In DSG Holdings Australia Pty Ltd v Helenic Pty Ltd [2014] NSWCA 96, the Court of Appeal considered the meaning of the “interests of the creditors as a whole” under section 600A of the Corporations Actand the circumstances in which the Court will intervene to set aside or impose conditions on resolutions passed at creditors meetings.

BACKGROUND

This decision considered the passing of a creditors resolution for a company, Retail Adventures Pty Ltd, to enter into a deed of company arrangement (DOCA).  The resolution was passed by a small margin which included the vote of two companies, DSG Holdings (DSG) and Bicheno Investments (Bicheno), that were “related creditors” within the meaning of section 600A of the Corporations Act

The resolution was passed against the advice of Retail Adventures’ then administrators.  The administrators believed that winding up the company was in the creditors’ interest as there was sufficient evidence of insolvent trading and preference payments.

WHAT HAPPENED AT FIRST INSTANCE?

Two creditors applied to the Supreme Court of NSW to have the creditors’ resolution set aside under section 600A of the Corporations Act.  Section 600A empowers the Court to set aside creditor resolutions in circumstances where the resolution was passed as a result of the votes of one or more related creditor:

  • if it would be in the “interests of the creditors as a whole” to do so; or
  • to defeat unreasonable prejudice to creditors who voted against (or for) the resolution.

The creditors’ application was successful before the Supreme Court and Retail Adventures was wound-up in insolvency.

THE APPEAL

As a consequence of the liquidation of Retail Adventures, in order to proceed with the appeal, DSG and Bicheno had to make the following applications under the Corporations Act:

  • leave to proceed with the appeal pursuant to section 471B ;
  • orders terminating the winding up of Retail Adventures pursuant to section 482; and
  • orders reviving an amended version of the DOCA approved by the creditors’ resolution pursuant to section 447A. 

The Court of Appeal rejected all three applications.  The Court nevertheless considered the substantive question of the appeal, being whether setting aside the resolution to enter into a DOCA was “in the best interest of the creditors as a whole” or necessary to avoid unreasonable prejudice.

HOW DO YOU DETERMINE THE INTERESTS OF CREDITORS AS A WHOLE?

The Court held that the “interests of the creditors” is to be construed as identical in substance to “creditors’ interests” under section 438A and 439A of the Corporations Act.  The court identified 3 main principles in determining what is in the creditors’ interest.

First, consideration must be had to the express object of Part 5.3A contained in section 435A, namely, to maximise the chances of the company continuing in existence or, if this is not possible, to achieve a better return for the creditors than would result from an immediate winding up of the company

Secondly, the focus must be on whether setting aside the resolution is in the interests of creditors in their capacity as creditors only.  That is, their interest in being repaid or continuing to provide goods or services to the company.

Thirdly, the examination is not limited to a comparison of the expected returns under the proposed DOCA as opposed to winding up.  For example, a trading outcome may be preferable if there is benefit in creditors maintaining a trading relationship with the company.

BROADER IMPLICATIONS

The finding that “interests of the creditors as a whole” in section 600A has the same meaning as the “creditor’s interests” referred to in sections 438A and 439A is significant.  This clarification of section 600A will  assist creditors in determining whether an application under section 600A should be brought.  Further, on the other side of the coin, administrators will also be able to take note of the Court’s reasoning in section 600A applications for the purposes of their investigations and recommendations to creditors.