The Dalesun Holdings Appeal: The danger of extinguishment of contingent claims

The Court of Appeal in Western Australia¹ has recently upheld Justice Le Miere’s first instance decision² that found that a deed of company arrangement (DOCA) had extinguished future liability of a guarantor arising under a guarantee made well before the DOCA was executed.

In this case, the appellants supplied building products and services on credit to Newglen³, whose obligations were supported by guarantees and indemnities provided by the respondent, supported by an equitable charge over land.

In December 2010, the respondent went into administration and subsequently executed a DOCA in early 2011.  The appellants did not vote in favour of the DOCA.

Materially, the appellants continued to supply under the relevant agreements through early 2012 and then, upon default by Newglen (who itself entered into administration), sought to recover the outstanding balance from the respondent.

At first instance, His Honour determined that the statutory regime governing DOCAs⁴ did not have the effect (contrary to the appellants’ argument) of allowing a secured party to preserve its rights, so as to allow it to enforce debts which “matured” post-execution of the DOCA.

The Court of Appeal agreed with this assessment, and said that a secured creditor who has not voted in favour of a DOCA is permitted to do no more than realise or otherwise deal with its security.  Further, the relevant claims could not be “deemed” to have been preserved for the purposes of allowing the appellants to continue to exercise security rights once the DOCA was terminated, because they had taken no steps to do so before then (as they had no exercisable rights at that time).

Lavan Legal comment

This decision is a reminder to financiers that they should tread very carefully in maintaining supplies on credit, or otherwise, once a surety has executed a DOCA. 

Consideration should be given to requiring that party to enter into a new guarantee and whether new documentation with the principal debtor is required, if a contractual relationship is to continue.

Financiers cannot simply rely on the fact that they have existing security and have not voted in favour of a DOCA as a basis to maintain the status quo.  The decision affirms that parties who do not act expeditiously (either to enforce security interests, cease supply, or re-document existing relationships) may be caught by the extinguishment provisions, even in relation to contingent claims.