Vol 13 (2016) - Issue 1

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Deeds of Company Arrangement (DOCAs) Can Extinguish Secured Creditors’ Debts – Whether They Like It or Not

1. Introduction
Australia’s insolvency regime has been described as one that disproportionately favours the interests of creditors and criticised on the basis that it does not sufficiently provide a system in which companies may be rehabilitated or in which rehabilitated companies may be encouraged to thrive.
However, two recent judicial authorities suggest that the deed of company arrangement ('DOCA') mechanism provided under Part 5.3A of the Corporations Act 2001 (Cth) ('Act') may provide greater scope to extinguish past liabilities of a financially distressed company than previously believed, which may enhance the prospects of DOCAs being used to successfully restructure distressed companies.
This represents a potentially significant departure from the existing law affecting secured creditors:
(i) First, in Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd, ('Dalesun') the Western Australian Court of Appeal determined that a DOCA could be used to extinguish pre-DOCA contingent liabilities owed by the company under guarantees in respect of third party liabilities, even where those liabilities arose after the termination of the DOCA.

(ii) Secondly, Black J of the Supreme Court of New South Wales decided in In the matter of Bluenergy Group Limited 3 (‘Bluenergy’) that a DOCA would extinguish the pre-DOCA debts owed to a secured creditor of the company and release security over after-acquired property (even if the secured creditor abstained or voted against the resolution).

It is submitted that these decisions are consistent with the objective and general policy of Part 5.3A of the Act but reflect a significantly expanded approach to how a DOCA may achieve that objective. This produces a viable platform to implement restructurings going forward, as well as introducing potential pitfalls for unsuspecting creditors in certain situations.

2. The purpose of a DOCA
A DOCA is one of the 'normal' outcomes after a company is placed into administration. Appearing in Part 5.3A of the Act, the purpose of a DOCA is to maximise the chances of the company (or as much of that company as possible) continuing in existence. That objective is consistent with a recent finding of Australia’s Productivity Commission that:
'Any insolvency system should allow for a restructured company to emerge from the process in a more efficient form, or where this is not possible, expedient closure should allow for the redeployment of employees and capital to more productive uses.'