In the recent decision of Commonwealth Bank of Australia v C2C Developments Pty Ltd  NSWSC 724 the New South Wales Supreme Court considers some of the factors that the Court will take into account when exercising its discretion to terminate a deed of company arrangement (DOCA) under section 445D(1) of the Corporations Act 2001 (Cth) (Corporations Act).
In late 2008, C2C Developments Pty Limited (subject to a deed of company arrangement) (C2C Developments) was placed into voluntary administration. In December 2008, the creditors of C2C Developments resolved that a DOCA be executed. The DOCA had been proposed by the sole director of C2C Developments and required, amongst other things, that $690,000 be paid to the deed administrator by December 2011 for distribution to creditors.
The DOCA contained an unusual provision in that any creditor that had the benefit of a personal guarantee from the director was entitled to an increased dividend if they agreed to release the director from his obligations under that guarantee.
Payment was not received by December 2011 and in February 2012, the creditors of C2C Developments resolved to amend the DOCA to provide that the date for payment be extended to 30 September 2012.
On failure to make payment by the later varied date, the director proposed the DOCA be further amended so that an increased sum of $1.2 million be paid to the deed administrator by 31 December 2013.
While the further variation was opposed by the deed administrator, it was ultimately approved by the creditors in a meeting on 10 December 2012, with the resolution only being carried because of the votes cast by related creditors to the director and proponent of the amendment to the DOCA.
The plaintiff, a creditor unrelated to the director sought to have the DOCA set aside under s445D of the Corporations Act on the basis that:
- a material contravention of the DOCA had occurred;
- the DOCA could not be given effect without injustice and undue delay; and
- the DOCA was oppressive, unfairly prejudicial, or unfairly discriminatory or was against the interests of the creditors as a whole.
The Court found that there were a number of grounds on which the DOCA should be terminated.
First, the Court found that there had been a material contravention of the DOCA because notwithstanding the resolution of creditors, no deed of variation had been executed and accordingly, the variation did not take effect. Consistent with existing authority, the Court held that the amendment could only be effected with the consent of the deed administrator. As the administrator did not consent, there had been a material contravention of the DOCA as the $690,000 payment had not been made.
Secondly, the Court found that the continued failure to pay to the deed administrators over a four and a half year period constituted injustice and undue delay for the purposes of the Corporations Act and was grounds for terminating the DOCA.
Thirdly, the evidence demonstrated that the DOCA was oppressive, unfairly prejudicial or against the interests of the creditors as a whole in that:
- there would be claims that could be made against the director and others for uncommercial transactions or preferences if the company went into liquidation that would not be available under a DOCA; and
- there were provisions in the DOCA that were unfairly discriminatory and favoured creditors that had been provided with personal guarantees by the deed proponent.
Administrators should be cautious when considering DOCAs that will not result in a distribution to creditors until a number of years has passed. This case demonstrates that DOCAs promising great returns are worthless unless the creditors can be satisfied that payments to the deed fund will be made and will be made in a timely manner. It is arguable that the DOCA in this case would have been liable to be set aside from the day it was executed as even on the best case, it would have been 3 years before any funds were received.
It also demonstrates that the court will consider the availability of voidable transactions and potential insolvent trading claims and also the desirability of ensuring such claims are prosecuted in determining whether a DOCA ought to be set aside.