Australia: Contingent claims maturing after termination of DOCA extinguished

BACKGROUND

The Appellants supplied building products and services on credit to Newglen Nominees Pty Ltd (Newglen). Dalesun Holdings Pty Ltd (Dalesun) guaranteed Newglen's obligations. This guarantee was supported by an equitable charge over Dalesun's land. Dalesun went into administration and subsequently entered into a deed of company arrangement (DOCA). The DOCA released all claims against Dalesun, including contingent claims. The Appellants did not vote in favour of the DOCA. The DOCA was terminated after its purpose was achieved.

The Appellants supplied further goods on credit to Newglen. Newglen defaulted and the Appellants sought to recover the unpaid sums under the guarantee, including by enforcing the charge.

The Court at first instance found that the DOCA bound the Appellants and their claims against Dalesun were precluded.

The Appellants appealed the decision and argued that:

• the security granted by Dalesun applied to all debts payable under the guarantee;
• s444D of the Corporations Act 2001 (Cth) preserved their security rights, such that they were entitled to realise their security to enforce the debts which were contingently payable prior to the DOCA, but which matured into a presently payable obligation after termination of the DOCA.

Dalesun submitted that the proper construction of s444D(2) meant that a secured creditor stands outside a DOCA and is entitled to realise its security. However, those rights are co-extensive with, and confined by, the secured creditor's existing claims. Contingent claims and other obligations under the guarantee are not kept alive by reason of these rights and could be extinguished under a DOCA.

DECISION

The majority of the Court of Appeal agreed with the primary judge and dismissed the appeal.

Fresh start

The Court found that a main purpose of the DOCA was to allow the company a fresh start for the future by discharging the debtor from future liability for its existing debts. The Appellant's construction of s444D went against this purpose.

Contingent claims

Prior to the DOCA, the Appellants had contingent claims against Dalesun for goods supplied to Newglen but not paid for. Dalesun also had a contingent liability in respect of goods supplied by the Appellants to Newglen in the future on credit, after the specified date in the DOCA.

The first category of contingent claims above would be provable under the DOCA, with a value to be estimated at the specified date in the DOCA.

The second category of contingent claims would at least be quantifiable at nil value. They were not of a character in respect of which the security rights preserved by s444D(2) could be exercised.

S444D(2) preserves, but does not interfere with, property rights. It does not say anything about reinstating provable claims that have been released by the DOCA.

The claims cannot be 'deemed' to not be released for the purposes of the Appellants continuing to exercise their security rights after the termination of the DOCA, because their security rights were not exercisable prior to then.

Notification of the meeting

The Court held that it was not unreasonable or unfair that the Appellants had not received notice of the meeting to approve the DOCA. It is unlikely that the legislature intended s444D to be construed on the basis that a particular creditor may not become aware of the meeting convened to approve the DOCA and therefore continued to supply goods after the effectuation of the DOCA.

COMMENT

The beneficiary of a guarantee needs to be mindful that a DOCA may extinguish its contingent claims under the guarantee, even where those claims arise after termination of the DOCA. In this situation, its security rights under the guarantee will effectively be worthless.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Most awarded firm and Australian deal of the year Australasian Legal Business Awards	Employer of Choice for Women Equal Opportunity for Women in the Workplace (EOWA)