Appeal resolved in favour of MPH’s client

MPH acted for the Receivers and Managers of Specialised Welding Australia Pty Ltd (Receivers and Managers Appointed) (Company) in proceedings commenced in the Federal Court of Australia. As explained in our previous article concerning those  proceedings, a separate secured creditor of the Company, Blackbird First Mortgage Corporation Pty Ltd (Blackbird) challenged the appointment of our clients on several bases including that the claim asserted by our clients’ appointor was a contingent claim arising under the security documents and had consequently been extinguished by a Deed of Company Arrangement (DOCA) executed by the company, which DOCA our clients’ appointor (Mr Grono) had voted in favour of executing.

Charlesworth J dismissed Blackbird’s interlocutory application for a declaration that the appointment of our clients was invalid. Her Honour’s decision was appealed by Blackbird to the Full court, which yesterday unanimously dismissed the appeal and in doing so endorsed the validity of our clients’ appointment as receivers and managers over the business and assets of the Company.

The decision marks an important development in the law with respect to deeds of company arrangement and part 5.3A of the Corporations Act 2001 (Cth). MPH was pleased to assist the receivers and managers – Bob Jacobs and Andrew Smith from Auxilium Partners – during the course of their appointment.

MPH also successfully assisted the receivers and managers with an interlocutory application in the course of the first instance proceedings in connection with a dispute concerning which party was entitled to manage the affairs of the Company whilst the proceedings remained on foot. Our clients obtained orders;

1. compelling ANZ transfer all funds held in the account of the Company to the account maintained by the receivers and Managers appointed by Mr Grono;
2. compelling the competing receivers appointed by Blackbird to transfer any funds withdrawn from the company’s account, or otherwise any other funds retained by those receivers in any legal capacity connected to the plaintiff, to the account maintained by the receivers and managers appointed by Mr Grono.

Those orders were obtained primarily by reason of the Court’s first instance dismissal of Blackbird’s application on the basis of its contention that our clients’ appointment was invalid.

Brief Chronology of the Facts

The key facts relevant to Blackbird’s appeal were as follows:

1. Mr Grono advanced funds to the Company pursuant to loan agreement (Loan Agreement), which was secured by way of a general security agreement (GSA), which security was registered on the PPSR;
2. subsequently to the advancement of funds pursuant to the Loan Agreement, and the execution of the GSA and related PPSR registration, the Company went into administration on 7 November 2022;
3. at the second meeting of creditors, it was resolved that the Company enter a deed of company arrangement (DOCA) on 19 June 2023, which DOCA was subsequently effectuated;
4. pursuant to a deed of variation dated 26 September 2023 (Deed of Variation) which varied the Loan Agreement, Mr Grono advanced further funding to the Company; and
5. on the basis of the funds extended pursuant to the Loan Agreement, as varied by the Deed of Variation, which was secured by the terms of the GSA, Mr Grono appointed receivers and managers over the Company on 18 July 2024.

The Appeal

Blackbird’s grounds of appeal to the Full Court were relevantly that:

1. Charlesworth J erred in limiting her Honour’s enquiries to whether Mr Grono’s claims based on funds advanced to the Company after the execution of the DOCA were claims that were contemplated by clause 4 of the DOCA, in determining whether clause 4 of the DOCA operated to extinguish the security interest relied upon by Mr Grono in appointing our clients as receivers and managers over the company. Blackbird contended in the appeal that her Honour should have found that the combined effect of clause 4 of the DOCA and s 444D (2) of the Act was that, irrespective of whether or not the liabilities secured by those security interests were released by the DOCA, Mr Grono was permanently deprived from enforcing, realising or otherwise dealing with any security interest created under the principal loan agreement or the accompanying general security agreement (GSA); and
2. Charlesworth J erred in concluding that Mr Grono’s claims for the repayment of additional advances made to the Company after execution of the DOCA pursuant to the Deed of Variation were not released by the operation of the DOCA, together with sections 444D (1) and 444H of the Act. Blackbird contended that the additional advances pursuant to the Deed of Variation were taken to have been made on 16 August 2022 under the terms of the Loan Agreement (as varied by the subsequent deed), or alternatively, clause 3 of the Loan Agreement made provision for a contingent liability to repay additional advances as they fell within the meaning of “Further Moneys” under the Loan Agreement, which meant the funds were a “Debt” for the purposes of the Loan Agreement, as at 7 November 2022 being the date of the administration.

At the heart of the issues on the appeal was whether Blackbird could successfully argue that the further advance made to the Company under the Deed of Variation was a contingent claim at the point of the administration, such that both clause 4 of the DOCA and the combined effect of sections 444D (1) and 444H operated to release Mr Grono’s claims against the Company and by extension the enforceability of his rights under the GSA to appoint receivers and managers over the Company. As stated in the plurality judgment at [64] of the Full Court’s decision, the question to which attention was directed in disposing of ground 1 of the appeal was whether the Deed of Variation brought into existence a new  obligation secured by the GSA or if it was merely crystalising a contingent obligation that existed as at 7 November 2022 (which would be a claim to which s 444D of the Act applies).

The plurality judgment of the Full Court held that the primary judge neither:

1. misconstrued the proper construction and effect of the Deed of Variation, and agreed with her Honour that the amendments to the Loan Agreement had prospective (and not retrospective) effect, such that it was held on appeal that the meaning of “Debt” was amended on and from 26 September 2023 (the date of the Deed of Variation), which for that reason meant the additional advances to the company by Mr Grono were not captured by the “claims” contemplated by clause 4 of the DOCA or s 444D (1) of the Act; or
2. erred in relation to the application of the legal principles concerning contingent liabilities, such that her Honour was correct to conclude that any obligation on the part of Mr Grono to make advances of money under the Loan Agreement as at 7 November 2022 was exhausted and any liability to repay advances of money that may have been made in the future, otherwise falling within the description of Further Moneys under the Loan Agreement, were not contingent liabilities or contingent claims for the purposes of the meaning of “Claims” in the DOCA or “claims” for the purposes of s 444D (1) of the Act as at 7 November 2022.

Key Takeaways   

Some practical takeaways for secured creditors include:

1. ensuring that the transaction documents in secured facilities are newly drafted in a manner that ensures future advances made to a company, after the occurrence of an insolvency event, are delineated from sums payable by the company at the point of administration, such that any future advances after the effectuation of a DOCA are not claims that become released by force of the terms of the DOCA itself and sections 444D (1) and 444H of the Act; and
2. ensuring that a secured creditor understands exactly what restrictions the DOCA purports to impose on the secured creditor’s rights to take steps under a security, in relation to both claims which pre-date the DOCA and also the enforcement of security in respect of funds advanced after the effectuation of a DOCA.

It should also be noted that the Court thoroughly examined the distinction between future and contingent claims, analysis that will of no doubt serve as a useful guide to secured creditors and stakeholders generally in the corporate insolvency context.

MPH was pleased to assist the receivers and managers in the course of the proceedings, and can assist on short notice in advising secured creditors and insolvency practitioners alike in relation to the complexities which may arise if a borrower company is (or may become) subject to some form of external administration.