In July 2015 Justice Black handed down a decision in the case of Bluenergy which dealt a blow to secured creditors holding a security interest in all of a company’s present and future assets.
Pre fight - tale of the tape
In September 2013, Keybridge Capital Limited (Keybridge) advanced $300,000 to Bluenergy Group Limited (Bluenergy) and took a charge over all of Bluenergy’s present and future acquired property.
In April 2014, Bluenergy was placed into administration. Subsequently in August 2014 a Deed of Company Arrangement (DOCA) was executed. Keybridge abstained from voting on the DOCA at the second meeting.
In March 2015, whilst Bluenergy was still subject to the DOCA, Keybridge (as a secured party) appointed an administrator to Bluenergy pursuant to section 436C Corporations Act (the Act).
The DOCA administrators challenged the appointment of the Keybridge administrator and sought orders terminating that administration.
The issue was did the DOCA extinguish Keybridge’s debt and if so what was the effect? Was Keybridge able to appoint an administrator and/or vote in that administration?
Keybridge argued a DOCA did not “prevent a secured creditor from realising or otherwise dealing with its security interest, unless the secured creditor has voted in favour of the DOCA or the court otherwise orders”( section 444D(2)).
Justice Black held a secured creditor has two separate rights and/or interests:
- a personal right (the debt owed by Bluenergy); and
- a proprietary right (the interest in Bluenergy’s property created by the charge).
The Act treats these two rights differently. The personal right was extinguished by the DOCA, even though Keybridge did not vote in favour of the DOCA. The proprietary right was preserved, but limited to the secured property to which it attached immediately prior to the release of claims by the DOCA.
It followed that Keybridge was entitled to appoint an administrator under s 436C as it remained a secured party but was not a creditor of Bluenergy due to its debt being extinguished by the DOCA. Accordingly, Keybridge could not vote on any resolutions within that administration. His Honour terminated the second administration as the only creditor entitled to vote was the DOCA administrator for his fees and expenses.
Post fight analysis
Justice Black was concerned to ensure that companies exiting a voluntary administration have a “fresh start” unburdened by debts (either unsecured or secured) - an outcome consistent with the general policy of Part 5.3A of the Act.
The effect will be felt most keenly by secured creditors who have been brought firmly within the ambit of a DOCA. Secured creditors must carefully consider the implications of not only the appointment of an administrator, which is a given, but also each DOCA proposal and its effects.
The prevailing view amongst secured creditors had been to either appoint a receiver over the top of an administrator or not to involve themselves in the VA process on the basis that they could simply rely on their security. Its likely secured creditors will now take a more active role in the VA process, particularly in relation to negotiating and responding to DOCA proposals. Their position will now need to be considered by any deed proponent and may even require their backing.
This is a positive outcome for the company in administration as an active secured creditor within a DOCA is likely to result in more successful outcomes for companies in the VA process.
Polczynski Robinson has vast experience in acting for secured creditors, DOCA proponents, administrators and unsecured creditors alike.
For more information, please contact Richard Lyne or Stephen Polczynski on 02 9234 1500.