The Court’s Power To Terminate A Company’s DOCA

By Krisha Reddy, Law Clerk MST Lawyers and Alicia Hill, Principal, MST Lawyers

Justice Sifris, in the recent Supreme Court decision of Eco Heat (Vic) Pty Ltd v the Syndicate Forty Four Pty Ltd (Subject to Deed of Company Arrangement) & Ors [2018] VSC 156, used his power under the Corporations Act 2001 (Cth) (Act) to terminate a Deed of Company Arrangement (DOCA) executed by creditors. His Honour demonstrated the Court’s power to use such measures where corporate morality or public interest issues arise.

Factual Background

The Syndicate Forty Four Group of companies provided high-interest finance for motor vehicles, sourcing the funds from investors. Due to bad debts from customers not repaying loans, unrealistic returns and legal action brought by investors, the company faced financial difficulty. On 28 October 2016, Administrators were appointed.

On 24 November 2016, the Administrators circulated their Report to Creditors under s 439A of the Act. Despite the Administrators recommendation that the creditors resolve to wind up the companies as it would not be in their interest to execute the proposed DOCA, the creditors voted to accept it regardless.

Eco Heat (Vic) Pty Ltd (Eco Heat), voted against the acceptance of the DOCA arguing that it was contrary to the interests of the creditors as a whole, the public interest and commercial morality. Eco Heat submitted that the DOCA resolution should be overruled as the decision was not made objectively but in order to heed the advice of the director, who was a friend of many of the creditors.

Issue

The issue was whether the Court should exercise its power under s 445D(1)(f)-(g) of the Act to terminate the DOCA. The relevant provision is as follows:

Section 445D

  • The Court may make an order terminating a deed of company arrangement if satisfied that:

(f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:

(i)  oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or

(ii)  contrary to the interests of the creditors of the company as a whole; or

(g)  the deed should be terminated for some other reason.

Reasoning

Justice Sifris held that discretion must be exercised considering the interests of the creditors as a whole, public interest and corporate morality. Meaning that a DOCA will not necessarily be allowed to stand even if creditors would get a greater return from a deed compared to liquidation. In certain circumstances, the ruling to terminate a DOCA is made despite unanimous creditor consent. This includes where there are fraudulent purposes, misconduct or a need for a more intensive investigation of the company’s affairs.

Findings

His Honour found that the DOCA should be set aside under s 445D(1)(g) of the Act for the following reasons:

  • The anticipated returns to creditors under the DOCA were overstated and entirely misleading. The actual returns would likely be negligible;
  • There were close connections between the creditors, and the director and evidence showed that these creditors would have followed whatever advice the director gave; and
  • The operation of a possible Ponzi scheme required investigation as it is in the public interest to ensure that funds advanced to promoters for investment are

His Honour also criticised, in obiter, the conduct of the director and the apparent wish to avoid winding up the Syndicate Group Forty Four at all costs.

Practical Implications

The decision demonstrates the ability of the Courts to terminate a DOCA where commercial morality and public interest issues arise. This can be despite unanimous creditor support and the possible financial benefits to some. It is important for insolvency practitioners to note these issues when making recommendations as to whether creditors should vote in favour of DOCA proposals.

If you would like to discuss any aspect of this article further, please do not hesitate to email Alicia Hill or phone +61 3 8540 0200.