Bank guarantees and insolvency

Posted on Oct 6, 2018 by Jason Dunn   |   Categories: Commercial & Business Law

Can a landlord who calls on a bank guarantee due to the insolvency of its tenant be subject to an unfair preference claim by a liquidator?

The New South Wales Court of Appeal recently delivered its decision in Hosking v Extend N Build Pty Ltd. That decision considered the reach of the term “transaction” for the purposes of determining when a payment by a third party to an unsecured creditor might be an unfair preference for the purposes of section 588FA of the Corporations Act 2001 (Cth) (Act).

The insolvency law in Australia permits a liquidator to seek to recover payments made by a company to an unsecured creditor 6 months prior to the company’s liquidation.

This case raises an interesting question. If a landlord calls on a bank guarantee of an insolvent corporate tenant, is the payment by the bank to the landlord susceptible to a later claim by the tenant’s liquidator that the payment is an unfair preference?

The short answer to this question is no. The payment by the bank pursuant to its obligations under the terms of the bank guarantee may well be a transaction for the purposes of the Act, but it is not a payment which the landlord receives from its tenant. This fact is significant as it means that a liquidator will be unable to establish an essential element of an unfair preference claim.

A bank guarantee requires the bank to pay out the guarantee from its own funds if demanded by the landlord, without regard to the tenant’s direction. Following payment, the bank seeks repayment from the tenant pursuant to its “cash backed” facility or the terms of some other form of security. The payment by a bank pursuant to a bank guarantee is from its assets and not that of the company.

Given the nature of a bank guarantee, even if payment pursuant to a call on it can be considered a transaction for the purposes of the Act, it is not a payment which the creditor receives from the company and therefore does not satisfy an essential element of section 588FA of the Act.