A Deed of Company Arrangement (DOCA) is essentially the equivalent of a PIA for a corporation. However, a company must be in administration for a DOCA to be proposed.
In order for a DOCA to come into effect it must be approved by the Company’s creditors at the second meeting of creditors that occurs in a voluntary administration. The Administrators are required to put forward a recommendation to creditors as to whether the DOCA should be accepted or not. Like with the PIA’s, the Court has the power to set aside a resolution by creditors to enter into a DOCA, or alternatively to terminate the DOCA.
Set aside resolution
In the matter of Premiercorp Pty Limited (Administrators Appoint)  FCA 778, the Plaintiff, the Deputy Commissioner of Taxation (ATO) applied for the resolution of creditors for the Defendant company (Company) to enter into a DOCA, to be set aside.
At the Second Meeting of Creditors, the Administrators recommend that the DOCA not be entered into and that the Company be placed into liquidation, however the creditors resolved for the Company to enter into the DOCA.
The basis for the application was that a debt owed to the wife of the director of the Company was included in determining whether the resolution was passed. It was submitted to the Court that if the wife’s debt had not been included, the motion would not have passed without the need for the chairman to exercise a casting vote.
Whilst it was not necessarily established that the winding up of the Company would result in a better monetary result to creditors, the Court was persuaded that it would not be in the creditors best interests if the resolution stood, because:
- There had been deficiencies in the documents provided by the director, and there was some suspicion that there might be more assets available to satisfy creditors’ claims than discovered as at the time of the order
- The director, his father, and his wife would benefit from a building contract (which could only occur if the DOCA was executed), but not the creditors
- Payments to the participating creditors of the DOCA were to be small and were to be paid over a 3 month period – discounting their value and heightening the risk of default
- The administrators recommended that it was in the interests of creditors that the defendant be wound up and not be returned to the control of the director (which would have occurred pursuant to the deed).
Accordingly, it was ordered that the Company be wound up in insolvency.
Termination of DOCA
The unreported case of Re: Gladstone Civil Pty Ltd ACN 081 893 414 is a case where the DOCA was executed and had been in place for about 16 months. However, the Deed Administrators subsequently determined it was no longer in the interest of creditors for the DOCA to remain on foot and sought orders from the Court to terminate the DOCA.
Warren Jiear (Piper Alderman, Brisbane) acted on behalf the Deed Administrators of Gladstone Civil Pty Ltd (the Company) in relation to this matter. By way of background, when the Company was in voluntary administration, the administrators conducted the relevant investigations into the Company’ affairs. A DOCA was proposed and, based on the information available to the Administrators after conducting reasonable investigations, was recommended to the Company’s creditors, and executed.
The Deed was to automatically terminate after 18 months, with control of the Company to return to the director. During the 18 months after the Deed was executed, three other companies related to the Company (Related Companies) entered liquidation, with one of the Deed Administrators appointed to each of those Related Companies.
While investigating the affairs of the Related Companies, the Deed Administrator uncovered substantial information in relation to the Company that was unavailable to the Deed Administrators prior to the execution of the Deed, including:
- The discovery of possible voidable transactions claims available if the Company was in liquidation
- A possible insolvent trading claim
- The increase in secured and unsecured creditors
- The assignment of debtors that the Company’s director recommend be entered into with one of the Related Companies was potentially entered into on a misinformed basis.
Based on this new information the Deed Administrators determined it was no longer in the creditor’s best interest for the DOCA to remain in place, as the creditors would (based on this new information) receive a higher distribution in liquidation than it would under the DOCA.
The Federal Court agreed with the Deed Administrators that it was in the best interests of creditors for the Deed to be terminated and the Company to enter liquidation. Accordingly, the Deed Administrators were successful in their application, and one of those Deed Administrators was appointed Liquidator of the Company accordingly. The investigations into the affairs of the Company are continuing.
It is obviously difficult for administrators or trustees to make recommendations in respect of PIA’s or DOCA’s based on the limited information available to them when those recommendations need to be provided. That being the case, as can be seen from the above, Courts are willing to overturn those agreements when further information becomes available. The primary concern for the court will be whether the overturning of the agreement will be in the best interests of creditors.
Sarah Drinkwater & Timothy Logon