Unfair DOCAs: When do the Courts Step In to Terminate?
Overview
A Court may make an order terminating a deed of company arrangement (DOCA) entered into under Part 5.3A of the Corporations Act 2001 (Cth) (CA) upon the application of a creditor, the company, ASIC or any other interested person; CA s 445(2). The Court’s power to make such an order is enlivened upon any of the grounds in s 445(1) being established on the balance of probabilities. However, whether or not an order is ultimately made remains a matter of discretion: Decon Australia Pty Ltd v TFM Epping Land Pty Ltd [2022] FCAFC 54 at [144].
The ground that a DOCA or one of its provisions is oppressive, unfairly prejudicial to, or unfairly discriminatory against one or more creditors is but one of the grounds on which a DOCA can be terminated by Court order; CA s 445(1)(f)(i). This ground is often considered together with the ground that the DOCA or one of its provisions is contrary to the interests of the company’s creditors as a whole because they are subject to overlapping considerations; CA s 445(1)(f)(ii); Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd [2023] FCAFC 110 at [66].
Both grounds require the Court to consider all the circumstances of the case, including the objects of Part 5.3A; the interests of creditors, the company and the public; the relative position of all creditors under the DOCA; the existence of any collateral benefit to shareholders; and, most significantly whether or not creditors will be “better off” in a winding up; Sino Group, [66].
Oppressive, Unfairly Prejudicial or Discriminatory – s 445(1)(f)(i)
The mere fact that the operation of a DOCA discriminates against or is prejudicial to a creditor is not a sufficient reason to terminate it because CA Part 5.3A is concerned with achieving a better return to creditors than immediate winding up. To that end, Part 5.3A expressly contemplates differential treatment among some creditors or classes of creditors rather than pari passu distribution. What is required is unfair prejudice or discrimination; Sino Group [64].
Whether or not a DOCA is unfairly prejudicial is assessed having regard to what the purportedly prejudiced creditors would likely receive on a winding up and the reasonableness of the administrator’s conclusions on that question; Sino Group [64], and Decon [168].
Whether or not a DOCA is unfairly discriminatory is assessed having regard to whether (Sino Group [64], and Decon [168]):
There are reasonable grounds consistent with the objectives of Part 5.3A for discrimination between creditors; for instance, some creditors may need to be paid first to ensure the company can continue to trade and therefore pay other creditors;
Ordinary commercial common sense demands unequal treatment among unsecured creditors or that some creditors lose priority;
There is any prima facie evidence of misfeasance, concealment, or a materially inadequate examination of the company’s affairs;
The DOCA offers real financial benefits credibly estimated to exceed those likely to be secured by winding up; and,
The DOCA offers indirect or collateral benefits from the survival of the company or its business in some form.
Against the Interests of Creditors as a Whole - s 445(1)(f)(ii)
This ground requires the applicant to establish on the balance of probabilities that there is a “not unrealistic prospect” that there may be a better return to creditors on an immediate winding up, considering all the circumstances. It is not necessary for the applicant to show immediate winding up will necessarily secure a better return to creditors; Sino Group [66]-[68].
Discretionary Factors
Once the Court’s discretion to order the termination of the DOCA is enlivened, in determining whether to exercise that discretion, the Court must balance the interests of creditors and the public, having regard to the following (non-exhaustive) factors (Sino Group [71]-[73]):
The interests of creditors as a whole – including whether they would be better off under a DOCA or an immediate winding up;
The public interest – which may be seen through the lens of the effect of the DOCA continuing on commercial morality or public confidence in financial systems;
Whether the dividend payable under the DOCA is likely to be significant;
Whether creditors voted in favour of the DOCA, noting that creditors are taken to be better placed than the Court to judge their own best interests;
Whether the creditors who carried the vote in favour of the DOCA were related to the company in some way;
Whether the information on which creditors voted was materially flawed because it was false, misleading or omitted relevant information; and,
Whether the DOCA's effect would enable an insolvent company to continue trading contrary to the public interest.
Key Takeaways
Section 445D(1)(f)(i) requires the applicant for an order to show more than mere discrimination or prejudice; the discrimination or prejudice must be unfair, having regard to the objectives of CA Part 5.3A. Therefore, differential treatment among creditors may be permissible provided it achieves a better return to creditors overall than immediate winding up.
Section 445D(1)(f)(ii) requires the applicant for an order to show a “not unrealistic prospect” (as opposed to a certainty) that creditors may receive a better return from immediate winding up than under the DOCA.
Once the Court’s discretion to make an order terminating a DOCA is enlivened, the Court weighs the interests of creditors and the public – although the matters the Court may consider are not closed.