When will a Deed of Company Arrangement (DOCA) be set aside? Disgruntled creditors have agitated this issue in the courts on several occasions recently. In this three-part series, we cover the grounds on which DOCAs have recently been set aside or terminated.
The first case we will consider is In the matter of ACN 613 909 596 Pty Ltd (formerly Minle Wine Negociants of Australia Pty Ltd) (subject to a deed of company arrangement)  NSWSC 753, where the creditor succeeded in having a DOCA terminated and the company wound up.
The key background facts to the application were:
- The company, formerly Minle Wine Negociants of Australia Pty Ltd (Minle) was a business engaged in wholesale liquor, export sales and excise duty drawbacks which accounted for nearly all its revenue.
- From March 2019, Monoova Global Payments Pty Ltd (MGP) engaged in foreign exchange trades with Minle.
- Those trades resulted in a substantial loss, and after applying its security MGP sued Minle for the shortfall in the amount of $1,307,041. Minle defended those proceedings and filed a cross-claim.
- In FY2021, Minle’s director established a new company (Wine Vendors) engaging in an export business similar to that of Minle. Minle transferred $1,230,000 worth of stock to Wine Vendors and ceased any operational or trading activities apart from defending the proceedings and prosecuting its cross-claim.
- By 2022, Minle wound down its business, reducing its revenue from $13,583,908 in FY2020, to $4,339,640 in FY2021, and to just $2,205 in FY2022. Concurrently, Wine Vendors had become increasingly profitable.
- Minle was not working towards a restructure and there was no indication that the business would resume operations.
- In 2022 Minle went into voluntary administration.
- In 2023 a DOCA was proposed which extinguished MGP’s claim and prioritised payments to the sole director and associated interests, including Wine Vendors.
MGP applied to have the DOCA terminated under the provisions of sections 447A and 445D of the Corporations Act 2001 (Cth) (Act).
MGP sought to have the DOCA terminated pursuant to section 447A of the Act, which empowers the Court to set aside a DOCA if the administration provisions of the Act are being abused.
In considering the application of that section, the Court referred to the decision of the NSW Court of Appeal in Joseph Khoury & Sons v Zambena Pty Ltd (1999) 217 ALR 527:
‘…the Court should not encourage the notion that “anything goes” provided only that that a deed of company arrangement provides some benefit for dissatisfied creditors. Commonly, companies proposing deeds of company arrangement are insolvent and what is proposed involves some benefit for unsecured creditors. That cannot be permitted to be used by those who promote such proposals as a critical factor which warrants the Court’s refusal to terminate or declare void such deeds, especially when different groups of unsecured creditors are treated differently.’
The Court determined that DOCA should be set aside under s 447A of the Act and that the company be wound up. In coming to that decision, the Court had regard to the following matters:
- Minle had ceased trading by the time the DOCA was proposed, and did not have any employees, such that the DOCA did nothing to promote the company’s operations or the welfare of its employees;
- the only creditors who voted in favour of the DOCA were associated with Minle and its director;
- the DOCA did not provide any benefit to creditors that were unrelated to Minle; and
- the DOCA would shield the director and associated parties from scrutiny by a liquidator.
MGP had argued, in the alternative, that the Court ought to terminate the DOCA under the provisions of s445 of the Act, which provide that the Court may set aside a DOCA where:
- s445(1)(e) – ‘…effect cannot be given to that deed without injustice; the element of injustice may be established if the effect of the deed would be to avoid a proper investigation of relevant transactions’;
- s445(1)(f) – ‘…that deed is oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more of the company’s creditors or is contrary to the interests of the creditors of the company as a whole’; or
- s445(1)(g) – ‘…the Court is satisfied that the deed should be terminated for some other reason’.
The Court was satisfied that, had it been necessary to do so, the DOCA could have been terminated on any of these bases.
DOCAs that are being proposed without a company demonstrating a genuine intention to restructure will come under increasing scrutiny from disgruntled creditors and other stakeholders. DOCAs proposed in those circumstances run the risk of being the subject of an application to be terminated.
Such an application is likely to be successful in circumstances where the public interest may weigh in favour of facilitating the investigation of antecedent transactions by a liquidator, even where the company’s winding up may be less financially beneficial to creditors.
The decision should give creditors comfort in knowing that unfair or oppressive DOCAs can and will be set aside by a Court.
If you have any questions about this article, please get in touch with an author or any member of our Restructuring, Turnaround & Insolvency team.
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.