Rights of Secured Creditors in a DOCA situation

In a recent Supreme Court of NSW decision, Bluenergy Group Ltd (Subject to a Deed of Company Arrangement) (Administrator Appointed) [2015] NSWSC 977, Justice Black adopted a very practical approach in dealing with the legitimacy of the appointment of a voluntary administrator by a secured creditor whilst Bluenergy was still subject to the Deed of Company Arrangement (“DOCA”).

Bluenergy was placed into voluntary administration and subsequently entered into a DOCA, resulting in the extinguishment of all creditors’ claims at the commencement of the administration. One of the Secured Creditors, Keybridge, had abstained from voting on the deed proposal and subsequently appointed a second voluntary administrator relying on section 444D(2) of the Corporations Act 2001 (Act), which allows a secured creditor to realise or otherwise deal with its security interest where they had not voted in favour of the proposal.

The appointment of the second administrator was questioned by the existing deed administrator on the grounds that as Keybridge had not voted against the proposal, it was bound by the terms of the DOCA.  As a result of this, Keybridge had no debt owed to it and as such had lost the ability to appoint the second administrator.

Keybridge argued that as section 444D(2) preserved the rights of a secured creditor, it automatically preserved the debt owed to the secured creditor and accordingly, the appointment of the second administrator was valid.

In his decision, Justice Black noted that the purpose of Part 5.3A of the Act was to allow a fresh start to companies with a prospective future.  Justice Black made orders encompassing that:

  • The debt to Keybridge had extinguished due to the terms of the DOCA and as such Keybridge ceased to be a creditor of Bluenergy.
  • Due to the operation of section 444D(2), Keybridge’s proprietary interest in the property prevailed and therefore, it possessed the right to realise its security.
  • Relief be granted under section 447A of the Act to end the second administration on the grounds that there was no utility in the process i.e. the second administrator’s appointment did not meet the objectives of Part 5.3A of the Act.

The above decision has serious implications for secured creditors:

  • Although their security rights are preserved, they can only be exercised on the assets existing at the time of the administration and do not extend to include any after-acquired property; and
  • The only recourse available to the secured creditors would be to enforce their security rights over a company’s property as soon as the security crystallises i.e. at the date of voluntary administration. Alternatively, secured creditors should pay close attention to the formulation of a DOCA and consider being actively involved in negotiating its terms, to ensure their rights remain intact, even to the extent of any after acquired property of the company.

It is the writer’s view that the active involvement of secured creditors in negotiating the terms of a DOCA may result in a higher success rate of DOCAs and the resurrection of companies, as intended by Part 5.3A of the Act.