RESTRUCTURING & INSOLVENCY Alert: Bluenergy decision – impact of a DOCA on secured creditors’ rights

Nov 26 2015

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The recent decision in the matter of Bluenergy Group Ltd (Subject to a Deed of Company Arrangement) (Administrator Appointed) [2015] NSWSC 977 (the Bluenergy decision) has clarified the rights of secured creditors under section 444D(2) of the Corporations Act 2001 (Cth) (Corporations Act) in circumstances where a Deed of Company Arrangement (DOCA) releases their claim as a creditor effective from the commencement of the DOCA.

Background

Bluenergy Group Ltd (Bluenergy) was the subject of a DOCA entered into on 18 August 2014, which provided for the recapitalisation of Bluenergy. The DOCA provided that all creditors’ claims were extinguished at the commencement of the deed. This release was with respect to all creditors’ claims, including secured creditors. 

Subsequent to the execution of the DOCA, on 19 March 2015 Mr Rathner was appointed as an administrator by a secured creditor known as Keybridge Capital Limited (Keybridge) who had abstained from voting in favour of the DOCA. This appointment was made under section 436C of the Corporations Act. 

The Deed Administrators, for whom Thomson Geer acted, sought, among other things, orders and declarations to the effect that Keybridge was not a creditor of Bluenergy by force of the release contained within the DOCA which meant that the appointment of Mr Rathner under the second administration should be terminated. It was contended that Mr Rathner’s appointment did not meet the objectives of Part 5.3A of the Corporations Act which are to maximise the chances of the company continuing, or if that is not possible, to provide for a better return to the company’s creditors and members than would result from a winding up. 

Was Keybridge’s debt released by the DOCA? 

Section 444D of the Corporations Act relevantly provides that:

(1) The DOCA binds all creditors of the company, so far as concerns claims arising on or before the day specified in the Deed…

(2) Subsection (1) does not prevent a secured creditor from realising or otherwise dealing with the security interest, except insofar as:

(a) the deed so provides in relation to a secured creditor who voted in favour of the resolution of creditors because of which the company executed the deed; or

            (b) the Court orders under subsection 444F(2).

In considering the implication of this provision the Court examined the reasoning of the Western Australian Court of Appeal decision in Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd [2015] WASC 95; (2015) 106 ACSR 79 (Gypsum). The Court determined that the DOCA extinguished the secured creditor’s debt against Bluenergy in accordance with section 444D(1) of the Corporations Act by force of the release contained within the DOCA (which took effect from the commencement of the DOCA). However, by reason of Keybridge abstaining from voting in favour of the resolution in favour of the DOCA, that release was subject to the preservation of Keybridge’s ability to realise or deal with its security in respect of its proprietary interest in the secured property.

The Court reasoned that: 

if a secured creditor’s rights extended indefinitely into the future over a company’s after-acquired property, notwithstanding that a DOCA had provided for the release of the secured creditor’s debt, this would place a very significant obstacle in the way of any future operation of a company that emerged after a DOCA, including potentially preventing its obtaining new secured finance without the cooperation of its former secured creditor.” 

Nonetheless, despite Keybridge not being a creditor, it was determined that Keybridge retained its rights to realise or deal with its security, which meant its security retained the “relevant character” to appoint an administrator under section 436C of the Corporations Act.

Keybridge could appoint, but should it have appointed?
 

Even though Keybridge was entitled to appoint an administrator the Court found that the appointment frustrated the purpose of Part 5.3A of the Corporations Act and should be terminated for the following reasons:

  • the only identified creditors of the administration, being the former administrators, oppose its continuance and no benefit can come from its continuance over that opposition;
  • the result propounded by Keybridge (and the second administrator) “verged on the unreal” and would be prejudicial not only to the Deed Proponents and creditors who voted for the DOCA, but also prejudicial in a wider sense. 

The Court found that if the approach taken by Keybridge in not voting for the DOCA and then subsequently appointing an administrator “so as to take advantage of the extinction of debts in the earlier DOCA and divert any remaining assets of the company to itself” was adopted more widely by secured creditors, then this would have the effect of increasing “the risk involved in implementation of deeds of company arrangement for deed proponents and creditors generally, and thereby increase the risk that companies are placed in liquidation rather than reconstructed, and reduce the prospect that the objectives of Part 5.3A of the Corporations Act will be achieved.”

What does this mean for secured creditors?

It has been suggested that this decision has serious implications for secured creditors by limiting or “guillotining” any after acquired security interest by reference to the release provided for in the DOCA. We would suggest that whilst such an interest may be limited by operation of a DOCA, as a practical matter, it will not likely have a material impact on the rights of secured creditors. 

The reason for this is that where further monies are to be raised under a DOCA by way of a capital raising, if a secured creditor sought to have recourse to all those amounts it is likely that a DOCA would not be viable in any event as there would be a lack of support for such a DOCA from other creditors. It would also make the prospect of raising monies by the Deed Proponent a more remote one, whilst the security remains in place. Consequently, in such an instance there would be no after acquired property in respect of which the secured creditor need concern themselves. 

Secured creditors and their advisers should, however, pay close attention to the release provided for in any DOCA proposal. In many cases (as was not the case in the Bluenergy DOCA) the release will only be effective at the conclusion or effectuation of the DOCA, in circumstances where a condition of the DOCA is that releases be obtained from all secured creditors. In such circumstances, secured creditors who do not vote in favour of the DOCA are far better placed to leverage their position. 

If the terms of a DOCA are unduly prejudicial to a secured creditor, there would always remain the option of seeking orders terminating the DOCA. That was an option which the secured creditor elected not to pursue in the Bluenergy matter. Instead the secured creditor sought to utilise the voluntary administration provisions. 

Clearly that is not a step the Court will tolerate in the face of an effective release in respect of which the secured creditor seeks to take advantage to the detriment of other creditors. Careful thought should also be given to the effect of a release in a DOCA where a secured creditor is seriously contemplating the appointment of a subsequent voluntary administrator. 

If you require any further information or advice in relation to this decision or its implications, please do not hesitate to contact us.

Written by:

Peter Hegarty | Partner | +61 2 8248 3407| phegarty@tglaw.com.au

Katherine Smith | Senior Associate | +61 2 8248 3406| ksmith@tglaw.com.au