Australia: Finding room in DOCAs for insured claims and payouts with the help of the Corporations Act

Clayton Utz Insights

Key Points:

The amendment to the DOCA meant that insurance proceeds were excluded from the proof and pro rata divisibility provisions, so the beneficiary of the insurance policy could receive the insurance proceeds directly.

In a recent decision, In the matter of Nahas Construction and Development Pty Limited (Subject to Deed of Company Arrangement) (ACN 083 581 257) [2014] NSWSC 628, Justice Brereton in the NSW Supreme Court made orders to amend a deed of company arrangement (DOCA) to the effect that insured claims against the company subject to the DOCA would attract the operation of section 562.

This meant that insurance proceeds were excluded from the proof and pro rata divisibility provisions of the DOCA, ensuring the person, against whom the company incurred the liability, would receive the insurance proceeds directly.

The DOCA and the plaintiff in negligence

Three companies, including Nahas Construction (NSW) Pty Limited (ACN 124 452 786), were subject to a DOCA. The DOCA incorporated Part 5.6 and section 562 of the Corporations Act 2001 (Cth) requiring insurance proceeds to be given directly to a person to whom a company has incurred an insured liability.

Ms Gisele McTear commenced proceedings against Nahas for damages for personal injuries said to have been occasioned when temporary fencing fell on her. When it became apparent that Nahas was subject to a DOCA, McTear applied to substitute its insurer, HIA Insurance Services Pty Limited, as defendant under section 6(4) of the Law Reform Miscellaneous Provisions Act 1946 (NSW).

Section 562 and insurance payments

Where a company is insured against a liability to third parties, and that liability is incurred either before or after the commencement of the winding up, section 562 provides that any amount paid by the insurer to the liquidator or company in respect of that liability is to be paid to the relevant third party in priority to all debts mentioned in section 556.

The deed administrators were concerned that the DOCA would limit McTear's claim to proving pro rata with the unsecured creditors. If so, she would only receive a portion of her purported claim. Therefore, the deed administrators sought to amend the DOCA to make clear that insured claims that would attract the operation of section 562 are excluded from the proof and pro rata divisibility provisions of the DOCA. This would mean that McTear would receive the entire sum of damages from the insurer if her claim was successful.

How a DOCA can be varied – and why this one was

The Court considered various provisions in the Corporations Act which can be used to vary a deed:

  • section 445A, which provides for variation approved by a meeting of creditors (which had not happened in this case);
  • section 445G, under which a court can terminate a DOCA provision where there is doubt that it complies with the Corporations Act (which was not the case here); and
  • section 447A, which empowers the court to make such orders as it thinks appropriate about how Part 5.3A is to operate in relation to a particular company (which this Court used).

The Court highlighted the breadth of the operation of section 447A of the Corporations Act and held that the DOCA should be varied as requested because:

  • the deed administrators had asked for the variation;
  • no creditors had appeared to oppose it; and
  • there would be no prejudice to the other creditors, as excluding the claims of insured creditors from the deed fund would preserve the value of the deed fund for the other creditors, leaving the insured creditors to claim against the insurance funds only.

A sensible decision

The case demonstrates the flexibility of section 447A of the Corporations Act, and the path taken by the deed administrators and the use of section 447A by the Court seems to be a sensible one in the circumstances. Absent the orders, McTear may have had to stand in line with creditors before receiving only a pro rata portion of compensation for her injury and loss.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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