The Supreme Court of New South Wales has somewhat controversially held that a deed of company arrangement (DOCA) operated to extinguish debts owing to a secured creditor, even though the secured creditor did not vote for or otherwise adopt the DOCA.
Recently, the Court in In Re Bluenergy Group Limited (subject to DOCA) (administrator appointed)  NSWSC 977 among other things considered whether a secured creditor who did not vote in favour of a DOCA proposal was able to rely on its security to appoint administrators to the company after the DOCA had been executed.
A link to the decision is available here.
Since the introduction of Part 5.3A of the Corporations Act 2001 (Cth) (Corporations Act) almost 25 years ago, it has been accepted that secured creditors, subject to their express contrary agreement, would stand outside the DOCA process.
Justice Black’s decision, together with the Court of Appeal’s judgment in Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd  WASCA 95 (Australian Gypsum), fundamentally alters this position. For the first time secured creditors have been brought squarely within the ambit of a DOCA, with their secured debts subject to the same extinguishment principles as those which apply to the debts of unsecured creditors, even though existing proprietary interests of secured creditors are preserved.
We anticipate that the interaction of DOCAs and secured debts will be the subject of further consideration by the courts and may well require the High Court’s imprimatur, or legislative intervention, before being finally resolved.
In the meantime, we recommend that secured creditors very carefully consider the implications of a DOCA proposal. We expect that going forward secured creditors may adopt a more interventionist approach towards voluntary administrations, including by voting against DOCA proposals, seeking to be carved out from the terms of any proposed DOCA, and by proactively appointing receivers and managers to realise secured assets.
In September 2013, Keybridge Capital Limited (Keybridge) advanced $300,000 to Bluenergy Group Limited (Bluenergy) and took a charge over its assets.
In April 2014, Bluenergy was placed into administration.
In July 2014, Bluenergy’s creditors voted to adopt a DOCA proposal and in August 2014 the DOCA was duly executed. Keybridge did not vote in favour of the DOCA, preferring to abstain.
In March 2015 while Bluenergy was still subject to the DOCA, Keybridge appointed an administrator to Bluenergy pursuant to section 436C of the Corporations Act.
The deed administrators of the DOCA challenged the appointment of the administrator on several grounds. One argument advanced was that the DOCA had extinguished Keybridge’s secured debt and consequently Keybridge was unable to rely on section 436C of the Corporations Act to appoint an administrator to Bluenergy.
Keybridge contested the assertion that its secured debt had been extinguished by the DOCA, relying on section 444D(2) of the Corporations Act which provides that a DOCA does not prevent a secured creditor from realising or otherwise dealing with its security interest, unless the secured creditor has voted in favour of the DOCA or the court otherwise orders.
Justice Black found that section 444D(2) of the Corporations Act operated to preserve Keybridge’s right to realise or otherwise deal with its security interest in the secured property.
However, His Honour found that the section did not preserve Keybridge’s secured debt, which had been extinguished by the DOCA. This meant that after execution of the DOCA Keybridge was no longer a creditor of Bluenergy irrespective of the fact that Keybridge had not voted in favour of the DOCA.
This finding was made in relation to a current and secured debt. His Honour’s reasoning was not limited to the future or contingent debts of a company subject to a DOCA, as was the case in Australian Gypsum.
In making this finding, His Honour drew a distinction between: (a) Keybridge’s personal rights (that is, the debt owed by Bluenergy) which were extinguished by the DOCA; and (b) Keybridge’s proprietary rights (that is, its interest in Bluenergy’s property pursuant to its charge) which were not extinguished by the DOCA.
His Honour rejected submissions made on behalf of Keybridge that it was meaningless to preserve Keybridge’s proprietary interest if there was no underlying debt to recover, and that there could sensibly be no “security interest” (as defined by the Corporations Act) if there was no associated debt in existence.
Justice Black’s decision was guided, at least in part, by the majority’s judgment in Australian Gypsum, together with considerations of the “practical difficulties” which His Honour considered would arise if secured debts survived the execution of a DOCA. Justice Black was concerned to ensure that companies coming out of voluntary administration have a “fresh start” unburdened by debts (either unsecured or secured). This is an outcome which His Honour considered was consistent with the general policy of Part 5.3A of the Corporations Act.
Interestingly, His Honour concluded that notwithstanding that Keybridge was no longer a creditor of Bluenergy, section 444D(2) of the Corporations Act meant that it retained the right to appoint an administrator to Bluenergy pursuant to section 436C of the Corporations Act. However, His Honour was persuaded to terminate the administration under section 447A of the Corporations Act because, among other things, there was no utility in it where Keybridge’s debt had been extinguished.