When will a company be wound up despite a proposed Deed of Company Arrangement?

In the first two articles of this series, we discussed directors’ conduct resulting in deeds of company arrangement (or DOCAs) being set aside.  In this third and final instalment, we consider the case of In the matter of Rio Dorado Limited [2023] NSWSC 1398 where the Court weighed up the benefit to creditors in adjourning a winding up application in favour of the continuation of a voluntary administration and proposed DOCA as against the immediate appointment of a liquidator.


The key background facts to the application were:

  • Rio Dorado Limited (Rio) was a mining company based in Sydney whose principal asset was a stake in a gold and platinum mining enterprise in Ecuador.
  • Rio entered into a Series 2 Note Agreement with various noteholders, including Featherstone Enterprises Pty Limited (Featherstone), which originally contemplated an advance for a short term of 30 days, but which in fact extended to twenty months.
  • Featherstone issued a creditor’s statutory demand for over $700,000 in relation to the convertible notes.
  • On 25 July 2023, Featherstone applied to wind up Rio, based on a presumption of insolvency arising out of the unsatisfied creditor’s statutory demand.
  • On 5 September 2023, orders were made listing Featherstone’s application for hearing on 10 November 2023.
  • On 23 October 2023, Rio appointed Mr Levi as its voluntary administrator (Administrator), although it was disclosed that the company had been in contact with the Administrator in the previous two months concerning the possibility of an appointment.
  • Also on 23 October 2023, immediately before the Administrator’s appointment, Rio’s directors caused the company to enter into a Share Sale Agreement with a Mr Nicholas as trustee of a discretionary trust (who had been party to a joint venture with Rio that was terminated shortly before the Administrator’s appointment) for a purchase price of $10 million.
  • The Share Sale Agreement served as the foundation of a DOCA recommended by the Administrator as being in the interests of the creditors.
  • Notably:
    • The Share Sale Agreement required the purchaser to pay a deposit of $100,000. That deposit was not paid.
    • Completion was subject to due diligence. By the time the application was heard, due diligence was not complete and the purchaser had raised several concerns arising out of his enquiries.
    • The purchaser had declined to produce evidence of his ability to pay the purchase price under the Share Sale Agreement.
    • In forming a view that the DOCA offered a greater return to creditors than a winding up, the Administrator had not assessed any claims available to the company in liquidation including in relation to the conduct of Rio’s directors.

It was in this context that the Administrator, supported by Rio’s directors, filed an application on 9 November 2023 seeking an order under s 440A(2) of the Corporations Act 2001 (Cth) (Act) to adjourn the hearing of Featherstone’s winding up application listed the following day pending the second meeting of creditors and a vote in relation to the proposed DOCA.

Featherstone opposed that application, and sought Rio’s winding up and the appointment of another liquidator.


The operation of s 440A(2) of the Act permits the adjournment of a winding-up application if:

“…the company is under administration and the Court is satisfied that it is in the interests of the company’s creditors for the company to continue under administration rather than be wound up.”

The Court noted that the onus is on the company to establish that it is in the creditors interests to continue in voluntary administration, and additionally recognised that there is a possibility that voluntary administration may be commenced to effectively frustrate a winding up application, and that the Court should treat an application to adjourn a winding up brought at the ‘very last moment’ with caution.

The Administrator’s submission that it would be in the interests of the creditors for the administration to continue was founded his view that the proposed DOCA would result in an injection of $10 million into the company upon completion of the Share Sale Agreement, which would be unavailable in liquidation, and which would be sufficient to repay all creditors but for the Series 2 noteholders, who would recover the principal advanced.

The Court did not accept the Administrator’s assessment of the proposed DOCA, and found that in circumstances where:

  • The DOCA was premised on the successful completion of the Share Sale Agreement; and
  • The Purchaser had defaulted on his obligation to pay a deposit under the Share Sale Agreement, had declined to produce evidence of his ability to pay the purchase price, and had taken issue with matters arising out of due diligence, such that it was highly uncertain that the Share Sale Agreement would in fact complete.

The Court observed that the Administrator had not undertaken an assessment of potential recoveries available in a liquidation scenario, including as to claims against Rio’s directors, making it impossible to reliably compare the likely returns in a liquidation versus under a DOCA.

Accordingly, the Court was not satisfied that it would be in the interests of Rio’s creditors for the administration to continue, and dismissed the Administrator’s application. Consequently, the Court made orders for the winding up of Rio. In considering the identity of the liquidator, the Court emphasised the importance of the appearance of impartiality in addition to actual independence on the part of a liquidator, and considered that it would be preferable in this case for the liquidator nominated by Featherstone to be appointed.

Key Takeaways

This case again highlights the significant weight placed upon creditors’ rights to have the underlying circumstances leading to insolvency, and director conduct, properly investigated.

Consistent with the previous cases considered, the Courts are hesitant to permit arrangements where a DOCA may result in a director being shielded from such investigation absent a clear benefit to creditors.

Companies and administrators should ensure in negotiating any DOCA and in going before the Court that consideration is given to any conditional aspects of the agreement or elements which may lead to uncertainty in the contemplated benefit flowing to creditors, and a proper comparison is performed between likely returns under the proposed DOCA as against a liquidation scenario.


If you have any questions about this article, please get in touch with an author or any member of our Restructuring, Turnaround & Insolvency or Litigation & Dispute Resolution teams.


This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.