This week’s TGIF considers the case of In the matter of Eastmark Holdings Pty Limited (receivers and managers appointed) and 1 Denison Street Holdings Pty Ltd (receivers and managers appointed; In the matter of Eastmark Holdings Pty Limited (receivers and managers appointed (subject to a deed of company arrangement) & ors  NSWSC 1437 in which the court reinforced that a DOCA will be void insofar as it purports to force creditors to release third parties.
The Deed of Company Arrangement (DOCA) in question contained clauses purporting to bind creditors to give releases to third parties (the administrators, deed administrators, receivers and senior creditors) in respect to claims other than claims against the company the subject of the DOCA. The obligation of the administrators to distribute the relevant deed fund to creditors was dependent upon such a release being provided.
The plaintiff applied to the Court for an order pursuant to section 445D of the Corporations Act (Act) , terminating the DOCA on various grounds and alternatively, an order pursuant to section 445G declaring the DOCA void.
The Court considered a preliminary question as to whether the plaintiff was entitled to an order pursuant to section 445G of the Act, that the DOCA be declared void on the grounds that the provisions contained in it, concerning releases of parties other than the company in question, were invalid by virtue of section 444D(1) of the Act.
Section 444D(1) provides that a deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed.
The Court held that the releases were void, however, were severable from the DOCA.
The Court followed the High Court’s decision in Lehman Brothers Holdings Inc v City of Swan & Ors which held that in the context of a DOCA, creditors were not bound by provisions in such a deed that involved releases of claims against entities other than the company the subject of the DOCA.
In addition, the Court held the third party releases were also void due to a failure to adhere to procedural requirements under Pt 5.3A of the Act. The releases in question did not form part of the DOCA proposal that was voted upon at the meeting of creditors.
The Court determined that the contentious third party release clauses were severable for the following reasons:
- The third party releases were never intended to be part of the DOCA proposal in the first place and they were not in the proposal or discussed at the meeting of creditors;
- When one considered the Administrator’s report to creditors and the minutes of meeting of the creditors, it is clear that there was never an intention to include third party releases.
- Severance of the third party releases would allow the DOCA to operate as intended by the creditors, ie creditor’s claims against the company would be extinguished upon receipt of a distribution from the deed fund.
Accordingly, the Court held that the third party releases were void, but severable which allowed the DOCA to continue.
This case reinforces the High Court’s application of s 444D(1) in Lehman Brothers- claims againstthird parties cannot be released under a DOCA. In short, a creditor cannot be bound by a DOCA to give up claims, other than claims against the company the subject of the DOCA.