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  5. Guarantees are not so Guaranteed under Deeds of Company Arrangement
2 Jun 2015
In the recent WA Court of Appeal decision of Australian Gypsum Industries Pty Ltd v Dalesun Holdings Pty Ltd [2015] WASCA 95, the WA Court of Appeal considered whether a Deed of Company Arrangement (“DOCA”) could prevent a secured creditor who did not vote in favour of it from cashing in its security to cover debts arising after the DOCA was made.
The appellants were members of the BGC group of companies (“BGC Group”). The BCG Group supplied goods on credit to Newglen Nominees Pty Ltd (the “Debtor”). Dalesun Holdings Pty Ltd (“Dalesun”) guaranteed the Debtor’s payment for those goods. The guarantee was supported by a charge over Dalesun’s land.
Dalesun went into administration in 2010.   It then entered into a DOCA relevantly purported to release Dalesun from liability for all claims against it (except those claims otherwise expressed in the DOCA), including contingent claims (that is, claims which its creditors had no present, accrued entitlement to make against it).  Dalesun recovered financially in 2011.  This meant the DOCA had served its purpose and so it was terminated.
Thereafter, the BGC Group supplied further goods on credit to the Debtor until the Debtor went into administration in 2012. Even after executing its own DOCA, the Debtor was unable to fully satisfy the amount owing to the BGC Group. The BGC Group then sought to recover those unpaid sums from Dalesun under the guarantee. At trial, the Primary Judge found, in effect, that the BGC Group’s claims were precluded by the DOCA executed by Dalesun.
The Issue
The main issue on appeal was whether s444D(2) of the Corporations Act 2001 preserves the rights granted to the BGC Group under the guarantee. If it did, the BGC Group would be entitled to enforce the debts which became due and payable after Dalesun’s entry into the DOCA by seizing and selling Dalesun’s land, which had the relevant charges over it.
The BGC Group argued that the guarantee covered debts incurred after the DOCA took effect. Dalesun argued that by virtue of s444D of the Corporations Act, the DOCA covered the field of a creditor’s rights of recovery against the insolvent company.  This included rights arising independently, such as, in this case, recourse under a guarantee.
The Court’s Decision
In their joint judgment, Newnes and Murphy JJA, constituting the majority, found that:
• While s444D preserves the BGC Group’s rights at the time of the DOCA to realise or otherwise deal with its security (i.e. the charge over Dalesun’s land), it provides nothing about reinstating provable claims that have been released by the statutory effect relating to the DOCA. That is, the future or contingent claims arising under the guarantee were not protected under s444D(2) from being extinguished by the DOCA; and
• Weight must be given to the statutory purpose of s444D, which is, among other things, to give the insolvent company a ‘fresh start’. In this case, rather than providing Dalesun a ‘fresh start for the future’, the BGC Group’s interpretation of s444D(2) would give Dalesun a ‘legacy of debt’ after termination of the DOCA.
Lessons Learnt
This case highlights the risks involved in working with a company facing insolvency, even when that company or a third party enters into a guarantee. It is likely that a DOCA will be final and binding on all creditors, including those who voted against it, and entirely dispose of creditors’ rights and interests in connection with a liquidated company’s debts, including as against third party sureties. When obtaining guarantees as security for commercial arrangements, it is important ensure adequate securities are created and subsequently registered, and a thorough due diligence is completed as to the solvency of the other parties to any guarantee.
HHG Legal Group is well versed in this area of law. Speak to our commercial litigation team about mitigating your risk in commercial arrangements, or how best to deal with debts or contingent or future claims.
This is general information only, and does not constitute specific legal advice. If you would like further information in relation to this matter or other legal matters please contact our office on Freecall 1800 609 945 or email us now.

*This is general information only, and does not constitute specific legal advice. Please consult one of our experienced Legal Team for specific advice relevant to your situation.

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