Nick Cooper

Principal – Oracle Insolvency Services

PUGWALL PTY LTD V ARTHUR MCKENZIE INVESTMENTS: AN UPDATE

In the matter of Pugwall Pty Ltd v Arthur McKenzie Investments Pty Ltd [2022] VSCA 272, on 9 December 2022 the Victorian Court of Appeal found that a director can be personally liable for a guarantee given under a joint venture agreement, despite the director only executing the agreement in their capacity as a sole director of a company that was party to the agreement, and not in their personal capacity as a guarantor.

For context, Martin Clark (Clark) is the sole director of the applicant, Pugwall Pty Ltd (Pugwall), and Arthur McKenzie (McKenzie) (second respondent) is the sole director of the first respondent, Arthur McKenzie Investments Pty Ltd (AMI). Both companies trade as commercial builders. The parties discussed working together on a development, on land that was owned by Pugwall.

In 2016, both parties entered into a Joint Venture Agreement (JVA) for the proposed development, which stipulated that;

• Pugwall would contribute the value of the land at an agreed amount of $480,000.00, together with interest, and that these monies would be paid prior to the calculation of profits;
• they would both cooperate in obtaining external funding secured by a mortgage over the land to discharge an existing mortgage Pugwall held with NAB for the remainder of the development costs; and
• they would both share equally in the profits and losses of the development.

The JVA on it’s first page, also identified Ponza Nominees Pty Ltd (Ponza) as the manager of the JVA and was granted broad powers of making decisions about the management of the joint venture.

Further, the agreement named both Clark and McKenzie as guarantors in respect of their respective guarantees of their obligations as joint venturers, with clause 19.1. of the JVA stating that “Clark guarantees the obligations of Pugwall under the Agreement. McKenzie guarantees the obligations of AMI under this Agreement.”

Further, the JVA stated that in the event of a default of payment to Ponza or another relevant third party by Pugwall or AMI, the defaulting party’s guarantor is required to then honour that payment and indemnify the joint venturer from any losses that may occur as a result of that default.

In 2019, the parties fell into dispute regarding funding, and a Deed of Arrangement (Deed) was prepared by AMI’s solicitors, however the Deed wasn’t signed or dated.

At the trial prior to the appeal, the judge found that McKenzie did not intend to be personally liable under the guarantee in the JVA. Further, the judge made orders that AMI pay Pugwall the sum of $1,347,969.82 for loss arising from AMI’s breach of an implied term to exercise reasonable care and skill.

On appeal:

1. Pugwall argued that McKenzie’s guarantor obligations were immediately binding when the JVA came into existence;
2. AMI argued that the JVA does not contain a separate execution block for each of Clark and McKenzie to sign as guarantors, however contained an execution block whereby they signed as directors of their respective companies;
3. Pugwall argued that the 2019 Deed prepared by AMI’s solicitors stipulated that McKenzie be released from his personal guarantee provided in the JVA, which insinuates that such a guarantee was indeed in existence.

The judges found:

1. McKenzie was a separate party from his company and was a party to the JVA, despite not being named as a party on the cover sheet or the first operative page of the JVA. Namely, as the JVA defines McKenzie as a guarantor in respect of his guarantee of the joint venture and provides that McKenzie “guarantees” the obligations of AMI under the JVA, therefore applies directly and in plain terms to McKenzie.

1. Each party expressly acknowledged that they had received independent legal and financial advice in respect of “all obligations” under the JVA. Given that the obligations included terms which imposed guarantee obligations, McKenzie’s signature suggests that he read and approved these terms or was “willing to take the chance of being bound by them”.

1. The body of the JVA suggests that McKenzie intended to be personally bound as a party to the JVA, and there was an objectively manifested intention for McKenzie to be personally bound.

As such, the judges found that the previous judge had erred in their finding that McKenzie did not intend to be personally bound by the JVA and granted Pugwall leave to appeal.