A recent decision of the Supreme Court of New South Wales serves as a reminder that a deed of company arrangement cannot be used as a tool to release parties other than the company the subject of the deed and highlighted some important steps that practitioners should bear in mind when seeking to have resolution for a DOCA passed at a meeting convened under section 439A of the Corporations Act.

In the matter of Eastmark Holdings Pty Limited (receivers and managers appointed) (subject to a deed of company arrangement) & ors [2015] NSWSC 1437 Brereton J of the Supreme Court of New South Wales considered an application made by an unsecured creditor to have deeds of company arrangement (DOCAs) executed by various companies declared void pursuant to section 445G of the Corporations Act 2001 (Act).  For various reasons, the application was dealt with as a preliminary question, with the principal ground of challenge being the inclusion in the DOCAs of various releases of parties other than the companies the subject of the DOCAs (Companies). 

The decision serves as a reminder that DOCAs should not be used as a mechanism to release third party claims and also highlights the importance of ensuring that a draft DOCA (or a sufficiently detailed DOCA proposal) is provided to creditors at or before a meeting held under section 439A of the Act.

The DOCAs in question contained two releases which were expressed to be in favour, not only of the Companies, but also the administrators (both in their capacity as voluntary administrators and also as deed administrators of the Companies), the receivers and managers of the Companies and also certain secured creditors of the Companies:

  1.  the first release applied to deed creditors and which was to be given in connection with the distributions to be paid under the deed (Distribution Release); and
  2. the second was to be given to creditors in connection with their participation in the post-DOCA liquidation of the Companies (Post DOCA Releases).

The Court found that both the Distribution Release and the Post DOCA Releases did include releases of parties other than the Companies.  However, his Honour drew a distinction between to two releases and found that the Post DOCA Releases were optional, rather than "binding" on creditors, having regard to the wording of the DOCA.  Principally, his Honour's views were informed by the use of the words such as "condition precedent" rather than "will" and "must" in the release and the fact that the release required the deed administrators to call for creditors who wished to be eligible to participate in the post DOCA liquidation to form a view that those releases were not binding on creditors.

Conversely, in applying the decision of the High Court in Lehman Brothers Holdings Inc v City of Swan & Ors [2010] HCA 11 (201) 240 CLR 509, his Honour found that the Distribution Releases were void because the terms of the DOCA connoted an obligation (as opposed to a choice) to give the releases, which was binding on creditors (even dissenting creditors).  The Distribution Releases required each creditor to give a release "prior to" receiving a distribution and that the obligation of the administrators to distribute the deed fund was depending upon such a release first being given.  His Honour found that a dissenting creditor cannot be bound by a DOCA to give up claims other than claims against the company the subject of the deed. 

In addition to these matters, his Honour highlighted the dangers of "not having a draft deed available for approval by creditors or at least a detailed prescription of what the deed is to contain, and a reference to it in the resolution". The DOCA proposal made no reference to the Distribution Releases and as a consequence were not specified implicitly or explicitly in the section 439C meeting and "therefore have no proper place in the DOCA". It followed that his Honour found that the DOCA had not been entered into in accordance with Part 5.3A because the DOCAs executed were not those referred to in the section 439C resolution.  It also did not comply with Part 5.3A because the Distribution Releases were found to be void.

His Honour went one step further than the High Court in Lehmans and considered whether the Distribution Releases were severable from the DOCA (as opposed voiding the entire deed).  His Honour chose not to rely on a contractual severance provision as again, it was not referred to in the DOCA proposal or the meeting and, as a consequence his Honour indicated that it was not clear that it was intended to be part of the deed creditors resolved should be executed. 

On the basis that the Distribution Releases were not contained in the DOCA Proposal and were not discussed at the creditors' meeting, his Honour formed the view that creditors had not intended the Companies to execute DOCAs containing the Distribution Releases and, as a consequence, if those parts were severed from the balance of the DOCAs, the DOCAs would be as creditors had originally intended.