Creditors’ rights under a DOCA – are claims to future rents extinguished?

The NSW Supreme Court has given a Landlord leave to commence proceedings against a company for rent and make good costs arising after the date of the DOCA.

BACKGROUND

In March 2015, Baseline Constructions (Company) entered into a Deed of Company Arrangement (DOCA). At the time of entering into the DOCA, the Company leased premises from Place Management (Landlord). The Company continued to hold the lease after entering into the DOCA in order to carry on its business operations. There was an obligation under the DOCA that the Company pay all monies due to the Landlord as and when they fell due.

In May 2015, the Landlord terminated the lease and took possession of the premises on the basis that the Company failed to pay rent owing under the lease.

The Landlord wished to recover unpaid rent, future rent and make good monies, but given the existence of the DOCA, required the Court’s leave to do so under s 444E of the Corporations Act

QUESTION BEFORE THE COURT

The key issue for the Court was whether the Landlord’s right to unpaid and future rent, together with make good costs, was extinguished by the terms of the DOCA, in circumstances where the lease was entered into before the Company went into administration, but the liability under the lease arose after it went into administration.

This involved the Court undertaking an analysis of the following clauses of the DOCA:

• a moratorium clause that prevented creditors from commencing a proceeding against the Company without leave of the Court. However, the clause was subject to a requirement that the Company pay all monies owing to lessors and landlords as and when they fell due;

• a clause which provided that the DOCA may be pleaded by the Company as a bar to any debt or claim admissible under the DOCA. The only claims that were admissible under the DOCA were ‘Creditors’ Claims’. To be a Creditors’ Claim, the claim had to arise out of circumstances which occurred on or before the Relevant Date and had to be a ‘debt payable by or Claim against the Company as at the Relevant Date’ (emphasis added). The Relevant Date was 15 January 2015, when administrators were appointed;

• a clause which required creditors to accept their entitlements under the DOCA in full satisfaction and complete discharge of all debts or claims ‘which they have or claim to have against the Company as at the day when the administration began’ (emphasis added); and

• a clause which provided that the Company was released from any Creditors’ Claims upon termination of the DOCA and could plead the DOCA as a bar to such claims.

In arguing that the DOCA extinguished the Landlord’s claims, the Company relied on earlier cases in which the Court held that the lessor’s claim for rent arising after the ‘Relevant Date’ specified in the DOCA, was extinguished because the lease had been entered into prior to that date (see Henaford Pty Ltd v Strathfield Group Ltd and BE Australia WD Pty Ltd v Sutton).

DECISION

The Court did not accept the Company’s argument. It noted the DOCAs in the cases relied upon by the Company were worded differently to the DOCA in question and went on to say that whether the Landlord’s claim was extinguished in this case depended upon the proper construction of the DOCA.

In construing the terms of the DOCA the Court placed particular emphasis on the moratorium clause. The Court found that the moratorium only applied if the Company continued paying rent to the Landlord, which it had failed to do. The Company’s failure to pay rent therefore meant the moratorium did not apply.

The Court applied the same reasoning to remaining clauses. Given the clear intent of the DOCA that the Company would be under a continuing obligation to pay all monies due to the Landlord as and when they fell due (failing which the moratorium would not apply), the Landlord’s claim for outstanding monies was not subject to the moratorium nor would the claim be released and discharged upon termination of the DOCA.

The Court granted the Landlord leave to commence proceedings on the following conditions:

• the proceedings could not cause the administrator to engage in work over and above his fee cap. However, the Court noted that it was unlikely the administrator would be involved in the action given that control of the Company had passed back to the Company’s director; and

• the Landlord could not execute any judgment against the ‘Deed Fund’ established under the DOCA which comprised moneys to pay employee entitlements and the administrators costs.

COMMENT

This decision demonstrates that when considering the wording of a DOCA, it is important to ensure that the DOCA clearly specifies the claims that are extinguished by it.

It is also a reminder for creditors to consider whether there are sufficient assets outside of the Deed Fund against which any judgment can be executed