The Supreme Court of NSW in Citadel Financial Corporation Pty Ltd  NSWSC 886 has made orders (in accordance with section 447A(2(b) of the Corporations Act 2001 (Cth)) to terminate a deed of company arrangement (DOCA) on grounds that entry into such DOCA was an abuse of the voluntary administration process.
The DOCA was approved by the requisite majorities (by number and value) of creditors. All 12 creditors who voted in favour of the DOCA were related and director friendly creditors. The DOCA was anticipated to deliver a small return to participating creditors of 1.97 cents in the dollar by distribution of a deed fund of A$65,000.
However the deed fund was exhausted in the costs of administration before any distribution to creditors. Accordingly, the only potential benefit of the DOCA to the two creditors who were not related parties of the debtor did not eventuate.
There was also no real benefit from the DOCA to the 12 creditors who voted in favour the DOCA. The only parties that benefited from the DOCA were the director and related parties of the debtor company who avoided or deferred any potential claims they were exposed to.
Section 239ADO(2)(b) of the New Zealand Companies Act 1993 is equivalent to section 447A(2)(b) of the Corporations Act 2001 (Cth). Although no DOCA has been terminated in New Zealand to date on grounds of abuse of process under s 239ADO(2)(b), the New Zealand courts may take a similar approach. In Citadel, arguments were made for termination of the DOCA by reason of unfair prejudice (equivalent to those that can and have been made under NZ section 239ADD), however the Court did not deem it necessary to make a finding on those issues given its conclusion as to abuse of process.
The decision can be found here.