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Part 5.3A is not a device to escape payment, much less to protect directors from their misconduct

A deed of company arrangement (DOCA) was set aside despite 7 out of 8 creditors supporting it, and despite it offering more to creditors than a liquidation of the company. The dissenting creditor, Pilot Advisory, whose judgment debt totalled $880,000, challenged the DOCA.

On the facts set out in the judgment, the Judge said it was difficult to see how the object of Part 5.3A is served by the DOCA.

“The provisions of that Part were intended by the Legislature to make the administration of genuinely insolvent companies more efficient and less costly …  They were not intended to be used as a device to escape the payment of a company’s debts, much less to protect directors from their misconduct in the affairs of a company”.

In brief, the Judge’s reasons for setting the DOCA aside were, as paraphrased:

In the first place, during the three and a half year period prior to it being placed in voluntary administration in June 2018 the directors caused Cloud 9 to pay out $7.31 million of the $8.8 million proceeds of its asset sale to a Telstra subsidiary which may have constituted breaches of their duties and uncommercial transactions;

Secondly, throughout the same period, the directors caused Cloud 9 to defend Pilot Advisory’s claim. That ultimately resulted in a trial at which they then caused the company to completely capitulate and consent to judgment for the full amount of that claim, plus interest, plus costs. This may have involved a breach of the directors’ duties to the company

Thirdly, despite the fact that they had, throughout that three and a half year period, maintained a situation where Cloud 9 had an excess of liabilities over assets of between $1,525,738 and $2,156,925 the directors chose the receipt of Pilot Advisory’s statutory demand for its judgment debt “to opportunistically declare that Cloud 9 had become insolvent, thereby justifying it being placed in voluntary administration under s 436A of the Act”.

Fourthly, the directors then voted with the other creditors of the company, the majority of whom were either shareholders in the company, or its financial and legal advisers, to execute the DOCA.

Finally, and most importantly of all, the DOCA, which was the ultimate result of the directors’ course of conduct as outlined above, contained clauses which:

  • shielded the directors from the scrutiny that would otherwise occur in a liquidation;
  • conditionally discharged the directors from liability for breaches of duty; and
  • returned the company to the control of the directors in anticipation that it would continue in existence.

Pilot had offered to fund liquidators’ examinations of the directors up to $60,000.

Pilot Advisory Pty Ltd, in the matter of ACN 137 806 574 Pty Ltd (Administrators Appointed) formerly Cloud 9 Software Pty Ltd v ACN 137 806 574 Pty Ltd (Administrators Appointed) formerly Cloud 9 Software Pty Ltd [2019] FCA 2171

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