RSSG Update  29 Jul 2019 Deeds of Company Arrangement – What “Claims” Can be Released? 

Smith v Sandalwood Properties Limited [2019] WASC 109 concerned a forestry scheme.

Investors were granted leases of land by one of the companies in the group which promoted the scheme. That land supported an investment in sandalwood trees which were to be planted and grown on it.

Under a contract with another company in that group (the “Plantation Operator”), the Investors made arrangements for the management of their interest in those sandalwood trees. An annual fee was payable by Investors to the Plantation Operator on account of its services for managing the plantation. The investors could defer the payment of that fee in respect of any year. If they did so, they were not entitled to the return on their investment in respect of that year.

In the event that such an election was made, the Investors’ obligation to pay rent under the lease was also deferred and on the same basis.

The companies involved in the promotion of the forestry scheme entered deeds of company arrangement (the “DoCA’s”). Those deeds purported to extinguish the rights of Investors to defer their obligations in respect of the payment of management fees and rent. Under ancillary agreements but not by the terms of the DoCA’s, it was possible for the Investors to novate the management agreements albeit on less favourable terms. 

Two questions arose for consideration.

First, was a possible future breach of a contract a contingent claim which could be bound by a deed of company arrangement.

It was held that claims bound by s 444D(1), Corporations Act, being the claims bound by a deed of company arrangement were coextensive with the claims bound in the event of a company’s liquidation under s 553, Corporations Act.

Moreover, contrary to the obiter dictum in Lam Soon Australia Pty Ltd v Molit (No.55) Pty Ltd 1996) 70 FCR 34, “a contingent claim may be identified where there is an existing legal obligation and, out of that obligation, there may emerge a liability of the company to pay an amount of money on the happening of an event, even if that event may not necessarily occur.”; [164]

Having regard to that test, it was held that claims for possible future breaches of each of the leases and management contracts by the relevant companies in the group of promotors were contingent claims which were able to be bound by the DoCA’s.

Similarly (and more typically), e.g., a claim for future rent which may or may not be paid is a contingent claim capable of being bound by a deed of company arrangement.

Second, it was necessary to decide whether the right to defer the obligation to pay the management fee under the agreement with the Planation Operator could be extinguished by the DoCA’s.

That decision turned on the meaning of s 444D(1) which provides that “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…” and, in particular the phrase; “so far as concerns claims”.