DOCA Extinguishes Debt of Secured Creditor, but does not Extinguish Right to Recover. In the Wake of Bluenergy Group Limited (Subject to a Deed of Company Arrangement) (Administrators Appointed) [2015] NSWSC 997.

It has previously been general practice that a secured creditor who abstains from voting on a Deed of Company Arrangement (“DOCA”) will effectively stand outside of the terms of the DOCA and will be free to enforce their security pursuant to section 444D(2) of the Corporations Act 2001 (Cth) (“Corporations Act”).

In the matter of Bluenergy Group Limited (subject to a Deed of Company Arrangement) (administrators appointed) [2015] NSWSC 997, the court controversially held that the effect of the terms of a DOCA on a secured creditor resulted in the extinguishment of the secured creditor’s debt. However, the court further held that the secured creditor may nevertheless realise or deal with their security as a proprietary right.

Background

Keybridge Capital Limited (the “secured creditor”) held a security interest in all present and future rights and property of Bluenergy Group Limited (the “company”), in the form of a GSA which was registered on the Personal Properties Security Register (“PPSR”). The security was registered on the PPSR from 24 September 2013.

On 9 April 2014, administrators were jointly appointed pursuant to s436A of the Corporations Act 2001 (Cth). On 29 July 2014, the majority of creditors voted in favour of executing a DOCA which contained the following clause:

“On and from the commencing date, this Agreement fully and irrevocably releases and discharges the Company from all Claims”.

The secured creditor attended by proxy but abstained from voting.

On 19 March 2015, the secured creditor appointed another administrator pursuant to s436C of the Corporations Act, in its capacity as the holder of a security interest. The deed administrators of the DOCA brought proceedings to challenge the validity of the appointment of the administrator who had been appointed by the secured creditor and sought a declaration that the appointment be terminated.

The deed administrators argued that the secured creditor was not a secured creditor within the meaning of s51 of the Corporations Act, as its security interest had been extinguished by the DOCA and therefore was unable to meet the requirements of s436C of the Corporations Act to appoint an administrator.

Decision of the Court

The Supreme Court of New South Wales held:

1. the construction of the term of the DOCA (as detailed above) acted to extinguish the secured creditor’s debt;

2. the secured creditor’s right to realise and deal with its security was preserved as a proprietary right irrespective of the debt. The terms of the DOCA could not extinguish the right to enforcement as it is expressly protected pursuant to s444D of the Corporations Act;

3. the secured creditor’s right to realise and deal with its security interest, including appointing a receiver, was not defeated by the wording of the DOCA and accordingly the secured creditor had the right to appoint an administrator. However, the secured creditor was held not to be a creditor in the administration and accordingly the administration was terminated for lack of practical utility (and inconsistency with the purpose of Pt 5.3A of the Corporations Act);

4. the secured creditor could realise and deal with its security at the date of the release pursuant to the terms of the DOCA, but rights in after-acquired property were not preserved.

Despite the secured creditor’s submission that for s444D(2) of the Corporations Act to have effect, “the debt that is secured should therefore be preserved”, the court followed the reasoning given by the decision in Australian Gypsum Industries Pty Ltd v. Dalesun Holdings Pty Ltd [2014] WASC 89 (“Australian Gypsum”), in determining that a secured creditor holds both a proprietary right as to the security interest granted and a personal right against the company with respect to the debt.

The court looked at the statutory scheme and purpose under Pt 5.3A of the Corporations Act, as well as the decision in Australian Gypsum, in determining that the purpose of the provision is to allow a “fresh start” and further went on to describe the “practical difficulties” in allowing secured creditors to preserve rights to after-acquired property indefinitely.

Application to secured creditors

Pursuant to this decision (and unless distinguished), a secured creditor’s personal rights to the debt and its interest in after-acquired property would be considerably effected where creditors vote in favour of a DOCA that releases all claims.

This recent legal development necessitates the active involvement of secured creditors in negotiating the terms of a DOCA. In instances where a secured creditor’s debt far exceeds the current value of the realisable secured property held (at the time of considering a DOCA), or where there is a likelihood of acquiring considerable after-acquired property, then secured creditors may consider taking an active role in DOCA negotiations to ensure that their full debt is recoverable.

Author: Tania Smith

Published: October 2015