The Appellants supplied building products and services
on credit to Newglen Nominees Pty Ltd (Newglen). Dalesun Holdings
Pty Ltd (Dalesun) guaranteed Newglen's obligations. This
guarantee was supported by an equitable charge over Dalesun's
land. Dalesun went into administration and subsequently entered
into a deed of company arrangement (DOCA). The DOCA released all
claims against Dalesun, including contingent claims. The Appellants
did not vote in favour of the DOCA. The DOCA was terminated after
its purpose was achieved.
The Appellants supplied further goods on credit to Newglen.
Newglen defaulted and the Appellants sought to recover the unpaid
sums under the guarantee, including by enforcing the charge.
The Court at first instance found that the DOCA bound the
Appellants and their claims against Dalesun were precluded.
The Appellants appealed the decision and argued that:
the security granted by Dalesun applied to all debts payable
under the guarantee;
s444D of the Corporations Act 2001 (Cth) preserved
their security rights, such that they were entitled to realise
their security to enforce the debts which were contingently payable
prior to the DOCA, but which matured into a presently payable
obligation after termination of the DOCA.
Dalesun submitted that the proper construction of s444D(2) meant
that a secured creditor stands outside a DOCA and is entitled to
realise its security. However, those rights are co-extensive with,
and confined by, the secured creditor's existing claims.
Contingent claims and other obligations under the guarantee are not
kept alive by reason of these rights and could be extinguished
under a DOCA.
The majority of the Court of Appeal agreed with the primary
judge and dismissed the appeal.
The Court found that a main purpose of the DOCA was to allow the
company a fresh start for the future by discharging the debtor from
future liability for its existing debts. The Appellant's
construction of s444D went against this purpose.
Prior to the DOCA, the Appellants had contingent claims against
Dalesun for goods supplied to Newglen but not paid for. Dalesun
also had a contingent liability in respect of goods supplied by the
Appellants to Newglen in the future on credit, after the specified
date in the DOCA.
The first category of contingent claims above would be provable
under the DOCA, with a value to be estimated at the specified date
in the DOCA.
The second category of contingent claims would at least be
quantifiable at nil value. They were not of a character in respect
of which the security rights preserved by s444D(2) could be
S444D(2) preserves, but does not interfere with, property
rights. It does not say anything about reinstating provable claims
that have been released by the DOCA.
The claims cannot be 'deemed' to not be released for the
purposes of the Appellants continuing to exercise their security
rights after the termination of the DOCA, because their security
rights were not exercisable prior to then.
Notification of the meeting
The Court held that it was not unreasonable or unfair that the
Appellants had not received notice of the meeting to approve the
DOCA. It is unlikely that the legislature intended s444D to be
construed on the basis that a particular creditor may not become
aware of the meeting convened to approve the DOCA and therefore
continued to supply goods after the effectuation of the DOCA.
The beneficiary of a guarantee needs to be mindful that a DOCA
may extinguish its contingent claims under the guarantee, even
where those claims arise after termination of the DOCA. In this
situation, its security rights under the guarantee will effectively
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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When determining if a DOCA is to be terminated, public interest can, and often will, outweigh any benefit to creditors.
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