In the matter of Bluenergy Group Limited (subject to DOCA) (Admin Apptd)[2015] NSWSC 977

The conventional approach to a proposal by a grantor for execution of a Deed of Company Arrangement (DOCA) by secured parties has been that secured parties stand almost entirely outside of the DOCA process. The very recent Bluenergy decision signals a material departure by the Courts from that conventional approach, in the context of a "floating charge" or "circulating security interest" holder who votes against or abstains from the vote on a DOCA.

In Re Bluenergy the Court decided that:

  1. on and from execution of the DOCA, the secured party's debt (as distinct from its security for that debt) is extinguished; and
  2. where the secured party holds a floating charge or circulating security interest over present and future property, the secured party's rights to "realise or otherwise deal with" its security interest are restricted to those assets in the hands of the grantor as at the time of execution of the DOCA - after-acquired or future property of the grantor that might otherwise be caught by the circulating security interest is wholly out of the reach of the secured party.

Obviously, the decision has serious implications for secured parties under circulating security interests.  The rights that survive the execution of the DOCA (even if the secured party voted against or abstained from the DOCA proposal) are much narrower - critically, the "after-acquired property" under the security interest is effectively guillotined by reference to the date of execution of the DOCA.

It follows that, at least in relation to circulating security interests, a secured party may be exposed to some degree of "cramming up" by unsecured creditors through a DOCA.

While it is too early to say for sure, it may be expected that secured parties will move to be more pro-active in their resistance of DOCA proposals that may circumscribe their security interests, particularly in respect of after-acquired property subject to a circulating security interest.  This increased resistance may translate into an increase in applications to terminate or vary DOCAs, in order to mitigate that risk of dimunition in the secured party's rights.

It may also be expected that secured parties will also be more proactive in appointing receivers and managers to grantors who enter administration, as a further means of discouraging DOCA proposals that cut across their security.