What can I do to get out of a DOCA I voted against?

24 April 2018

A myriad of ways exist in which a Deed of Company Arrangement (DOCA) can be terminated, including in accordance with the termination provisions of the DOCA itself or as a result of an application to the Court to set aside the DOCA brought by an unhappy creditor pursuant to section 445D or 447A of the Corporations Act 2001 (Cth) (Act).

In Shaoyong (David) Guo & Anor v Xinwei Song & Ors In the matter of SG Capricorn Investments Pty Ltd (subject to Deed of Company Arrangement); Dameng Developments Pty Ltd (subject to Deed of Company Arrangement); and New Mangrove Pty Ltd (subject to Deed of Company Arrangement) [2018] NSWSC 12, Black J granted the application to set aside the Companies’ creditors’ resolutions authorising entry into the DOCA pursuant to section 75-41 of the Insolvency Practice Schedule (Corporations) and terminated the DOCA pursuant to section 447A of the Act.

It appears that the primary reason for Black J’s decision is that the DOCA would have unreasonably prejudiced all of the Companies’ creditors by excluding the prospect of further investigation and potential recovery action against a Director and Deed Proponent who funded the Companies’ operations who may have received reimbursement for interest amounts exceeding the amounts the Director contributed to the Company.  In this regard, Black J noted that the DOCA treated all creditors other than the Director equally (and treated the Director less favourably than the other creditors) and was not oppressive or unfairly prejudicial to, or unfairly discriminatory against, one creditor or group of creditors.  Rather, the DOCA was contrary to the interests of the Companies’ creditors as a whole.

Among other things, Black J also considered the following in reaching his decision:

  1. That there was no prospect of the Companies or their business continuing in existence;
  2. That further investigation as to the possibility of pursuing any recovery action and the likely prospects of success of any such action was required in order to determine whether the creditors of the Companies would receive a better return under the DOCA or if the Companies were placed in liquidation;
  3. That the interests of the Companies’ creditors were likely better served by further investigations and potential recovery actions than by entry into the DOCA which did not involve a contribution of additional funds by the Directors (beyond that held by the Companies) or repayment of amounts transferred to the Directors;
  4. In accordance with section 445D(1)(e) of the Act, a DOCA may be terminated if effect cannot be given to the deed without injustice or undue delay and the element of injustice may be established if the effect of the deed would be to avoid a proper investigation of relevant transactions. In this regard, Black J noted that the emphasis is therefore on the effect rather than the purpose of the DOCA; and
  5. The fact that the Australian Taxation Office voted against the DOCA.

This decision is fact specific. However, it appears to suggest that if an Administrator has not completed all investigations concerning potential voidable transactions and causes of action that may be commenced against a Director and the company has entered into a DOCA, a creditor who voted against the resolution for the company to enter into the DOCA may nonetheless seek a Court order to terminate the DOCA on the basis that it is not in the best interests of all creditors even though the creditor may not be specifically oppressed, unfairly prejudiced or unfairly discriminated against by the terms of the DOCA (especially where the ATO has determined not to vote in favour of the DOCA).

Of course, care needs to be taken where detailed investigations would incur significant costs and time and the prospects of success of any subsequent recovery action would be low.

This article was written by Holly Lam, Senior Associate.

Publication Editor: Grant Whatley, Partner.

Subscribe to HWL Ebsworth Publications and Events

HWL Ebsworth regularly publishes articles and newsletters to keep our clients up to date on the latest legal developments and what this means for your business.

To receive these updates via email, please complete the subscription form and indicate which areas of law you would like to receive information on.

Contact us