The Queensland Supreme Court in the case of Scott & Ors v Port Hinchinbrook Services Limited & Ors [2017] QSC 92 has again confirmed the utility of a Deed of Company Arrangement (DOCA) in respect of director appointments and members’ rights as part of a restructure.

Issues

The Court was asked to consider the following issues:

  • Did section 442A of the Corporations Act 2001 (Cth) (the Act) empower an administrator to appoint a person as director who would not ordinarily be eligible under the company’s constitution to hold that office?
  • Could the DOCA lawfully amend the company’s constitution?
  • Could the DOCA confer voting rights inconsistent with the company’s constitution?

Background

Port Hinchinbrook Resort is a residential estate (the Estate), which was owned and developed by Williams Corporation Pty Ltd (Williams Corporation). The responsibility for maintenance and provision of roads and sewerage services to the Estate was assumed by Port Hinchinbrook Services Pty Ltd (PHS), over which Williams Corporation had a controlling share under the terms of PHS’s constitution.

Williams Corporation went into provisional liquidation in June 2013 and subsequently into administration. In 2015, Passage Holdings Pty Ltd (Passage) entered into a contract to acquire parts of the Estate.

Under clause 12.1B of the constitution of PHS, a special member, which was Williams Corporation, had 76% of the votes capable of being cast at a meeting of members.

A DOCA was entered into between PHS, Mrs Moira Carter of BRI Ferrier (in her capacity as administrator of PHS) and Passage. The DOCA sought to give Passage 76% of the voting rights of PHS, by amending the constitution of PHS.

The DOCA contained the following relevant clauses:

  • clause 5 allowed the deed administrator to alter the clause in the constitution of PHS pertaining to the special rights conferred on a special member of PHS;
  • clause 6 gave the deed administrator power under section 442A of the Act to appoint specific people directors of PHS, who were not members of PHS as required under the constitution;
  • clause 17.1 permitted PHS’s constitution to be amended to allow for the transfer of the 76% voting share held by Williams Corporation to Passage; and
  • clauses 17.3 and 17.4 sought to empower Passage to exercise Williams Corporation’s vote and operate so that Williams Corporation effectively appointed the administrator as proxy to vote and pass resolutions on it’s behalf as well as providing that the members were bound by the DOCA.

Members of PHS brought an application challenging the legitimacy of the provisions contained in the DOCA.

Constitutional amendment – invalid

Justice Henry concluded that despite the DOCAs wide range of powers, none expressly empower a DOCA or its administrator to amend the company’s constitution. Clause 17.1 attempted to use a non-existent power to amend PHS’s constitution regarding conferral of voting rights from Williams Corporation to Passage. The only valid methods by which to amend a constitution of a company are through a Court Order or special resolution, which, as Henry J held, is contemplated in section 137 of the Act. Further the Act prescribes the way for shares to be transferred, including under section 444GA of the Act, and the attempt in clause 17.1 to transfer by other means was inconsistent with the Act.

Appointment of Directors - approved

Henry J concluded Ms Carter’s power of appointment of directors pursuant to section 442A only came to an end when the process of the DOCA’s execution had ended. Ms Carter therefore still held the power conferred upon her by section 442A when she entered the DOCA. His Honour went on to state section 442A “does not prescribe any particular means by which the act of appointment ought to be articulated.” Therefore, as the DOCA articulated the act of appointment by reference to Ms Carter entering into the DOCA, this was adequate for the purposes of section 442A.

Henry J rejected the Applicant’s argument that Ms Carter could not appoint non-members as directors and held that section 442A should be read without limitation. Further, there is nothing in section 442A to suggest normal statutory requirements for the eligibility of a director would not apply to persons to be appointed by an administrator under section 442A.

Inconsistent Rights – approved

Henry J held that the powers conferred by a DOCA take precedence over and override the exercise of members’ powers. The Court noted the general principle adopted by Santow J in North Sydney District Rugby League Football Club Ltd & Anor v Hill and Ors [2000] NSWSC 249, that the powers conferred by a DOCA take precedence and override the exercise of members’ powers during the currency of the DOCA to the extent provided. Therefore clauses 17.3 and 17.4 of the DOCA, which sought to confer voting rights inconsistent with the constitution, were valid. It was held that placing Passage in control of the voting rights of Williams Corporation is an exercise of power for a legitimate purpose of implementing a central feature of the arrangement, which is a similar process of allocating members’ proxy voting rights under the constitution. Members were held to be bound by the DOCA, which is consistent with section 444G of the Act.

Implications

This case again highlights the ability to achieve creative restructures of a company’s equity structure through a combination of DOCAs and powers granted to administrators under the Act. It appears clear that DOCAs bind members and that a DOCA’s terms override pre-appointment powers of members.

The case also highlights the potential for overreach when it comes to the power and utility of DOCAs by reaffirming the fact that DOCAs and deed administrators cannot otherwise amend the constitution of a company.