Is a Landlord’s claim against a Company under administration extinguished by a Deed of Company Arrangement (DOCA)?

30th Jun 2018

Traditionally, a DOCA extinguishes all claims that existed at the time when a company was placed into administration. This is governed by the Corporations Act 2001 (Cth) (the Act).

Section 444D(1) of the Act provides:

A deed of company arrangement binds all creditors of the company, so far as concerns claims arising on or before the day specified in the deed under paragraph 444A(4)(i).

Under Section 444A(i) of the Act, a DOCA must indicate what date on or before which claims must have arisen. In the 1996 case of Brash Holdings Ltd v Katile Pty Ltd[1] the term “creditors” in Part 4.3A was held to be similar to the parts of the Act that relate to winding up. Therefore, the term “creditors” in Section 444D(1) of the Act, should be constructed in accordance with Section 553 of the Act which provides:

Subject to this Division and Division 8, in every winding up, all debts payable, by and all claims against, the company (present, future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.

From the above, it is clear that a DOCA will not only bind creditors with a debt that was due and payable at the time of that the company was placed in administration, but also those with a claim which is “future, certain of contingent, ascertained or sounding only in damages”. However, this is not always the case.

In the matter of Baseline Constructions Pty Ltd (subject to a deed of company arrangement) [2017] NSWSC 1018, the Supreme Court of New South Wales granted a landlord leave to commence proceedings against a company subject to a DOCA.

In March 2018, Baseline Constructions (the Company) entered into a DOCA. At this same time, the Company leased premises from Place Management (the Landlord). Two months later, 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 sought leave of the Court to recover unpaid rent and future rent from the Company. As the Company was subject to the DOCA, the Landlord was required to seek leave under Section 444E of the Act.

The primary question before the Court was whether the Landlord’s right to unpaid and future rent, was extinguished by the terms of the DOCA (in this circumstance, the lease was entered into before the Company went into administration but the liability under the lease arose after the date of administration). To answer the question, the Court considered the terms of the DOCA.

Ultimately, the Landlord was granted leave to commence proceedings on the following conditions:

  1. 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
  1. 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.

Additionally, there are specific provisions in the Act that deal with Landlords rights during insolvent administration, namely:

Section 443B of the Act which provides that the Administrators’ liability under lease agreements does not commence until five (5) business days after the Administrators’ appointment. However, Section 443B applies if under an agreement made before the administration of a company began, the company continues to use or occupy, or to be in possession, of property which someone else is the owner or lessor.

In summary, a Landlord’s claim against a Company subject to a DOCA may not be extinguished, so long as the landlord can satisfy the requirements of Section 443B of the Act. For further information please contact our commercial litigation team on (07) 3009 8444.

The above information is intended only as a selective overview of the provisions of the Act and not be interpreted or relied upon for legal advice.

[1] Brash Holdings Ltd v Katile Pty Ltd [1996] 1 VR 24 at [34].

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