A Case Analysis of Crawford v Demertjis & Ruhs Pty Ltd [2024] NSWSC 48
A known risk of dealing with companies is that a company may become insolvent, but what are the implications of dealing with a company that is suddenly deregistered?
The recent New South Wales Supreme Court case of Crawford v Demertjis & Ruhs Pty Ltd [2024] NSWSC 48 considered the status of a deregistered company which owed money under a lease, as well as the question of whether a guarantor or indemnifier could be held liable for money owed by a company which no longer existed.
Key facts
The relevant facts:
- A lessor of commercial premises granted a lease of 3 years, from 1 March 2010 until 28 February 2013, to the lessee. Mr Crawford was the guarantor.
- The relevant clauses of the lease were as follows:
- a holding over clause provided that unless a party gave written notice of termination of the lease, it would continue as a periodic lease from month to month at the same rent or at a rent agreed by the parties; and
- cl 35, the guarantor’s liability clause, that relevantly stated, “in consideration of the Landlord leasing the Premises to the Tenant in accordance with this lease, the Guarantors [..] unconditionally agree that they and each of them will be jointly and severally liable to the Landlord for the payment of rent and all other monies payable by the Tenant, and also for the due performance and observance of all the terms and conditions on the part of the Tenant contained or implied. And it is hereby expressly agreed and declared that the Landlord may grant to the Tenant any time or indulgence and may compound or compromise or release the Tenant without realising or affecting the liability of the Guarantors.”
- On 11 July 2010, the lessee was deregistered. The lessor was not notified of this by the lessee or by Mr Crawford, the guarantor.
- The rent on the premises was paid up until 15 June 2018. However, by 15 January 2022, when the lessor regained possession of the premises, the outstanding rent was $57,040.
The proceedings against the guarantor
The lessor commenced proceedings against the guarantor, Mr Crawford for a sum of $57,238, comprising the outstanding rent and the cost of rectifying damage. Mr Crawford argued that:
- upon the lessee’s deregistration the lease was terminated, and rent was not payable.
- his liability was secondary to the lessee’s and at the point of de-registration the lessee’s liability ceased to exist, and therefore his liability did not arise.
The Local Court held that the lease was not terminated upon deregistration but continued with the property rights of the lessee being vested in ASIC. On that basis, the lessee could not be held liable for the outstanding rent. However, the Court held that Mr Crawford’s guarantee under cl 35 continued to bind him, or in the alternative, his “guarantee” could be construed as an indemnity which imposed an “independent primary liability” to pay the rent. Ultimately, Mr Crawford was held liable for the outstanding rent.
The guarantor’s appeal
Mr Crawford appealed to the Supreme Court on a number of grounds, including that the Magistrate erred in law in finding that the lessee, as a deregistered company was capable of accruing liabilities for rent and outgoings, and in finding that cl 35 contained an indemnity rendering the applicant liable to indemnify the respondent, whether or not the lessee was primarily liable.
What did the Supreme Court decide?
The Court held that while deregistered companies cannot be held liable for pre-existing debts nor accrue further debts, other parties to the contract may still be liable for those debts. Accordingly, the mere fact that the lessee had been deregistered was insufficient to release Mr Crawford from his own contractual obligations.
In determining whether cl 35 was a guarantee or an indemnity, the Court was required to consider the lease as a whole to ascertain the intentions of the parties. The characterisation by the Court of whether cl 35 was a guarantee or indemnity would determine whether Mr Crawford owed secondary liability (as guarantor) or primary liability (as indemnifier).
The Court considered the following in determining that cl 35 contained an indemnity:
- The description of Mr Crawford as a “guarantor” was not determinative, and the parties’ intention in drafting the lease was to create an indemnity, particularly since the lease stated that “headings do not form a legal part of the lease.”
- The words of cl 35, which provided for Mr Crawford’s joint and several liability, could only have meaning in circumstances where his liability extended but for the deregistration of the lessee.
- The words “payable by [the lessee]” in cl 35 did not mean payments “for which the lessee is liable”. This would have the effect of preventing recovery against Mr Crawford for obligations owed by the lessee, i.e. payment of rent, in circumstances where the lessor was unable to recover against the lessee. This would subvert the commercial purpose of the clause. Rather, the words were considered to mean payments “which the lease contemplated would be paid by the lessee, whether or not the lessee actually ever accrued liability for those amounts”.
None of the grounds of appeal were made out, the appeal was dismissed, and Mr Crawford was held liable for the money owed.
Key takeaways
This case serves as a reminder that by signing as a guarantor or indemnifier, one is taking on an element of risk on account of the personal liability that might potentially be incurred. By signing an indemnity clause that covers the obligation of a company, it is possible that the indemnifier may be held liable under that indemnity notwithstanding the subsequent deregistration of the company, and even in circumstances where the company never incurs the liability for which the indemnifier is responsible.
Care should be taken when giving personal guarantees or indemnities over a company’s obligations, and legal advice should always be sought before entering into any agreements.
Queries
If you have any questions about this article, please get in touch with one of our Key Contacts in our Litigation and Dispute Resolution team.
Disclaimer
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.