Dirty Deeds: The effect of DOCAs on secured contingent liabilities

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Dirty Deeds: The effect of DOCAs on secured contingent liabilities

The WA Court of Appeal in Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd [2015] WASCA 95 (13 May 2015) has confirmed that deeds of company arrangement (DOCAs) can extinguish secured contingent debts or claims.

If you are a secured creditor, when considering any DOCA proposal, you should ensure so far as possible that your contingent rights are expressly preserved by the terms of the DOCA. If the DOCA is already approved, secured contingent creditors should consider their options to act early to challenge the DOCA under s 445D(1)(f)(i) or to obtain a fresh guarantee and security after the DOCA is terminated.

Background

Between 2007 and 2009, a number of companies in the BGC group (BGC Companies) entered into a series of agreements to supply building products and services on credit to Newglen Nominees Pty Ltd (Newglen). The obligations and liabilities of Newglen were guaranteed by Dalesun Holdings Pty Ltd (Dalesun), and the guarantees were secured by charges over Dalesun’s land.

Dalesun was placed into voluntary administration in December 2010, and in March 2011 its creditors resolved that Dalesun should execute a DOCA (Dalesun DOCA).  The BGC Companies did not attend the meeting or vote in favour of the resolution to execute the Dalesun DOCA.

The Dalesun DOCA contained standard clauses providing, amongst other things, that certain secured creditors (not including the BGC Companies) were not bound by the Dalesun DOCA, but that all other parties with a claim against Dalesun (including contingent claims) were required to accept their entitlements under the Dalesun DOCA in respect of their claims and that these claims would be released and extinguished upon termination of the Dalesun DOCA.  The Dalesun DOCA did not expressly address the guarantees given by Dalesun in relation to the Newglen agreements, and neither Dalesun or the BGC Companies took any steps to terminate the guarantees.

The Dalesun DOCA was executed on 8 April 2011, and was terminated on 13 June 2011 on the basis that it had achieved its purpose.

The BGC Companies subsequently supplied goods and services on credit to Newglen under the existing agreements in the period between November 2011 and February 2012.  Newglen was placed into voluntary administration on 1 February 2012, and executed a DOCA on 8 March 2012.  The BGC Companies received some but not all of the monies owing to them in respect of the goods and services supplied to Newglen.

In June 2013, the BGC Companies commenced proceedings in the Supreme Court of Western Australia against Dalesun, claiming:

• liquidated sums under the guarantees for the amounts unpaid by Newglen in respect of the goods and services; and
• declarations to the effect that they held charges over land owned by Dalesun to secure those debts.

Dalesun asserted that the Dalesun DOCA bound and barred any such claims.

The primary judge, Le Miere J, found that the Dalesun DOCA did in fact bind and bar the claims of the BGC Companies, and dismissed the BGC Companies’ claims.  The BGC Companies appealed the decision.

DOCAs under the Corporations Act

The key provision of the Corporations Act 2001 (Cth) (Act) in issue in this case was s 444D, which governs the effect of a DOCA on creditors.

S 444D(1) provides that a DOCA “binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed”.

However, s 444D(2) provides some protection for secured creditors who do not vote in favour of a DOCA, and states that “sub-section (1) does not prevent a secured creditor from realising or otherwise dealing with the security interest, except so far as (a) the deed so provides in relation to a secured creditor who voted in favour of the resolution of creditors because of which the company executed the deed; or (b) the Court orders under s 444F (2).”

The decision at first instance

One of the primary arguments put forward by the BGC Companies was that they were secured creditors of Dalesun that had not voted in favour of the Dalesun DOCA, and were therefore entitled to recovery of the debts owed and recognition of the enforceability of the charges because this constituted “realising or dealing” with their security interests pursuant to s 444D(2) of the Act.

Le Miere J held that the claims were barred under the Dalesun DOCA and dismissed the BGC Companies’ claims against Dalesun.  His Honour found that s 444D(2) only operates to preserve a secured creditor’s right to realise or deal with their security in respect of any existing or “present” claims held at that time, and that s 444D(2) does not automatically exempt secured creditors and their claims from the operation of a DOCA or preserve rights outside of the security such as contingent rights that might ripen into future claims.

The appeal

On appeal, the BGC Companies alleged that Le Miere J erred in law in finding that the protection offered to secured creditors by s 444D(2) did not extend to the preservation of contingent or future claims.

The BGC Companies argued that s 444D(2) preserved their rights under their security, and that this protection must necessarily extend to the underlying legal rights to enforce the secured debt which should be considered to be part of the security.

In response, Dalesun submitted that s 444D(2) only entitled a secured creditor to realise its security in respect of existing rights, and does not prevent a DOCA from subsequently extinguishing claims not expressly preserved by the DOCA.

The Court of Appeal delivered a split decision.  Newnes and Murphy JJA found against the BGC Companies and dismissed the appeal.  Buss JA dissented and would have allowed the appeal.

Majority opinion

In dismissing the appeal, Newnes and Murphy JJA found that:

• secured creditors have two different types of rights – a personal right against the company in respect of the debt, and a proprietary right against the property of the company over which the security was granted;
• by its express words, s 444D(2) preserves a secured creditor’s proprietary rights against the property of the company to satisfy claims at the specified date which would otherwise only be enforceable through the operation of the DOCA. However, those rights can only be exercised by reference to an existing claim or debt that triggers the right to exercise the security.  If there is such a claim or debt, then the secured creditor can ‘stand outside’ of the DOCA and realise its security;
• however, s 444D(2) will not protect or reinstate personal rights that are subsequently released by the statutory effect given to the terms of the DOCA by ss 444D(1) and 444H of the Act; and
• this interpretation of s 444D(2) is consistent with the underlying purpose or object of the DOCA regime in the Act which is to facilitate a discharge of the company’s existing debts so that the company may have a ‘fresh start for the future’ free of a ‘legacy of debt’ to be paid by the company after the termination of the DOCA.

In light of this reasoning, their Honours concluded that although the BGC Companies had contingent claims under the guarantees against Dalesun, they were not of a character in respect of which the security rights preserved by s 444D(2) could be exercised, and these rights were subsequently released under the terms of the Dalesun DOCA.

Dissenting opinion

In his dissenting opinion, Buss JA noted that the object and purpose of s 444D(2) was to preserve the right of a secured creditor to deal with its security, and that s 444D does not expressly or impliedly limit or alter the debts, claims or rights which are the subject of the security.  His Honour stated that the legislative intention of s 444D(2) would be defeated if the underlying debts, claims or other obligations the subject of the security were extinguished or discharged.  Buss JA would therefore have allowed the appeal on the basis that the contingent rights of the BGC Companies under the guarantee were preserved by s 444D(2).

Conclusion

s 444D(2) only protects a secured creditor’s right to exercise their security in respect of existing rights, and will not automatically preserve contingent claims or rights covered by the security.

Secured creditors should ensure that their contingent rights are expressly preserved by the DOCA, or consider whether they should challenge the DOCA under s 445D(1)(f)(i) or can obtain a fresh guarantee and security after the DOCA is terminated.