This week’s TGIF considers the decision of Deputy Commissioner of Taxation v BE100 Property Investments Pty Ltd  FCA 597 where the court found that a deed administrator acted unreasonably by attempting to terminate a deed of company arrangement immediately before a meeting of creditors.
BE100 Property Investments Pty Ltd was a corporate partner in a property development partnership, which was undertaking a residential development at Homebush in New South Wales. After a range of difficulties, the company was placed into voluntary administration in early 2015.
The company’s major creditor was the Deputy Commissioner of Taxation (DCT) who was owed around $4.5million in respect of taxation liabilities of the partnership. The only other creditor was the company’s former accountant with a debt of $11k.
On the day following his appointment, the administrator sent both creditors a document advising that his appointment would enable the company to obtain legal advice and prosecute an objection to the DCT’s assessed liabilities.
In his report to creditors the administrator recommended that it was in the best interests of the two creditors for a proposed ‘holding’ deed of company arrangement (DOCA) to be entered into so as to enable the DCT’s assessed liabilities to be challenged and for partnership assets of around $2.1 million to be realised.
At the second meeting of creditors held in mid 2015, the administrator moved a resolution that the company execute a proposed DOCA. The terms of the proposed DOCA provided that it would terminate if, amongst other things, all assets of the company had been realised and all distributions available to creditors had been made. The DCT voted against that resolution, while the other creditor voted in favour of it. The administrator exercised his casting vote and voted for the resolution on the basis that the realisation of the partnership assets would occur in the immediate future. The resolution was passed and the DOCA was subsequently executed.
In the following months, the objections to the DCT’s assessments of liability for the partnership were determined and the total liabilities reduced to around $2 million.
In late 2015, a proposal was made by the wife of the company’s director to vary the DOCA. The variation required, in essence, the DCT to release the director from all claims on the basis that a deed fund of $660k would be established. The DCT made it clear to the deed administrator that it would not support the proposed variation.
A meeting of creditors was then convened for early 2016. On the day before the meeting, the deed administrator informed the DCT that he had obtained legal advice to the effect that the DOCA had terminated because there was no prospect of any distributions being made to creditors. The legal advice was provided by the deed administrator’s son. On the day that the meeting was to be held, the deed administrator informed creditors that no meeting would take place as the DOCA had terminated.
The DCT applied to the Court for a declaration that the deed administrator’s purported termination of the DOCA was invalid and orders that the company be wound up and an alternative liquidator appointed. The DCT argued that the legal advice provided by the deed administrator’s son was contrived and that the DOCA was not capable of being terminated as the deed administrator had not in fact realised all available assets.
In finding in favour of the DCT, the Court held that:
- Even though the deed administrator had formed a view as to the ‘practical reality’ of any assets being realised, it was inappropriate for a decision as to the future of the company to be removed from the primary decision making forum of the meeting of unsecured creditors.
- The deed administrator ought to have allowed the unsecured creditors to vote on the course to be adopted in respect of the future of the company, particularly where the major creditor held a contrary view to the deed administrator.
- The deed administrator was required to pay the DCT’s costs of the proceeding.
The decision reinforces the importance of meetings of creditors to decision making in the administration process and the expectation that the future of a company in administration will be determined by the creditors.