The voluntary administration regime in Part 5.3A Corporations Act 2001 allows reconstruction possibilities to be pursued via a deed of company arrangement (DOCA) in such a way that, if creditors so desire, a legacy of debt may be extinguished so that liquidation may be avoided. Implicit in that is that the company will thereby be permitted to return to mainstream commercial life1 and have a "fresh start".
There have been two recent decisions of the Courts 2 that materially alter the perception of the position of a secured creditor once a DOCA has been executed. The previous thinking was that secured creditors who did not vote in favour of a DOCA had an unfettered right to exercise their security rights over assets of the company to recover amounts owed to them.
Recently, two decisions in Western Australia and New South Wales have cast some doubt on the ability of secured creditors to maintain their debt post the execution of a DOCA.
The impacts of these decisions are explored in this article.
Understanding the Legislative Framework
Section 444A(4)(d) Corporations Act 2001, provides that the instrument setting out the terms of the DOCA to be voted upon by creditors at a second meeting must specify to what extent the company is to be released from its debts.
Section 444D Corporations Act 2001, broadly provides that a DOCA binds all creditors of the company but does not prevent a secured creditor from realising or otherwise dealing with their security interest except in so far as the DOCA so provides and the secured creditor voted in favour of the resolution to execute that DOCA at the second meeting of creditors of the company.
The highlighted words above have particular importance. Firstly, it is usual that most DOCAs provide that it will bind all creditors who have a debt or claim against the company at the date of administration. However, nowhere in s444D (nor Part 5.3A for that matter) is the secured creditor's debt referred to as being preserved post the execution of DOCA. All that is preserved by the legislative framework is the right to realise and deal with a security interest. The statutory framework contemplates that the DOCA must state what debts are to be released and the extent of such release.
The Components of a Security Interest
A security interest also has a proprietary element, that part of it which is said to attach to the assets of the grantor company. That right allows the secured creditor a right of action against the property of the company. It is common for modern security interests to attach to present and future (known as after acquired) property. Thus there are two proprietary rights, those against existing assets, and those against future assets. Further, a security interest has a personal element, being a claim against the company itself (as distinct from the assets) for any debt owed. At law proprietary rights under a security interest exists regardless if a debt is owed to the secured creditor or not. That is why even though you may pay off your home loan (the debt), the bank still needs to release the mortgage (the security interest) over your house.
The DOCA in Question
In decision of Bluenergy Group Limited, the particular DOCA provided (like most DOCAs) that:
- The DOCA binds all persons having a Claim against the company;
- On and from the commencement of the DOCA, that all Claims against the company would be released and discharged;
- "Claim" was defined to include a debt or a present future or contingent claim against the company;
- A secured creditor could realise or otherwise deal with their security except to the extent the secured creditor voted in favour of the DOCA or released its security.
A particular secured creditor in question did not vote in favour of the DOCA, nor did the DOCA provide. The NSW Supreme Court had to consider, amongst other things, if:
(a) The secured creditor's debt was released?
(b) If the secured creditor's security remained?
(c) If the secured creditor's security extended to property acquired after the DOCA?
Does a DOCA release a secured creditor's debt?
The NSW Supreme Court found that nothing in the structure of Part 5.3A Corporations Act 2001 preserved the debt of a secured creditor if the DOCA provided that all debts of the company are to be released without saying anything about preserving the debts of a secured creditor. The reason for this is that s444D only preserved the proprietary rights of the secured creditor.
Does a DOCA release a security? Given that the DOCA in question (and s444D) expressly preserved the right of the secured creditor to realise and otherwise deal with its security interest, the security remained and still attached to the relevant assets of the company. However, that security interest no longer secured any debt obligation, the debts having been released by the entry into the DOCA.
Does a DOCA extinguish security over future property? The Court found that the existence of a continuing security extending indefinitely into the future over a company's after-acquired property, where the DOCA provided for the release of the secured creditor's debt, would place a very significant practical obstacle in the way of any future operation of a company that emerged after a DOCA, including potentially preventing the obtaining of new secured finance. The Court found this was inconsistent that a DOCA was to give a company a "fresh start". This interpretation places a restriction on the scope of the assets available to a secured creditor seeking
to "realise or otherwise deal" with its security. Only those assets which are held by company as at the time of the execution of the DOCA would be available.
What are the practical implications?
- Secured creditors should ensure that a DOCA expressly confirms that their debts are not released.
- Unless debts and security interests of secured creditors are preserved by a DOCA, it is likely that secured creditors will
— vote down any proposals for a DOCA thus reducing the prospects of restructures and companies having a fresh start; and
— enforce their security interests immediately (including by appointing receivers)
– this will limit the ability of restructures and increase the costs associated with external insolvency administrations. If secured creditors do not act as suggested above then companies entering a DOCA will have a lower debt burden and a greater chance of restructure.
*Joseph Scarcella is a partner at Ashurst in the Restructuring & Special Situations Group in Sydney. www.ashurst.com
FOOTNOTES: 1 Blacktown City Council v Macarthur Telecommunications Pty Ltd (2003) 47 ACSR 391
2 Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd (2015) 106 ACSR 79 and In the matter of Bluenergy Group Limited (Subject to a Deed of Company Arrangement) (Administrator Appointed) (2015) 107 ACSR 373