Federal Court Offers Guidance for Administrators Executing Deeds of Company Arrangement

By Alicia Hill, Principal and Nicholas Mason, Law Clerk MST Lawyers

The Federal Court has recently provided further guidance for administrators of insolvent companies In the matter of the Natural Grocery Company Pty Ltd [2020] FCA 433. The Court principally gave its attention to subsections 444F and 444GA of the Corporations Act 2001 (Cth) (Act). These provisions are relevant to administrators who are required to execute deeds of company arrangement as part of an insolvency proceeding.

Background

The Natural Grocery Company Ltd (Company) sold organic food products and groceries through retail stores in Queensland and New South Wales. Timothy Cook (Mr Cook) was appointed as deed administrator in February 2020 under a deed of company administration (DOCA). The company encountered financial distress in 2019.

The DOCA was executed between Mr Cook, the Company, Myahlo Pty Ltd in its capacity as trustee of the Natural Grocery Company Trust (Myhalo) as the deed proponent, and also the Company’s wholly owned subsidiary ACN 608 914 012 Pty Ltd.

During the course of the administration, Mr Cook had proceeded to close six of the company’s stores. Sixteen stores remained open for trade (ongoing premises).

The DOCA

At a creditors meeting in January 2020, a poll was taken to approve a DOCA on the recommendation of Mr Cook. The executed DOCA effectively became subject to a condition precedent. This required that a Court would make two orders within 90 business days of the DOCA’s commencement. These orders were sought pursuant to:

• Section 444GA such that Mr Cook, in his capacity as deed administrator, would transfer all shares in the Company to Myhalo (or its nominee) in its capacity as trustee; and
• Section 444F such that the owner or lessor of any ongoing premises operated by the Company may not take possession of that property, or otherwise recover it.

Section 444F of the Act

Section 444F of the Act provides the Court with the power to order the owner or lessor of property that is used by, or is in the possession of the company, not to take possession of that property or otherwise recover it.

Such an order can only be made where the Court is satisfied that if the owner did take possession or otherwise recover it, there would be a material adverse effect observed upon the Company achieving the purposes it established in the DOCA.

Justice Farrell provided that in determining whether to make such an order, the Court will have regard to factors including the Company’s financial position and the effect the grant of the order would have on the owner or lessor the ongoing premises.

Evidence provided by Mr. Cook was sufficient to support the following propositions:

• no breach of any lease for the ongoing premises had occurred;
• rent had been paid by the ongoing premises during the administration period;
• the Company was heavily reliant on goodwill attached to the location of ongoing stores; and
• the proposed orders would not affect the rights of any owner or lessor at an ongoing premise.

It was therefore considered appropriate the Court grant the order sought by Mr Cook under s 444F. 

Section 444GA of the Act

Section 444GA provides that the administrator of a DOCA may transfer shares in the Company, subject to some formality requirements, where the Court is satisfied the transfer would not unfairly prejudice the interests of the Company’s members.  

In considering whether such an order would be granted, Farrell J held that the relevant enquiry was a comparison of the circumstances of the affected party under the 444GA proposal with the likely circumstances that would be observed if a winding up of the Company instead occurred.

On the evidence presented, His Honour was persuaded that the only realistic alternative to the DOCA was a winding up. In such a circumstance, all classes of creditors would have been worse off than under the terms of the DOCA. Ordinary unsecured creditors were likely to receive no dividend. The Court was therefore satisfied that the granting of the order to effect the share transfer to Myhalo would not unfairly prejudice the interests of the Company’s shareholders.  

Takeaway Points

This decision is a reminder for administrators who may seek orders of the Court under subsections 444F and 444GA of the Act in accordance with their obligations under a DOCA.

In the case of s 444F, it will be particularly important to assess and put forward to the Court evidence of:

• the relevance of any obligations to the owners or lessors of ongoing premises.
• the circumstances of company members in direct comparison to a winding up scenario.

Where the outcomes for members under a DOCA are more favourable, the administrator is more likely to be granted an order from the Court to effect any desired share transfer.

If you have any queries regarding your legal obligations in the event of an insolvency event, please do not hesitate to contact Alicia Hill on 03 8540-0200 or alicia.hill@mst.com.au