In the recent decision of In the matter of Cresco Opus Fund No 4 Pty Limited (Administrator Appointed)  NSWSC 941, the Supreme Court of New South Wales refused an application by an administrator to adjourn a winding up application until after the second meeting of creditors.
In reaching this decision, the Court considered the interests of both related party creditors and independent creditors and gave less weight to the interests of the related party creditors.
Cresco Opus Fund No 4 Pty Ltd (Cresco) was a special purpose company which completed a property development in Turramurra, New South Wales. Mono Constructions Pty Ltd (Mono) undertook building work for Cresco. Cresco also entered into several loan agreements with financiers (Financiers). Shortly after entering into these loan agreements, Cresco paid some $1.4M in interest to the Financiers.
Mono issued a payment claim to Cresco under the Building and Construction Industry Security of Payment Act 1999 (NSW) and subsequently made an application for adjudication of its claim. Mono also commenced proceedings against Cresco and sought a freezing order in relation to the proceeds of sale of the last townhouse in the development. Mono then commenced winding up proceedings against Cresco.
Shortly after the winding up proceedings were commenced, Cresco appointed a voluntary administrator, Adam Farnsworth. Mr Farnsworth identified some transactions which may be voidable transactions and required further investigation. These included payments of interest to the Financiers as well as payments of mezzanine interest.
Cresco’s current director, Jack Bittar proposed that Cresco enter into a deed of company arrangement (DOCA) whereby:
- related party creditors would not prove for their debts;
- unsecured creditors would receive 30 cents in the dollar; and
- the Financiers would defer their claims against Cresco.
According to Mr Bittar’s solicitors, if Cresco continued pursuing other development opportunities, the Financier’s remaining debts will be converted into shares in the company. If Cresco did not continue after the DOCA, Financiers will forgive Cresco’s debts. The administrator sought an adjournment of the winding up application so that the DOCA proposal could be put to a vote before the creditors. Mono opposed the adjournment and sought to wind up Cresco.
The Court’s considerations
If the proposed DOCA was put to a vote, the DOCA may be accepted if a majority of creditors by number and a majority of creditors by value vote in favour of the DOCA.
In refusing to adjourn the winding up application, her Honour relied on well-established authority such as Deputy Commissioner of Taxation v Alternative Business Solutions (Aust) Pty Ltd (administrators appointed) (2006) 24 ACLC 425 and Animal Farm by George Orwell (1945).
Justice Rees noted that two of the creditors were related party creditors and the Financers were only creditors by reason of transactions which may themselves be liable to set aside if a liquidator was appointed.
According to her Honour, the question then, in considering whether to adjourn a winding up application under s 440A(2) of the Corporations Act 2001 (Cth), is whether all creditors must be treated equally or whether all creditors are equal but some are more equal than others.
The Court gave less weight to the interests of the related party creditors and Financiers and more weight to Mono’s interests.
Justice Rees noted that Mono was likely to be the only unrelated creditor attending the second meeting of creditors where the DOCA would be put to a vote. Mono’s position was clear from its application to wind up Cresco – it would not support a DOCA and would fund a liquidator to make further investigations.
It was clear that the DOCA was not in the commercial interests of the related party creditors and Financiers. According to her Honour, the reasons that the related party creditors wished to enter into the DOCA may be to bring an end to the administrator’s investigations and to preclude any further investigations by the liquidator. Further, it is also possible that the former director of Cresco wished to deflect claims against him from a liquidator.
As to the Financiers, her Honour surmised that they may have been prepared to defer claims against Cresco as they wished to engage in further property investment with the former director having already received repayment of their capital and substantial interest.
This decision demonstrates that “the interests of the company’s creditors” is not limited to considerations that creditors would receive a larger dividend in a DOCA scenario versus a liquidation scenario and also highlights the significance of a single unrelated party creditor’s opposition to a DOCA.
Voluntary administrators and DOCA proponents should be mindful that DOCA proposals which may on their face appear to provide a better return to creditors may not necessarily survive a challenge from unrelated party creditors.