This week's TGIF considers the case of In the
matter of Eastmark Holdings Pty Limited (receivers and managers
appointed) and 1 Denison Street Holdings Pty Ltd (receivers and
managers appointed; In the matter of Eastmark Holdings Pty Limited
(receivers and managers appointed (subject to a deed of company
arrangement) & ors  NSWSC 1437 in which the court
reinforced that a DOCA will be void insofar as it purports to force
creditors to release third parties.
The Deed of Company Arrangement (DOCA) in
question contained clauses purporting to bind creditors to give
releases to third parties (the administrators, deed administrators,
receivers and senior creditors) in respect to claims other than
claims against the company the subject of the DOCA. The obligation
of the administrators to distribute the relevant deed fund to
creditors was dependent upon such a release being provided.
The plaintiff applied to the Court for an order pursuant to
section 445D of the Corporations Act (Act) ,
terminating the DOCA on various grounds and alternatively, an order
pursuant to section 445G declaring the DOCA void.
The Court considered a preliminary question as to whether the
plaintiff was entitled to an order pursuant to section 445G of the
Act, that the DOCA be declared void on the grounds that the
provisions contained in it, concerning releases of parties other
than the company in question, were invalid by virtue of section
444D(1) of the Act.
Section 444D(1) provides that a deed of company arrangement
binds all creditors of the company, so far as concerns claims
arising on or before the day specified in the deed.
The Court held that the releases were void, however, were
severable from the DOCA.
The Court followed the High Court's decision in Lehman
Brothers Holdings Inc v City of Swan & Ors which held that
in the context of a DOCA, creditors were not bound by provisions in
such a deed that involved releases of claims against entities other
than the company the subject of the DOCA.
In addition, the Court held the third party releases were also
void due to a failure to adhere to procedural requirements under Pt
5.3A of the Act. The releases in question did not form part of the
DOCA proposal that was voted upon at the meeting of creditors.
The Court determined that the contentious third party release
clauses were severable for the following reasons:
The third party releases were never intended to be part of the
DOCA proposal in the first place and they were not in the proposal
or discussed at the meeting of creditors;
When one considered the Administrator's report to creditors
and the minutes of meeting of the creditors, it is clear that there
was never an intention to include third party releases.
Severance of the third party releases would allow the DOCA to
operate as intended by the creditors, ie creditor's claims
against the company would be extinguished upon receipt of a
distribution from the deed fund.
Accordingly, the Court held that the third party releases were
void, but severable which allowed the DOCA to continue.
This case reinforces the High Court's application of s
444D(1) in Lehman Brothers- claims against third parties
cannot be released under a DOCA. In short, a creditor cannot be
bound by a DOCA to give up claims, other than claims against the
company the subject of the DOCA.
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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A recent NSW decision has implications for liquidators of trustee companies dealing with trust funds and priority debts.
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