A recent decision of the Western Australian Court of Appeal throws into doubt the value of having secured guarantees and suggests lenders and suppliers may need to change their practices.

In Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd [2015] WASCA95 (AGI v Dalesun) the Court held that a deed of company arrangement (DOCA) which had been entered into by a surety prevented the holder of a guarantee from recovering money from the surety even though the surety had provided a charge over land it held.

This result may come as a surprise given those provisions of Part 5.3A of the Corporations Act 2001 (Cth) (the Act) that preclude a DOCA affecting the rights of secured creditors (unless they vote in favour of a deed).

In AGI v Dalesun, Australian Gypsum Industries Pty Limited (AGI) supplied goods and services to Newglen Pty Limited (Newglen) on credit. Dalesun Holdings Pty Limited (Dalesun), a related entity of Newglen, guaranteed to Australian Gypsum payment of monies owed by Newglen to Australian Gypsum. To secure the guarantee Dalesun provided AGI with a charge over certain land it held.

Subsequently, Dalesun appointed administrators and ultimately a DOCA was entered into by Dalesun. At the time of entry into the DOCA, AGI was a contingent creditor of Dalesun by virtue of the guarantee it had provided. AGI did not vote with respect to the proposed DOCA nor was it paid any dividend (despite being owed approximately $23,000 under the guarantee).

After the DOCA was effectuated AGI supplied further goods to Newglen who defaulted in payment. AGI then sought to recover the debt from Dalesun by enforcement of the charge it held over Dalesun’s land.

Both the Judge at first instance and the majority of the Western Australian Court of Appeal (Buss JA dissenting) held that AGI was prevented from recovering from Dalesun by virtue of the terms of the DOCA which provided that contingent claims were provable in the deed (in that sense the deed was the same as the vast majority of deeds of company arrangement).

In its appeal AGI relied upon the provisions of section 444D of the Act which provides that a secured creditor’s rights are not compromised by entry into a deed unless the secured creditor votes in favour of the deed or the Court otherwise orders.

In its analysis the Court held that the liability under the guarantee was a contingent liability at the time administrators were appointed to Dalesun. That conclusion may seem strange in circumstances where the goods supplied to Newglen which were the subject of the claim under the guarantee were not supplied until after termination of the DOCA. However, as the claim in question was a claim not against Newglen but against Dalesun as guarantor it is undoubtedly correct that as the guarantee was in existence at the time the DOCA was entered a claim under the guarantee would constitute a contingent liability of Dalesun.

In considering the matter the Court held that AGI has two separate rights against Dalesun. One is a right of action against the property of Dalesun over which security was held (i.e. the land) and the second is a personal right against Dalesun (to sue for recovery of the money owed).

The Court held that Part 5.3A of the Act is designed to bind all creditors, not just unsecured creditors. The Court pointed out, for instance, that notwithstanding the provisions of section 444D, AGI could still not apply to wind up Dalesun during the currency of the DOCA and the fact that AGI was secured made no difference to it being bound by the statutory moratorium. The Court held that the right of AGI to recover the money due to it was a right compromised by the DOCA.

The Court went on to hold that the contingent claim AGI had against Dalesun at the date of the appointment of the administrator was capable of being quantified. At that date Newglen owed AGI approximately $23,000. AGI had no legal obligation to further supply Newglen after that date and hence the value of its contingent claim with respect to goods that may be supplied in the future was zero, despite the fact that further goods were in fact supplied.

In other words the value of the contingent claim AGI had against Dalesun pursuant to the guarantee was quantifiable and hence capable of proof under the deed.

Accordingly the right of AGI to recover payment from Dalesun was subject to the compromise provided for in the DOCA.

The Court then said that the first right (being the right of the secured creditor to take action against the property of the company pursuant to its security) was not compromised by the DOCA. That the Court said was consistent with the requirement of section 444D of the Act.  The Court went on to say however, that the right to take action under AGI’s security was only exercisable where there existed a payment obligation by Dalesun. Of course that payment obligation (the first right) had been compromised by the deed.

In short, the judgment said the right of the secured creditors under the security survived the operation of the deed. But the right could not be exercised!

AGI went on to point out that the conclusion was unfair in that it did not receive notice of the holding of the meeting. Accordingly, it had no say in the decision to approve the deed.

A fair summary of the judgment is found in the passage where the Court said it doubted that section 444D:

“…should be construed by reference to the position of a secured contingent creditor of a guarantor who, subjectively unaware of the guarantors deed of company arrangement, continued to supply goods to the principal after the effectuation of the deed of company arrangement.”

Conclusion

The comfort of holding a secured guarantee has been thrown into doubt by this decision.

If a corporate guarantor enters into a DOCA the holder of the guarantee would be well advised to enter into a new guarantee with the guarantor. If this is not effectuated then any claim it has under the guarantee will be caught by the DOCA with respect to the guarantor, whether or not it holds security.

Similarly if the holder of the guarantee wishes to retain its security it will need to enter into a new security at the time of entering the new guarantee.

This decision has grave ramifications for people holding guarantees and/or secured guarantees and in the absence of action may adversely affect rights in a way not previously contemplated.

This area of law is one in which ERA Legal has considerable expertise and if you have any concerns that your rights may be affected we strongly recommend you contact us.