Issued June 2021, re-issued January 2023
The WA Supreme Court has dismissed a challenge to deeds of company arrangement (DOCAs) that offered ‘not much of a return to creditors’ but ‘better than’ the liquidation alternative, an outcome in accord with the secondary objects of the voluntary administration regime under s 435A(b) of Part 5.3A of the Corporations Act 2001. See O’Reilly v Precision Mining and Drilling Pty Ltd (subject to DOCA) [2021] WASC 176.
It is a low threshold, though it follows from the primary objective of allowing the company’s business to continue: s 435A(a). While there are other relevant factors, giving 1c to creditors instead of 0c will often see a DOCA through. The same applies in personal insolvency.
The Court’s decision sets out the background, including the dealings between the director P and the creditor shareholder O who described the deeds as “the latest attempt by [P] to defeat the legitimate exercise by [O] of his rights as a shareholder and as a creditor of the companies.” O brought proceedings under numerous grounds found in Corporations Act s 444D, that there were material omissions, misleading information etc.
As to the substance of the claim, the Court listed two main grounds of challenge and reasons (as paraphrased) for rejecting them.[1] My comments follow.
Ground 1 – the DOCAs ran counter to the interests of the creditors as a whole
The Court made two points:
- one, the creditors are those best placed to determine where their best interests lie;
- two, “given the alternative was liquidation, it cannot be said acceptance of the DOCA was not in the best interests of the creditors. As a matter of fact that is simply wrong”.
Ground 2 – the DOCAs were not in the public interest
The Court said that the “DOCA was clearly overwhelmingly in favour of the public interest” for three reasons:
- one, “it provided some return to creditors. It may not have been much of a return but it was better than the alternative”;
- two, the DOCAs allowed the companies to continue as a going concern; and
- three, the DOCAs allowed at least six individuals to remain in gainful employment with the company. “That fact alone must be seen as a factor which is in the public interest”.
These were supported by the administrator’s two overarching reasons why the challenge to the DOCA should be dismissed:
- one, setting aside the DOCAs benefited no one, not even O;
- two, an abuse of the DOCAs process could not be made out.
The challenge had “failed completely to establish any of the requirements of s 445D”.
Comment – is the “better than a liquidation” test set too low?
These are standard responses to any challenge to a regular DOCA and would generally be seen as properly made.
While, to an outsider, the outcome might seem rather too expedient, it needs to be seen in the context of the low level of expectations that insolvency offers, certainly to unsecured creditors – that is, it is the best of a bad lot, if often only marginally. The public interest is set low and the counterfactual, liquidation, is lower still.
One needs to see through the reasoning in such standard findings. To say that creditors determine their own best interests is rather specious when the options are invariably A and A+1; [the details of the DOCA were not disclosed in the judgment]. As to the public interest, that would better be assessed in 12 months time, to see if the newly restructured company continued as a going concern and as an employer and avoided the problems of the past. There is little done to check on that assessment and the law does not particularly require an advance opinion about it. The law also requires creditors’ interests to be the focus, not that of employees in particular.[2]
Perhaps the “better than a liquidation” test is too low, for the time and costs of DOCAs, and of any challenges.
While insolvency is not all about the money,[3] in that it meets various other needs – including here an on-going business and employment, both rather expediently assessed – what creditors receive one way or another, while a criterion of the legal test under s 439A, is often inconsequential – the term ‘derisory dividends’ is often used.
Derisory dividends
In Mustang Marine,[4] the Judge noted two alternative views on derisory dividends,
- that neither an administrator nor the court should conclude that “anything goes” in a deed of company arrangement provided that dissatisfied creditors get some return, however modest, or derisory;[5] or, alternately
- that one should not “second guess” commercial decisions made by creditors (citing a number of standard cases in support, also cited in this WA matter).
Either way, “most goes” in a DOCA.
The general and rather resigned approach of the courts, and probably of creditors, is that, as one judge said,[6]
“4 cents in the dollar is certainly a lot more than nothing, derisory though 4 cents in the dollar may be.”
Personal insolvency
Part X personal insolvency agreements (PIA) under the Bankruptcy Act, from which Part 5.3A originated, present similar issues and comments. A difference is that the alternative to a PIA is to make the debtor a bankrupt for 3 years, which is a more extreme response than rejecting a DOCA and liquidating the company. As well, there is usually no real focus on continuation of the debtor’s business in the Part X case law, although a debtor ceases to be an ‘insolvent under administration’ (s 9 Corporations Act) once the terms of the PIA have been complied with, which could happen promptly.
So in Re Agushi,[7] the court agreed that the dividend return of 0.019c in the dollar was “comparatively modest” or even “derisory” but noted “it is but one consideration to be taken into account”, and that there will be circumstances
“where informed creditors may consider it in their best interests to approve a personal insolvency agreement and accept comparatively little in return”.
Similarly, in Re Emmett[8], the Judge commented that while dicta suggest that small dividends and substantial debts might be sufficient, without more, to set aside a composition,
“it is significant that no case has been found where that has happened”.
Hint of abuse of process will change things, such as in one case where suggestions of tax evasion and sham transactions perhaps caused an otherwise generous 3 cents in the dollar to be assessed as “manifestly unreasonable and derisory”.[9]
Judges nowadays might be inured to the outcomes of insolvency?
Not so long ago, one experienced judge was stirred to exclaim that, in relation to a composition,
“there is something which, if not shocking, is at least something which takes one aback about a suggestion that somebody who owes almost 5.5 million dollars can offer $15,000 and walk away without there being any appropriate investigation of his affairs”.[10]
Given the limited returns in insolvency, the shock value today would be much reduced, or as the WA Court here said,
“it may not have been much of a return but it was better than the alternative”.
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[1] The three other grounds were that the administrator did not disclose the reason for the administrations; that he had invited the DOCA proponents to review the reports to creditors prior to the second creditors meeting; and that he had offered some creditors the full amount of their claim in exchange for voting for the DOCAs.
[2] Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No 4) [2019] FCA 1846 at [1411].
[3] “The liquidation of an insolvent company can affect many thousands, even tens of thousands, of innocent people. … An insolvent liquidation cannot be dismissed as ‘just a case about money’”: In re Barlow Clowes Ltd [1992] Ch 208.
[4] In the matter of Mustang Marine Australia Services Pty Ltd (admin apptd) – Perpetual Trustee Company Ltd v Mustang Marine Australia Services Pty Ltd [2010] NSWSC 1429.
[5] Citing Khoury v Zambena Pty Ltd [1999] NSWCA 402 at [80]
[6] Deputy Commissioner of Taxation v WPS Motorsport Pty Ltd [2009] FCA 476 at [27],
[7] [1992] FCA 440
[8] [1991] FCA 632
[9] Stedman v Deputy Commissioner of Taxation [2000] FCA 336.
[10] Sheppard J, as quoted in the appeal decision Re Lancaster v NZI Capital and the Official Trustee in Bankruptcy [1991] FCA 471.
