released from obligations undertaken in her personal capacity, yet clearly is still subject to duties and liabilities in her capacity as a director. It is therefore important to consider the scope of those duties.

It is a well-accepted principle of common law in Australia that when a company is solvent, the company’s directors owe a duty to the company alone. It is not owed to shareholders individually.[111] It now appears settled across most common law jurisdictions that directors have a duty to take into account the interest of creditors at times of impending insolvency. The leading case in this area is Walker v Wimborne. Mason J stated:

It should be emphasised that the directors of a company in discharging their duty to the company must take account of the interests of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them.[112]

The weight of authority supports the proposition that the duty owed by directors to take into account the interests of creditors is a duty owed to the company, and not one owed to, and enforceable by, creditors directly. Recently the High Court in Spies v The Queen commented:

Hence the view that it is ‘extremely doubtful’ whether Mason J (in Walker v Wimborne) ‘intended to suggest that directors owe an independent duty directly to creditors’. To give some unsecured creditors remedies in an insolvency which are denied to others would undermine the basic principle of pari passu participation by creditors...In so far as the remarks in Grove v Flavel suggest that the directors owe an independent duty to, and enforceable by, the creditors by reason of their position as directors, they are contrary to principle and later authority.[113]

The relevance of the duty to take into account the interests of creditors is more immediately apparent in terms of the company’s unsecured creditors, but also covers secured dealings with creditors. The value of the security may fall in a declining property market, there may be other valid competing claims against the property or for a number of reasons the creditor may ultimately find itself unsecured or only partially secured. Directors who have failed to act properly in the administration of the company and the consideration of the interests of all stakeholders, including creditors, may be liable in damages or subject to injunctive relief at the behest of the creditors.[114] The duty is also relevant in relation to ‘sexually transmitted debt’ cases. For example, the requirement that women directors adequately fulfil their responsibilities to the company’s creditors is illustrated in the House of Lords’ decision in Winkworth v Edward Baron Development Co Ltd.[115] In that case the husband and wife were directors of a company which owned the family home. The company's bank account was overdrawn by £8,000. Some months later, without the wife's knowledge or consent the husband caused the company to mortgage the property to the creditor by forging the wife's signature. When the company became insolvent the wife claimed an equitable interest in the home which took priority to that of the creditor. The House of Lords held that the company owed a duty to its creditors, past and present. The husband was clearly responsible for the insolvency of the company but because the wife had not exercised her powers as a director properly, equity would not allow the company to hold part of its property on trust for the wife to the detriment of creditors. The decision is in conformity with Australian cases considering the role of passive women company directors.[116]

The duty to prevent the company from incurring debts while insolvent is a particular aspect of a director’s general duty to take creditors’ interests into account. It is accepted that the risk of ‘moral hazard’ increases dramatically in insolvency resulting in an unfair reallocation of risk from stakeholders to creditors. Section 588G of the Corporations Act imposes a duty upon directors to prevent their company from trading while insolvent. A director breaches this duty if he or she fails to prevent the company incurring debts when either the company is insolvent, or the debt renders the company insolvent, if there are reasonable grounds for suspecting that it is insolvent. These rules have been adopted to deter improper behaviour and ensure that directors are personally liable for debts incurred when on an objective assessment they have failed to suspect insolvency. In this regard the law has generally not excused directors on the basis of their particular disabilities or their non-involvement in their company’s affairs.[117]

Wives who assume the role of company director, albeit without a clear understanding of the nature and responsibility of that role, will not be relieved of liability on that account. The policy issues and the standard applicable to non-executive directors, in relation to their companies' financial transactions have been articulated in a well-known series of insolvent trading cases. Some of the cases involved women who were inactive directors of small family companies seeking to avoid personal liability for the debts of a company under predecessor provisions to s 588G Corporations Act.[118] It was questionable whether the defences allowed under those provisions allowed an inactive director to be excused from liability.

In Metal Manufacturers Ltd v Lewis[119] the defence under s 556 of the Companies Code was successfully invoked to allow a non-participating company director wife to escape personal liability for the debts of the company. However, the latitude adopted in Metal Manufacturers was rejected in later decisions. In Statewide Tobacco Services Ltd v Morley[120] the director of a family company who had no role in its day to day to day management and had sought no information about the company's finances could not escape liability for its debts. In the Victorian Supreme Court, Ormiston J at first instance held that a non-executive director could not rely on insolvent trading defences where he or she has taken no part in the management of the company, but totally delegated responsibilities to other directors or managers. His Honour observed[121] that a director is obliged to inform himself or herself as to the financial affairs of the company to the extent necessary to form each year the opinion required for the director's statement and this obligation presupposed sufficient knowledge and understanding of the company's affairs and its financial records to permit the opinion of solvency to be formed. In essence, even a non-active director is required to give at least some attention to the affairs of the company and to obtain a reasonable knowledge and understanding of its financial position. His Honour suggested that even in a small company a director should seek out information about the company's trading figures on a regular basis.

Subsequent decisions also adopted a higher objective standard for non-executive directors. In Commonwealth Bank v Friedrich[122] Tadgell J held that an objective standard should be applied in determining whether the director had reasonable cause to expect that the company would be able to pay its debts as and when they fell due. Ignorance of the company's affairs was no excuse. He held that all directors should exercise an inquiring mind. His Honour approved of the reasoning of Ormiston J in Statewide Tobacco and interpreted the scope of s 566 in conformity with other provisions in the statute imposing duties on a director:

To inform him or herself as to the financial affairs of the company to the extent necessary to form each year the opinion required for the directors’ statements. Although that is only an annual obligation, it presupposes sufficient knowledge and understanding of the company’s affairs and its financial records to permit the opinion of solvency to be formed. ...Provisions such as these provide some indication of the attitude now taken by the legislative scheme in the Code towards the role and duties of directors and that altered attitude should be taken into account in interpreting provisions such as section 566.[123]

In Group Four Industries Pty Ltd v Brosnan, Debelle J said of Mrs Brosnan, a director of a family company who claimed that she did not know it was insolvent:

While some might say that it was not unreasonable for a wife who is a part-time employee of the company and who has employment elsewhere to rely on her husband who is engaged full-time in the business of the company, such a view cannot obtain if the wife is a director of the company. Once the wife takes the office of a director, she undertakes duties and obligations which require an active interest to be displayed in the affairs of the company.[124]

More recently, Slicer J expressed similar views in Hosken v Australian Securities Commission.[125] He held that a wife who is a co-director of a company is well able and expected to monitor the affairs of that company and was as qualified to discern irregularity as any other non-professional or layperson.

The New South Wales Court of Appeal in Deputy Commissioner of Taxation v Clark[126] recently dispelled doubts about whether a passive director’s total reliance upon her husband constituted a ‘good reason’ to excuse her from liability for failing to prevent the company from incurring debts while insolvent. At first instance Palmer J of the Supreme Court of New South Wales in Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation[127] allowed an intermingling of the special equity rules in Garcia with allowable defences under s 588H of the Corporations Act to relieve a non-participating director wife of her liabilities for the insolvent debts of her company. Mrs Clark had been appointed a director to satisfy the existing statutory requirement for two directors. The evidence showed that she was never shown any documents relating to the company or its financial affairs nor did she discuss these matters with her husband or seek any information or explanations at all about its financial affairs. She claimed that she could rely on the defence in s 588H(4) that she did not take part in the management of the company because of illness or ‘other good reason’. Her invocation of ‘other good reason’ as a defence to an action for insolvent trading was in essence a Garcia defence. Palmer J accepted her claim that her failure to appreciate the reality of her responsibilities as a director was due to deferral to her husband because of the trust and confidence she reposed in him in the sense referred to in Garcia. He held that this was a ‘good reason’ for her failure to participate in the management of the company for the purposes of the defence under s 588H(4). The decision of Palmer J in Southern Cross was at odds with the line of authoritative cases under previous provisions, some of which are discussed above, which have consistently displayed disapproval of directors who, after taking office, did nothing to keep themselves adequately informed about their company’s affairs. Moreover, in a prior decision on s 588H(4), Tourprint International Pty Ltd (in liq) v Bott,[128] the court concluded that:

Mr Bott’s submission is contrary to the policy underlying the subsection as disclosed by the Harmer Committee. In para 3.12 the Harmer Committee expressed the view that a director should not be excused where, though acting reasonably, he has not shown the necessary commitment to an involvement with the management of a company in financial difficulties.

Cassidy concluded that Palmer J’s decision adopted an inappropriate approach to directors’ responsibilities saying that it ‘implies an acceptance of a stereotypical assumption of the inherent inadequacy of females in commercial matters’.[129] Her conclusions are correct, particularly if, in accordance with s 5C of the Corporations Act, one takes a purposive construction of the legislative provisions regulating insolvent trading and the general duties of directors to exercise care and diligence. For example, Cassidy convincingly argued that the decision ignored the legislative background to the insolvent trading defences which indicated that the provisions were designed to discourage those who hide behind the shield of ignorance of or non-participation in their company’s affairs.[130] Directors are to be judged by objective standards for the purposes of both the statutory duty of care and the duty to prevent insolvent trading.[131] Indeed, this was the view of the New South Wales Court of Appeal, which overturned the decision of Palmer J and held that a Garcia type of defence did not constitute a ‘good reason’ within the meaning of s 588H(4) for failing to participate in the management of the company. Spigelman CJ, with whom Handley and Hodgson JJA concurred, examined the scope and purpose of the insolvent trading provisions and referred to decisions under previous provisions, critical of non-participation and imposing more stringent objective obligations upon all directors. His Honour also referred to the views of the Harmer Committee and to developments concerning directors’ duty of care and diligence, in concluding that Mrs Clark should not be excused from liability for insolvent trading. [132] Spigelman CJ acknowledged the policy dilemma in deciding whether the law requires formal equality or the existence of special rules as a defence to legal liability. He referred to the opposing views in the secondary legal literature. Ultimately he concluded that permitting women to rely on special rules was undesirable in that it carried the risk of reinforcing gender stereotypes and undermining the confidence with which potential creditors deal with small companies in which women participate with their husbands.[133]

The stricter, objective approach to directors' duties, adopted in the insolvent trading cases was reinforced by the introduction of s 232 (4) into the Corporations Law by the Corporate Law Reform Act 1992 (Cth).[134] Section 232(4) was the immediate predecessor of s 180(1) Corporations Act and was expressed in similar terms. The provision provided that an officer of a corporation must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances. Under both s 232(4) and leading case law such as Daniels v Anderson[135] minimum objective standards of care and skill for directors are required. Both the statute and case law recognise, however, that the objective standard applies in the context of the particular background and responsibilities of the director concerned, the size and nature of the corporation and the state of its financial affairs.[136] No matter what the circumstances, however, remaining ignorant and uniformed is not conduct that is expected of a director of ordinary competence. This is powerfully illustrated by the approach taken in the recent case of Sheahan v Verco[137] where the court held that non -executive directors had breached their common law and statutory duties of care. Mullighan J referred to and approved a line of cases increasing directors’ responsibilities pursuant to s 232(4) and at common law.[138] It was shown that two non-executive directors, Mr Verco and Mr Hodge, had abrogated all of their duties in that they failed to:

hold or attend any meeting or sufficient meetings of directors of the company, including any annual general meetings;
make any examination of the books of the company;
make any effort to verify information concerning the company provided to them from time to time by the company’s managing director;
ensure that the company kept or maintained proper financial statements or records;
seek even basic information as to the financial position of the company from time to time;
insist upon any record of the entry by the company into contracts;
insist upon any record of the use of the seal of the company;
make any enquiry at all as to whether the company could pay all or any of its debts;

They had put their implicit trust in the managing director, placing in his hands all matters concerning the ongoing running and management of the affairs of the company. Mullighan J held that whilst it may be accepted that as non-executive directors they were not under an obligation to carry out a detailed inspection of the day-to-day activities of the company, they were obliged to be aware of its true financial position. The company’s creditors were entitled to expect that it would be managed appropriately and the directors were obliged to do so.

There is an ominous comparison between the enumerated instances of dereliction of duty in Sheahan v Verco, for which the directors were held liable and similar instances of non-involvement by director wives in Garcia cases which, on the other hand, constitute grounds for equitable relief.

IV. RECOMMENDATIONS

With the advent of the sole person proprietary company the number of sexually transmitted debt cases will decline, but not disappear. It is submitted that the appearance of company director wives coming before the courts arguing their own ignorance and incompetence in dealings relating to their companies should be discouraged since it subverts the well-accepted principles underlying the responsibilities of company directors. At the same time the law should be sensitive to the complexities surrounding ‘sexually transmitted debt’. The High Court in Garcia resoundingly accepted a restrictive rule, applying only to one specific class of guarantor, even though the majority’s rationale for this protection, as explained in Part II, was somewhat tenuous. The rule is now beyond doubt, therefore consideration should be given to the issue of how best to protect vulnerable guarantors while at the same time encouraging responsible participation by those who undertake the role of company director. Women would better perform their duties if properly informed both about the guarantee transaction and about their duties as directors. In many of the cases it is evident that, despite the fact that the guarantor is a company director, there is an information imbalance about both the extent of her liability and the risk of the company defaulting. Creditors should use fair and transparent methods when dealing with married women guarantors. Stimulus to small business activity should not be discouraged, but neither party should shift responsibility for imprudent actions to the other! There are a number of approaches to achieving a proper balance between the interests of the creditor and the guarantor in company director cases. These include enhancing information disclosure, restricting the use of ‘all moneys’ clauses in guarantees, providing appropriate advice in situations where these clauses are permitted, and allowing the courts to achieve ‘practical justice’ by applying the doctrine of partial rescission in special equity cases.

A Enhanced Disclosure

It is submitted that the reforms affecting guarantees of business debts, recently implemented in the revised Code of Banking Practice[139] provide a useful means of improving information disclosure and of preventing the source of many problems in special equity cases by restricting the use of ‘all moneys’ clauses in guarantees governed by the Code. It is beyond the scope of this paper to provide an exhaustive review of recent changes to the Code, but there are some significant reforms clearly aimed at enhancing protection to those providing guarantees to support business and company debts.

The guarantee coverage of the Code of Banking Practice has now been extended to cover guarantees given to secure small business debts. The revised code of Banking Practice was launched on 12 August 2002, to come into effect in August 2003. It provides a complete overhaul and reform of the ‘old’ Code, which was first released in 1993. The guarantee provisions have been substantially rewritten to provide enhanced protection for guarantors. Unlike the previous version, the new Code covers guarantees given by individuals to secure small business lending and provides some controls over ‘all moneys’ securities. Under clause 28.1 the new Code applies to guarantees given by individuals in respect of facilities or accommodation provided by a bank to individuals or small business whether incorporated or not. ‘Small business’ means a business employing:

Less than 100 full time employees if the business includes the manufacture

of goods; or

In any other case less than 20 full time employees.

To achieve consistency in financial sector regulation, this is same meaning as ‘retail client’ in the Financial Services Reform Act 2001 (Cth).

While lenders are entitled to assume that the wife, as guarantor has a general understanding of the company’s business and financial affairs, they cannot assume that she always understands the complexities and risks involved in taking a guarantee, particularly those with unlimited or ‘all moneys’ clauses. In the interests of fairness guarantees require disclosure, warnings and advice which should be made available to the guarantor in a clearly understandable format. The Australian Bankers’ Association (‘ABA’) in adopting the recommendations of Richard Viney,[140] the independent reviewer of the Code, did not dispute that all of these steps were necessary and should be applied to consumer and small business guarantees. In most respects the ABA followed the Viney recommendations providing general benefits such as a commitment from banks to act ‘fairly and reasonably’,[141] improved pre-contractual information and the use of plain language documentation. Detailed provisions were inserted into the Code regulating all of these matters.[142] These procedural reforms are useful and to some extent mirror existing requirements in the Uniform Consumer Credit Code. Clearly, procedural reforms cannot address the root cause of sexually transmitted debt, which frequently stems from emotional rather than rational decision making by the guarantor. Nevertheless, they can go some way to redressing information balance. So far as the promotion and implementation of the reforms is concerned, in accordance with the recommendations of the Reviewer, the new Code contains provisions to ensure these steps are taken.[143]

As noted, many of the problems emerging in these cases stem from standard form documents containing ‘all moneys’ or ‘all accounts’ clauses and an appropriate response to addressing the protection/liability conundrum should primarily be addressed to these unjust contractual provisions, but doing so equitably, carefully balancing the rights of both guarantor and creditor. While in some circumstances the courts may regard the use of these clauses as unconscionable, either at common law or under statute, [144] a preventative approach restricting their use in guarantee contracts is preferable. They can be very useful for lenders and borrowers and banning them entirely would be an unnecessary fetter on the flow of funds to small business. It is worth noting that Clause 28.13 of the revised Code of Banking Practice imposes restrictions on the use of ‘all moneys’ clauses. However, although it fills a gap in the old Code in relation to future credit contracts, the provision is flawed[145] in that it fails to fully protect guarantors from the unexpected consequences of ‘all moneys’ guarantees. The wording of the clause allows a guarantee to be enforceable in relation to further advances, providing that an initial warning has been given that this can occur and the lending is within the previously agreed limit. This effectively means that guarantees will be enforceable in relation to further advances that a guarantor may not, at the time, be aware about or has agreed to, provided that a statement has been given some time in the past and the lending is within the previously agreed limit. Providing a warning is not sufficient protection and the effect of clause 28.13 is not in the spirit of banks’ commitment under clause 2.2 of the new Code to act fairly and reasonably at all times. The provision should be redrafted to remove the exception.

Despite concerns about the wording of clause 28.13, overall the new Code’s guarantee provisions are to be commended for the added protections they offer to vulnerable guarantors. It is to be hoped that these reforms will have a natural flow-on effect across the financial sector. Ultimately, global reforms requiring adequate information disclosure and controlling the use of onerous ‘all moneys’ provisions in guarantees going beyond the banking sector to cover all lenders to small business are needed. While the rules for taking of guarantees are changing and improving so far as banks[146] are concerned, there are still sectors of the finance industry which use guarantees in business lending which are unaffected by the scope of recent reforms. For example a Finance Company Code of Practice is needed, given the prominence of finance companies in business lending and the fact that they commonly use guarantees. This was recommended by the Expert Group on Family Financial Vulnerability, which expressed concerns that persons giving guarantees to some financiers are not offered the same protections as those with banks in terms of coverage by an industry code of conduct and access to independent costs effect dispute resolution processes such as those provided by the Banking Ombudsman. Referring to guarantee disclosure provisions in industry codes of conduct the Group said:

Finance Companies are major users of guarantees and yet do not have an equivalent obligation. We consider this position anomalous and one which should be resolved by the creation of a general rule applying to all guarantees.[147]

B Partial Rescission

It is submitted that the protective policies underlying special equity cases must be balanced against the public interest in both promoting proper standards of corporate conduct and in freeing up wealth tied up in the family home, and therefore need only be activated against the surety's assumption of risks in excess of that represented. Thus, a further modification in the case of director wives, lies in the potential role of the doctrine of partial rescission to effect justice in cases where the wife would have willingly supported the debt, but to a lesser extent than that outlined in ‘all moneys’ clauses embedded in convoluted security documents. Courts have only infrequently decreed partial rescission in guarantee cases. High Court authority now clearly supports its use. Deane J in Commercial Bank of Australia Ltd v Amadio[148] considered that the remedy of partial rescission might have been appropriate, but rejected it as an option as on the facts he found that the plaintiffs would not have entered the transaction at all had they known of their son's true financial position. [149] His Honour’s reasoning strongly suggested that a transaction could be partially rescinded where, in the absence of the misrepresentation, the surety would still have taken on part of the obligations of the guarantee. The High Court’s later joint judgment in Vadasz v Pioneer Concrete Pty Ltd[150] demonstrated that where the guarantor’s assent is procured by a misrepresentation about the extent of the risk assumed then it is justifiable to hold the plaintiff to his or her willing acceptance of a lower risk. In other words it is not inequitable that a plaintiff should be precluded from denying liability for the lower risk represented if he or she would have willingly accepted it. The decision in Vadasz is a useful approach, particularly suited to moulding relief in the many special equity cases where the essential wrongdoing attributed to the creditor consists of a misrepresentation as to the extent of the risk involved. It is therefore particularly apt where the guarantor is assumed to understand the general nature of her obligations, but may be subject to a specific misrepresentation as to its open-ended liability. It is an approach which has been followed in cases decided under s 7 of the Contracts Review Act 1980 (NSW) where the court is able to exercise discretionary relief.[150] Vadasz exemplifies the discretion and remedial flexibility of courts of equity. The High Court accepted the view that the right to rescind is not vested solely in the ‘misled victim’, but that a court of equity by its own decree may order partial rescission in accordance with standards of good conscience and practical justice.

An example of a court doing what was ‘practically just’ for both parties was the decision in Australia and New Zealand Banking Group Ltd v Petrik [151] in which Vadasz was cited. Petrik represents equity’s flexibility and notions of achieving practical justice for both guarantor and creditor. In that case a mother executed an unlimited mortgage guaranteeing the overdraft of her son’s building company at the time the company was set up. She was clearly a vulnerable guarantor with a disadvantaged background. Mrs Petrik wrongly believed that her liability was capped at $20,000. In fact her liability was ultimately in excess of $200,000. The trial judge, finding in favour of Mrs Petrik, found that the bank had acted unconscionably and set the mortgage aside. The bank appealed, relying on the High Court’s decision in Vadasz that it would be practically just to hold Mrs Petrik liable to the extent of $20,000. The Victorian Court of Appeal agreed that the mortgage should be enforced for $20,000 plus interest and costs on the basis that Mrs Petrik ‘Was willing, though reluctant, to risk her house for her son the extent of $20,000; she was only unwilling beyond that’.[152]

V. CONCLUSION

This paper has outlined and analysed the justification for providing protection and imposing liability on married women in their capacities as company directors. Some acute difficulties arise in trying to resolve two apparently contradictory sets of rules –equity versus company law. On both sides, the rules appear grounded in valid policy considerations and entrenched and supported in case law. An important consideration in considering the approaches is whether in fact the law can progress without compromising the goals and objectives of the rules underlying protection or liability. The rules of company law clearly impose a higher standard than many women, with their limited business experience, can achieve. The solution is not to accept a lower, variable standard for company director wives but to appreciate that wives would better perform their directors' duties if properly informed.

The arguments underlying the two perspectives presented in this paper-protection versus liability represent the reasons for and against lifting the corporate veil and determining whether these women sureties should be viewed as company directors or as wives. I conclude that adopting the latter view compromises some important principles of company law, recognised in cases on directors’ duties and insolvent trading, which should be reinforced. Lifting the veil in Garcia type cases, occurring as it invariably must, on a case-by-case basis, does not advance certainty or consistency in the law. It could also be seen as undermining the use of the corporate structure by wives who claim taxation and other benefits, while at the same time disclaiming responsibilities undertaken in their capacities as directors. It promotes the fiction that in many cases the director/wife is a volunteer who has obtained no substantial benefit from the transaction. In Garcia and subsequent cases, in effectively lifting the corporate veil and regarding the guarantor as a wife rather than as a director, the courts have interpreted the meaning of ‘substantial benefit’ in favour of the guarantor rather than the creditor. It is of concern that apparently a woman can be a director of a family company with, in many cases, highly valued assets and real estate, which is involved in financial transactions involving large sums of money being borrowed from creditors and through which the family has, in the past derived significant wealth and yet still be regarded as a volunteer. In these situations, the family as a whole, including the wife are in substance the true beneficiaries of significant wealth as a result of using the company as a vehicle for running the business. Taxation and other benefits have been utilised to the advantage of the entire family. It is specious to ignore or gloss over these benefits.

It is submitted that Spigelman CJ in Deputy Commissioner of Taxation v Clark[153] adopted an appropriate response to those who completely abdicate their responsibilities as directors when he stated that:

Maintaining a firm position on the duties of directors will encourage the use of single director corporate structures for small business. In my opinion, it is desirable to promote coherence between appearance and reality in corporate practice.[154]

It is important not to reinforce gender stereotypes about the non-participation of women in corporate life as well as maintain the confidence of creditors in dealing with small companies with which women participate with their husbands. The measures referred to in Part IV of the paper may go some way to creating a balance between protection and liability.


[*] 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.

[70] [2000] WASC 3.

[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> ).

[81] [1987] AC 22.

[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

[1939] 4 All ER 116.

[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.

[100] Corporations Act s 5C.

[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.

[119] (1988) 13 NSWLR 315.

[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.

[122] (1991) 9 ACLC 946.

[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’).

[135] (1995) 37 NSWLR 43.

[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.


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