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The Secured Creditor Salad

The Secured Creditor Salad

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Voluntary Administration, Deeds of Company Arrangement and Secured Creditor Rights

 

The Law

The Voluntary Administration process was designed to give a company and its creditors flexible and collaborative alternatives to satisfy the company’s debts.  Voluntary Administrations are governed by Part 5.3A of the Corporations Act 2001 (Cth) (Act), the purpose of which is to provide a “fresh start” to companies by restraining creditors from enforcing their claims, maximising the chances of survival of the business of an insolvent company or, if that is not possible, to provide a better return to creditors than would result from the immediate winding up of the company.

One key advantage of a voluntary administration is the moratorium imposed on unsecured creditors pursuant to sections 440A, 440D and 440F of the Act, which prevents unsecured creditors from commencing or continuing any enforcement action against the company.

On the other hand, secured creditors holding a security interest over the whole or substantially the whole of the company’s property may take enforcement action during the 13-business day “decision period” commencing on the date of appointment.  If no enforcement action is taken during the decision period they are bound by the moratorium for the duration of the voluntary administration.

The expected outcome of a voluntary administration is the execution of a deed of company arrangement (DoCA).  A DoCA binds all creditors so far as any claims that exist on or before the relevant date referenced in the DoCA however, a secured creditor who abstains from voting on the DoCA will effectively stand outside the terms of the DoCA and will be free to enforce their security pursuant to section 444D(2).

In many cases, unless a company and/or administrator gains support of the DoCA from a secured creditor, the successful effectuation of the DoCA may be compromised or prevented should the dissenting secured creditor take steps to enforce its security.

Thankfully, the Parliament has given the court powers pursuant to section 444F(2) of the Act to order a dissenting secured creditor from realising or dealing with its security if satisfied that such an exercise would have a material adverse effect on achieving the purposes of the DoCA, and that the secured creditor’s interest would be adequately protected under the DoCA.

 

The Background

Our Brisbane team recently dealt with quite a complex matter which involved juggling various issues and challenges which arose when dealing with secured creditors during a voluntary administration and DoCA process where one secured creditor out of ten, sat outside of the DoCA and intended to enforce its security interest during the DoCA period.  In this matter, we will call this secured creditor the “dissenting secured creditor”.

    • The dissenting secured creditor held a security interest in all present and after-acquired property of Company X, in the form of a GSA which was registered on the Personal Properties Security Register (PPSR).
    • The dissenting secured creditor appointed a voluntary administrator (the “former administrator”) to Company X pursuant to section 436(C) of the Act.
    • At the first meeting of creditors, creditors resolved to replace the former administrator, and Terry Rose and David Stimpson of SV Partners were appointed voluntary administrators on that day.
    • Prior to the second meeting of creditors, the Administrators held lengthy and numerous discussions and negotiations with all ten (10) PPSR secured creditors of Company X in an effort to reach a fair and acceptable compromise which would see all secured creditors, and unsecured creditors, received a better return than if Company X were to be placed into liquidation.
    • At the second meeting of creditors, the majority of creditors voted in favour of executing a DoCA, which contained an essential clause that all secured creditors would be party to the DoCA and would release and discharge their securities upon receipt of payment of a sum specified in the DoCA.
    • Prior to the deadline for executing the DoCA (15 business days from the resolution being passed at the second meeting of creditors) the dissenting secured creditor confirmed they would not execute the DoCA.
    • This required the Administrators to make an urgent application to Court to vary the terms of the DoCA. The outcome being that the dissenting secured creditor was no longer a party to or bound by the terms of the DoCA, except in so far as section 444D(1) applies.
    • Following the outcome of the first application, the dissenting secured creditor gave notice of its intention to enforce its securities against Company X during the DoCA period.
    • The Deed Administrators were again required to make a further urgent application to the Court pursuant to section 444F, in an effort to prevent the dissenting secured creditor from realising or otherwise dealing with the security held until such time as the DoCA had been wholly effectuated.

 

Decision of the Court

The Court’s powers

The Court determined there was a preliminary question of whether it can make the orders sought pursuant to section 444F(2), or if the dissenting secured creditor’s action in appointing an administrator pursuant to section 436C was an enforcement of its security interest falling within the provisions of section 441A(1), thus preventing the Court from making any orders subject to section 444F(2).  It was the dissenting secured creditor’s position that the relationship between the two provisions (ss 441(A)(1) and 444F(2)), as considered in Australia Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd [2015] WASC 95 was such that section 444F only applies once a DoCA has been executed, which is well after the decision period ends.

Having regard to the security instruments of the dissenting secured creditor, and the absence of an express contractual power to appoint an administrator, the Court took the view that the dissenting secured creditor did not enforce its security interest in relation to the property of Company X when appointing an Administrator but rather, it enforced a statutory right conferred upon it by the Act.  Therefore, the Court was able to make an order under section 444F.

Factors considered by the Court

As noted by Justice Lehane in Kisoro Limited v National Australia Bank [1996] FCA 1444 at [69], a secured party should not be permitted to exercise their proprietary rights where to do so would impede (or have a material adverse effect on) the achievement of the purposes for which the administration was commenced, so the legitimate interests of a secured party must be balanced against legitimate interests of other creditors of the company, and it is important to so far as possible, not prejudice those who were secured creditors when the administration commenced.

In this matter the Deed Administrators were able to satisfactorily demonstrate to the Court that a material adverse effect on achieving the purpose of the DoCA would result from the dissenting secured creditor enforcing its rights as a secured creditor, and furthermore, the dissenting secured creditor’s interests would be better protected by the DoCA than by the realisation of Company X’s assets, either through a receiver and manager or through a liquidation.

Ultimately, the Deed Administrators were successful in their application and the Court made orders to prevent the dissenting secured creditor from realising or otherwise dealing with the security held in, or with respect to, the Companies and/or their property until such time as the DoCA has been wholly effectuated.

The key takeaway here is that it is imperative for administrators to proactively engage with secured creditors in negotiating the terms of a DoCA in an effort to maximise the prospect of successfully effectuating a DoCA in the best interest of the majority of creditors.

 

Article written by Brooke Darlington (Senior Manager) – Brisbane

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