Challenge to Validity of Appointment of Receivers and Managers is Dismissed

16th October, 2024

In the recent Federal Court decision of Specialised Welding Australia Pty Ltd v Disselkoen [2024], legal principles concerning secured creditor rights, contingent claims, and the effect of a deed of company arrangement (DOCA) on security interests were examined.

The key issue explored was whether receivers and managers, represented by MPH Lawyers, were validly appointed in circumstances where the appointment was, in part, referable to a general security agreement (GSA) executed by Specialised Welding Australia Pty Ltd (Receivers and Managers Appointed) (Specialised Welding) and Mr Grono prior to:

  • the appointment of voluntary administrators to Specialised Welding (which occurred on 7 November 2022);
  • Specialised Welding entering a deed of company administration (DOCA) on 19 June 2023 which was subsequently effectuated.

Mr Grono’s claim related to funds which he advanced to Specialised Welding after entry into the DOCA but prior to its effectuation.  The further advance was documented by a deed of variation which incorporated the terms of the GSA.

Blackbird First Mortgage Corporation Pty Ltd (Blackbird) challenged the appointment on several bases including that the claim asserted by Mr Grono was a contingent claim arising under the GSA and had been extinguished by the DOCA (which Mr Grono had voted in favour of).

In dismissing Blackbirds, application, Charlesworth J found that the claim asserted by Mr Grono arising under the deed of variation was not a contingent debt compromised under the DOCA, observing that:

  • the original loan agreement (secured by the GSA) was an ‘exhausted facility’ as Mr Grono had no further obligation to loan funds to Specialised Welding and Specialised Welding had no contractual right demand further advances;
  • a creditor in Mr Grono’s position was entitled to consider what claims, including contingent claims, he had against Specialised Welding at the ‘Relevant Date’ (in this case, 7 November 2022) and that was all that was compromised under the DOCA;
  • Part 5.3A of the Corporations Act 2001 (Cth) “requires secured creditors to be in a position to make a choice based on facts and circumstances that are knowable at the time, or at least predictable”; and
  • the knowable and predictable facts and circumstances were that Mr Grono had performed all of his obligations under the original loan agreement, and it was any claims then existing which were extinguished at Specialised Welding under the DOCA.

With the challenge to their appointment being dismissed, the receivers and managers are pressing on with the duties and functions consistent with their appointment.

The substantive claim made by the receivers and managers remains on foot and is next listed on 21 October 2024 and further updates may follow.

The extent to which a DOCA extinguishes an existing or future claim will depend on the terms of the DOCA and the facts and circumstances known at the time of its execution. MPH Lawyers can provide guidance with respect to dealing with a company under external administration and going through the DOCA process. Please contact Dan Butler or Mark Williams by email to dbutler@mphlawyers.com.au or mwilliams@mphlawyers.com.au or on (08) 9221 0033.

The international bulletin Insolvency Insider has also included a case note about this matter in its most recent edition which can be found here.

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