The Supreme Court of Western Australia has recently held that a creditor’s claim against a guarantor was extinguished some years earlier, under the guarantor’s deed of company arrangement (DOCA).
The reasoning behind Le Miere J’s decision in Australian Gypsum Industries Pty Ltd v Dalesun Holding Pty Ltd is that a DOCA extinguishes future liabilities arising under an agreement made prior to the execution of the DOCA. This includes those arising under pre-existing guarantees.
The effect of the decision is that where a company guarantor enters into a DOCA, a creditor should enter into a new guarantee with that company before supplying further goods, services or credit.
The decision also has wider ramifications. Any creditor who has dealings with a company who has entered into a DOCA should consider whether new terms of arrangement are required, if it is intended to continue dealing with the company after execution of the DOCA.
The decision is subject to appeal.
The plaintiffs agreed to provide building products and services to Newglen Nominees Pty Ltd on a 30 day credit account. Dalesun Holding Pty Ltd, the defendant, provided guarantees to the plaintiffs for Newglen’s compliance with its obligations (‘Guarantees’).
The defendant entered into administration and on 21 March 2011 creditors resolved to enter into a DOCA (‘Dalesun DOCA’). The Dalesun DOCA dealt with all claims arising before the specified date of 3 December 2010 (‘Specified Date’).
Between November 2011 and February 2012 the plaintiffs continued to provide goods and services to Newglen on credit, relying on the Guarantees that had existed before the Specified Date.
On 1 February 2012, Newglen entered into administration and executed a DOCA. The plaintiffs could not recover all that they were then owed by Newglen.
The plaintiffs claimed the outstanding balance from Dalesun under the Guarantees.
At issue was whether the plaintiffs’ claims had been extinguished under the Dalesun DOCA.
The plaintiffs sought to establish that as the claims arose after the Specified Date, they were not extinguished by the Dalesun DOCA.
The defendant contended that any claims under the Guarantees were extinguished by the Dalesun DOCA, regardless of when the amounts claimed under those Guarantees became owing.
The plaintiffs put forward three arguments as to why the claims were not extinguished by the Dalesun DOCA:
- A DOCA cannot prevent claims arising due to a company’s conduct after the Specified Date. The amounts in question became owing after the Specified Date, and should therefore not be extinguished by the Dalesun DOCA;
- Corporations Act s.444D(2) states that a DOCA does not prevent a secured creditor from realising or otherwise dealing with a security interest unless they voted in favour of the DOCA. As secured creditors that did not vote in favour of the Dalesun DOCA, the plaintiffs argued that they were not bound by it; and
- Corporations Act s.444J provides that the release of debts under a DOCA does not affect a creditor’s rights under a guarantee or indemnity. As the plaintiffs’ claims arise pursuant to the Guarantees, they contended that the Dalesun DOCA did not affect their rights.
Argument 1: Claims arose after relevant date for claims in Dalesun DOCA
Le Miere J found that, at the time of the Dalesun DOCA, the plaintiffs’ claims were in existence.
He applied Brash Holdings Pty Ltd (administrator appointed) v Katile Pty Ltd,2 holding that the DOCA covered claims that would be admissible to proof under Corporations Act s.553.3 These include all claims that are present or future, certain or contingent. A DOCA can therefore bind all creditors in relation to future or contingent claims where the circumstances giving rise to the claims occurred before the Specified Date.
Le Miere J applied two cases to determine if the claims were in existence before the Specified Date:
- Lam Soon Australia Pty Ltd (administrator appointed) v Molit (No 55) Pty Ltd,4 where the Full Court of the Federal Court held that future payments due under a pre-existing contract are caught by a DOCA; and
- Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd,5 in which Hammerschlag J reasoned that for claims to exist, the “basal fact” necessary to bring the obligation into being must exist.
Le Miere J found that the making of the Guarantees was the “basal fact” necessary to bring the claims into being. The claims existed before the Specified Date, but were contingent on a future event. Thus, the claims under the Guarantees were caught by the Dalesun DOCA even though the liability arose after the Specified Date and, in fact, after the termination of the Dalesun DOCA.
Argument 2: Secured creditors are not bound by a DOCA
The plaintiffs may have been secured creditors of Dalesun as a result of the charging clause in the Guarantees. However, Le Miere J held that Corporations Act, s.444D(2) does not have the effect that a secured creditor is not bound by a DOCA. That section simply allows a secured creditor (who has not voted in favour of a DOCA that limits its rights to deal with a security and is not otherwise prevented by Court order) to realise or otherwise deal with the security. Further, s.444D(2) preserved the plaintiffs’ rights to deal with its security up to the Specified Date in the DOCA, but not beyond it.
Argument 3: DOCAs do not affect guarantees or indemnities
With reference to the purpose of the Corporations Act, the Explanatory Memorandum6 and the CAMAC Report7 , Le Miere J held that Corporations Act, s.444J should be interpreted to mean guarantees or indemnities given by third parties. He held that it does not apply to guarantees or indemnities given by the company the subject of the DOCA.
The first conclusion from the case is clear: any creditor who has taken a guarantee from a company that enters into a DOCA should enter into a new guarantee with that company for any ongoing supply of goods, services or credit.
The second conclusion is that the same reasoning in the case could apply to other arrangements which were in place before a specified date for a claim in a DOCA. Therefore, if a supplier is going to continue dealing with a company that is, or has been, subject to a DOCA, that supplier should consider entering into new arrangements.