Insolvency - When is a Creditor Compromise Deed of Company Arrangement Ineffective?
By Philip Stern, Partner
5 May 2010
Summary
Pursuant to s447A of the Corporations Act 2001 ("Act"), a deed of company arrangement ("DOCA") which had terminated by performance was set aside. The DOCA was found to be against the interests of the unsecured creditors, and oppressive, as unsecured creditors received no distribution after the administrator's fees were paid.
Facts
In Q.B.I. Corporation Pty Ltd v Plantation Rise Pty Ltd (2010) QSC 102 (1 April 2010), Plantation Rise Pty Ltd ("Company") was in voluntary administration. Receivers were appointed. The administrator recommended that the Company be wound up. He identified voidable transactions, a possible insolvent trading claim, and suspected offences. He opined that the DOCA proposed by a third party was not in the best interests of the Company as creditors would receive a lower return than in liquidation.
Creditors voted in favour of the DOCA. The resolution was passed on the voices, 4 to 1. The four in favour included the sole director and his wife.
The creditor who voted against the DOCA commenced proceedings to set aside the resolution and DOCA, and sought a declaration that the creditors' claims had not been extinguished, and a winding up order. The ASIC intervened to assist the Court on questions of law.
The DOCA
The DOCA involved a third party contributing $20,000, and for the sole director (Mr Poteri) and his wife (Ms Driscoll) to stand aside for dividend purposes.
The deed fund comprised the $20,000 contribution, and $51 cash at bank. The whole of the fund was applied to the administrator's remuneration (as approved by creditors). No dividend was paid to creditors. Unsecured creditors' debts were discharged, and extinguished. Four days after the execution of the DOCA, the administrator gave notice to ASIC that the DOCA had been wholly effectuated by its terms.
Submissions
ASIC submitted that the only persons to benefit from the DOCA were the administrator (although ASIC did not criticise his conduct), the directors and others who might have been exposed to voidable transactions in a liquidation. Unsecured creditors stood to gain no return. Such a DOCA is an abuse of Part 5.3A of the Corporations Act 2001.
The plaintiff submitted:
- the resolution was contrary to the interests of creditors as they would receive little or no dividend under the DOCA. In a liquidation, unsecured creditors would likely receive a dividend. The Company had net assets of $5,200,000. Proofs of debt from unsecured creditors totalled $1,146,026.
- The DOCA was oppressive, unfairly prejudicial to, or unfairly discriminatory against the plaintiff because it would receive little or no dividend under the DOCA. In a liquidation, the plaintiff would recover a significant portion of its debts.
- The resolution was effected by votes of related creditors, being the director and Ms Driscoll. If Ms Driscoll (the largest unsecured creditor) had not voted, the resolution would not have been passed as the plaintiff (the second largest creditor) voted against the resolution.
As the DOCA had been terminated by performance, the Court did not have power to terminate it under s445D of the Act. The plaintiff relied on s447A and s600A of the Act.
Section 600A
Section 600A gives the Court powers where the outcome at a creditors' meeting was determined by a related entity. An application can be made by a "creditor". The plaintiff was no longer a creditor of the company as its claim had been released under the DOCA. The Court held:
- "creditor" in s600A(1) refers to a person who was a creditor when the resolution was passed. Therefore, the plaintiff had standing.
- the director and his wife were "related creditors" as defined in s600A(3).
The plaintiff submitted that there would have been utility in the plaintiff demanding a poll had the related creditors not voted, and it would have then gone to a casting vote.
The Court was not persuaded that s600A(1)(b) was satisfied. The Court looked at the way the meeting was actually conducted and noted that no creditor demanded a poll.
Section 447A
Section 447A gives the Court broad powers to make orders on how Part 5.3A is to operate. The Court considered whether rights had been accrued since the end of the administration, because an order setting aside the DOCA may be inconsistent with the rights created in the intervening period. The Court concluded that it was "most unlikely" that rights had accrued since the DOCA was effectuated.
Orders
Pursuant to s447A, the Court ordered that:
- the resolution in favour of the DOCA be set aside;
- the DOCA be set aside ab initio;
- the operation of s444H and s445H be modified - the Court was concerned that the releases of the creditors' claims may not be affected by the setting aside of the DOCA due to the operation of those two sections; and
- the company be wound up in insolvency and the administrator be appointed liquidator.
Comments
This case potentially sets a dangerous precedent as the DOCA was set aside 6 months after it was performed and terminated. The application did not come before the Court until 1 month after the DOCA had been effectuated. Parties may have relied on the DOCA and acted based on the fact the DOCA had effectuated. If dividends had been paid to creditors, it would have been more difficult for the DOCA be set aside.
The plaintiff ought to have brought an application before the DOCA was executed, or performed, as delay is a relevant factor in determining whether to exercise the discretion. In this case, the DOCA was executed 4 days after the resolution. The administrator notified ASIC the DOCA had been effectuated 4 days after it was signed. If the plaintiff was unable to bring proceedings within this timeframe, the plaintiff ought to have sought an undertaking from the administrator not to effectuate the deed pending the application.
The assistance of Peggy Wong, Solicitor, of Addisons in the preparation of this article is noted and greatly appreciated