The recent decision of Deputy Commissioner of Taxation v Premiercorp Pty Limited (Administrators Appointed) [2013] FCA 778 is a good example of the supervisory power played by the Court in the voluntary administration process and shows how a deed of company arrangement (DOCA) may be set aside where it is contrary to the interests of the creditors as a whole, even if the creditors vote in favour of the proposed DOCA.

Facts

Premiercorp Pty Limited (Premiercorp) was a residential construction company that was placed into voluntary administration on 6 June 2013. 

In anticipation of the second meeting of creditors, the sole director put forward a proposal for a DOCA.  The draft DOCA provided that a deed fund of $50,000 would be made available to creditors through an initial contribution of $20,000 plus three monthly instalments of $10,000.

The administrators estimated the return to creditors under the DOCA proposal to be a mere 1.47 cents in the dollar.  The administrators were not able to determine the likely return under liquidation in an optimistic scenario and the return in a pessimistic scenario was nil.  The administrators recommended that the creditors vote in favour of liquidation in order to enable the liquidators to continue to investigate potential insolvent trading claims and other claims arising out of the collapse.  

Notwithstanding the administrators’ recommendation, a resolution in favour of the DOCA was passed, having achieved a majority in both the value of debts owed to creditors and the number of creditors voting at the meeting. Of the six creditors who voted at the meeting, five voted in favour of the resolution.  The only creditor that voted against the resolution represented a debt of $149,084.20 owed to the Deputy Commissioner of Taxation (Commissioner).

The administrators did not consent nor oppose the application, but submitted that if the resolution was set aside Premiercorp should be wound up because of its financial position.  

The decision

The Commissioner sought orders from the Federal Court setting aside the resolution and terminating the DOCA. The Commissioner sought to impugn the creditors’ resolution on the basis that it was passed on the votes of related creditors.  

Section 600A of the Corporations Act 2001 (Cth) provides that a resolution of creditors may be set aside if:

  • the resolution only passed (or it only failed) because of the votes of related creditors; and
  • the passing of the resolution (or failure to pass the resolution) was contrary to the interests of the creditors as a whole or prejudicial against the creditors that voted against (or for) the resolution.

The first limb was clearly satisfied as the resolution would not have passed without the votes of the related creditors.  With respect to the second limb, Farrell J held that the resolution passing the DOCA was contrary to the interests of the creditors as a whole for reasons including that:

  • the sole director failed to provide adequate disclosure of the company’s financial affairs to the administrators;
  • the terms of the DOCA meant that the shareholders would benefit from any future profit in the company, but the unrelated creditors would not;
  • the amounts that the Commissioner and the other creditors would receive under the DOCA, after payment of the administrator’s fees, could hardly be regarded as a real commercial benefit; and,
  • it was not immediately apparent how the sole director would fund Premiercorp’s ongoing liabilities should control of the company revert to him.

Comment

This decision highlights the relief open to unsecured creditors and the powers of the Court to look behind the conduct of a director and set aside a resolution that is contrary to the interest of the creditors as a whole. It is possible to set aside DOCAs that provide no real commercial benefit to creditors.