Two days before Christmas, the Supreme Court of New South Wales delivered a bonus for the general unsecured creditors of the collapsed discount giant Retail Adventures, and confirmed the requirements for deeds of company arrangement.

Deeds of Company Arrangement

Under the Corporations Act 2001 (Cth), the creditors of a company in voluntary administration decide whether the company should be wound up in insolvency or whether the business should be restructured via a deed of company arrangement. In most cases, deeds of company arrangement are proposed by the directors or related parties with a financial interest in the business.

Negotiating deeds of company arrangement can be contentious, especially where the deed proposers are related parties who stand to gain from the restructured business.The recent decision Helenic Pty Ltd as trustee of the Mastrantonis Family Trust v Retail Adventures Pty Ltd (Administrators Appointed) [2013] NSWSC 1973 considered how the interests of related creditors (e.g. entities which have given inter-company loans to the company) and non-related creditors (e.g. suppliers) sometimes collide.

A deed of company arrangement must provide an outcome for the creditors as whole which is better than an immediate winding up of the company. Section 600A of the Corporations Act 2001 (Cth) provides, amongst other things, that a creditor of a company may apply to the Court to set aside a deed of company arrangement that:

  • has been passed solely on the votes of related creditors of the company; and
  • unreasonably prejudices the interests of the creditors (or a class of creditors) who voted against (or for, as the case may be) the deed of company arrangement.

The purpose of the section is to stop individuals and entities related to the company from pushing through deeds of company arrangement that allow the company and its directors to avoid their obligations to creditors.

The Case

In its decision in Retail Adventures Pty Ltd (Administrators Appointed), the Court set aside a deed of company arrangement (DOCA) proposed by, and passed with the votes of, related creditors controlled by high profile businesswoman and sole director of Retail Adventures Pty Ltd, Jan Cameron. In doing so, the Court said that it was clear that the DOCA was unreasonably prejudicial to the general class of creditors (being those not related to the director). The Court found, in particular, that the DOCA would result in a return to Retail Adventures creditors that was substantially lower than under a liquidation scenario. That was enough, the Court said, to set aside the DOCA.

Further, the Court found that the non-related creditors of Retail Adventures were further prejudiced by the following:

  • a $5.5 million contribution from related creditors provided for in the DOCA was “too small an amount of money by a substantial margin” and, in effect, “discretionary” as there was no requirement that the contribution must be paid;
  • if the $5.5 million contribution was not paid, then the company might be returned to its directors, rather than being wound up; and
  • uncertainty about the $5.5 million contribution and its effects created “scope for further litigation, which could significantly reduce the funds that are ultimately available for distribution to unsecured creditors”.

Finally, under the DOCA, certain persons and related creditors would benefit from being freed from insolvent trading and voidable security claims in circumstances where the administrators had identified a liquidator might be able to recover for creditors $19.3 million – $31.3 million from insolvent trading claims and up to $49.7 million from voidable securities. This result, the Court said, would unreasonably prejudice creditors who stood to gain from any recoveries. It should be noted that the administrators did not recommend the deed proposal to the creditors. The deed proposers have been given until 24 January 2014 to appeal.

Practical information

Company directors and other deed of company arrangement proposers must ensure that deeds of company arrangement are “absolute, unambiguous, and final”. They must also ensure that the arrangements are fair to all creditors, not just those with the same interests or in the same position. The proposals cannot be purely self-serving and solely in the interests of related parties.

A deed of company arrangement should provide an outcome for creditors that is better than a winding up. In doing so the proposal also needs to be commercially sound so that any ongoing business can prosper.