Insolvency grey area clarified

A RECENT case in the Supreme Court of New South Wales has further clarified a previously grey area of insolvency law.

They considered whether deed of company arrangement provisions continuing the subordination beyond the deed’s termination justify court orders terminating the company’s liquidation.

In an interesting decision, the court held that the deed of company arrangement ceased to have statutory force on termination.

The case, Sutherland v Rahme Enterprises Pty Ltd, heard that Rahme went into administration from liquidation and executed a deed of company administration.

Under the deed related parties would not receive a payment for their debt and would retain those debts after the deed terminated.

However, they would only be entitled to payment of those debts out of Rahme’s readily available assets and then only if Rahme had sufficient funds to pay its ongoing trade creditors.

The related party debts amounted to $1.13 million and each related party creditor had executed the deed. It followed from the court’s decision that the deed ceased to have statutory force on termination that the post liquidation subordination of related party debts could only have contractual effect.

Given the related parties would take control of the company after the deed’s termination, the court had no confidence that the contract in question would continue unvaried. The risk this presented of launching an insolvent company back into the marketplace was held unacceptable and orders terminating the winding up were refused.

A trust-based subordination term may have avoided this problem.

Deed of company arrangement proponents and administrators considering such a debt subordination such as that in Rahme’s case should consider the means by which it is to be achieved.

David Thompson, senior associate

9288 6883

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