This article will examine the Q.B.I. CORPORATION P/L V PLANTATION RISE P/L  QSC 102 case and focus on certain issues surrounding a Deed of Company Arrangement.
QBI was owed in excess of $300,000 by Plantation Rise and following legal action for recovery, QBI appointed voluntary administrators. There was little doubt Plantation Rise was insolvent however it held sufficient assets, in excess of $5million, which would see a full return to all unsecured creditors.
The Company entered into a Deed of Company Arrangement.
The issue that arose in this case was whether the effect of the Deed of Company Arrangement (DOCA) was to extinguish the debt owed by Plantation Rise to QBI, such that even if Plantation Rise were wound up, QBI would no longer be a creditor capable of claiming in liquidation. QBI argued the DOCA was inequitable and ought be set aside. Given the DOCA had been effectuated, and QBI’s debt extinguished the issue arose as to whether QBI had standing to bring the application at all.
The applicant under Sec.447A of the Act, applied to the court for the Deed of Company Arrangement (DOCA), to be set aside. Sec.600A can also be considered in setting aside the DOCA and was also relied upon by QBI.
- Plantation Rise Pty Ltd (“the Company”) entered into voluntary administration.
- The director of the company gave the administrator financial information about the circumstances of the Company. Later the administrator received a DOCA proposal from a third party.
- He recommended that it was not in the best interest of the creditors for the administration to end and winding up of the Company was recommended instead as the Company was insolvent and a proposal for a Deed had already been received.
- He believed that the DOCA proposed by a third party was not in the best interests of the Company as creditors would receive a lower return than in liquidation. This was at the heart of the issue of this case.
- However, the creditors voted in favour of the DOCA – the minutes of the 2nd meeting show the resolution was carried ‘on the voices’ albeit only 2 creditors were present and voted in opposition.
- The creditor who voted against the DOCA, being the applicant in this case, commenced proceedings to set aside the resolution and DOCA, and sought a declaration that the creditors’ claims had not been extinguished and applied for an order to wind up the Company.
- It was directed by the Court that ASIC be fully informed about the application. ASIC intervened to assist the Court on questions of law arising on the application.
The DOCA proposal suggested contributions worth $20,000 from a third party. It also proposed that the director, Mr Poteri, and his wife were to stand aside for dividend purposes but could participate in voting. The deed fund encompassed the $20,000 contribution and $51.22 cash available at the bank. However, the creditors were not paid any dividend and debts of unsecured creditors were discharged.
Four days after the execution of the DOCA, the administrator gave notice to ASIC that the DOCA had been wholly effectuated by its terms under s 445C(c) of the Act.
Now one might ask – what is a DOCA?
This is a formal agreement which is executed by an insolvent company, already under voluntary administration and its administrator, binding them and (most) creditors to arrangements intended to keep the company out of liquidation. The creditors will have approved the making of the deed at a meeting called for that purpose.
The Act governs the making, execution, performance, variation and termination of that deed. That said, the Act leaves it to the parties as to what their deed contains and they are mostly free to draft a deed to suit their particular circumstances.
However, this does not suggest that all deeds will be fairly and justly executed to favour all those involved. In the case at hand, the applicant believed the contrary.
How is a DOCA initiated?
A DOCA must be accepted by the required majority of the company’s creditors at a meeting held during a voluntary administration of the company. Agreements not formed under this process are not DOCAs. A DOCA itself will come into force once it has been executed by all of the parties to the deed. This must be done within 21 days after it has been accepted at the meeting.
INTERVENTION OF ASIC
ASIC asserted that the only person who would have benefitted from the DOCA would be the administrator – It was the unsecured creditors who stood to no gain and this clearly defeats the purpose of such an arrangement during administration. It was submitted that an oppressive and unfair arrangement of such a kind is an abuse of the process governed under the Act.
The Applicant believed that the proposal did not benefit the creditors as they would receive no dividends at all under the deed. Further, on return of the Company’s control to the director, the Company would be free to pursue its counterclaim against QBI, notwithstanding QBI’s claim had been extinguished.
The DOCA was proposed and supported by a related creditor, namely the wife of the director of the Company. She was one of the largest unsecured creditors but had she not voted, the DOCA would not have been approved.
On this basis, the DOCA was therefore considered to be prejudicial, inequitable and unfair. If this is indeed the case, the court has power under section 445D of the Act to terminate or set aside a DOCA. However, as the DOCA had already been effectuated, the Court under Sec.445D did not have power to terminate it. The plaintiff therefore relied on Sec.447A and Sec.600A of the Act, which is considered below.
APPLICATION OF SEC.600A
Under Sec.600A of the Act, the Court has the powers to set aside a resolution passed at a creditors’ meeting. This section lays down a two fold test.
If the creditor is unhappy with the resolution passed at this meeting, he can call for a poll or a casting vote – now what does this mean?
This is a vote exercised by the liquidator or administrator under s600A (1)(b). The purpose of s 600A is to allow creditors who were outvoted by related creditors to apply to set aside a resolution that has the undesirable features described in subsection (1)(c), namely oppression, prejudice, inequitable and unfair treatment of creditors.
The resolution passed in this case executing the DOCA was prejudicial to the interests of the creditors. However, the option for exercising the casting vote was not used in this case and therefore the court was not satisfied that this limb of the section could be invoked.
The second test deals with ‘related entities’ under 600A(3).
If a related creditor’s vote adversely affects the creditor as a result of that vote, an application can be made by that creditor under this section. It was argued that the plaintiff was no longer a creditor of the Company as its claims had been released under the DOCA.
However, the Court held that, a “creditor” under Sec.600A (1) refers to a person who was a creditor at the time when the resolution was passed. Therefore, by reliance on this provision, the plaintiff qualified as a creditor and could argue that the director and his wife were “related creditors” as defined under Sec.600A(3).
This section provides protection to creditors who are unfairly prejudiced by such similar situations. Although the creditor was outvoted, he could still claim relief under this section. It is however important to bear in mind that the in this case, the DOCA had already been effectuated.
It is important that only creditors who are owed a debt by the Company must be creditors at the time the resolution was passed, in order to avail protection under s.600A. There might be instances where creditors, unknowingly or knowingly may apply to the court to set aside a resolution which has not been passed in their favour. The court will consider the timing and involvement of the creditor in all cases.
APPLICATION OF SEC.447A
Under this section the Court has broad powers to make certain orders concerning the administration of a company, such as putting an end to administration for example.
Section 447A gives the Court wide powers and the category of eligible applicants who can apply for such an order is also wide. This includes the company itself, a creditor, administrator, the DOCA’s administrator, ASIC and any other interested person.
The applicant relied on this section as well to set aside the resolution, the DOCA, and for orders to wind up the Company.
S.447A can also be used as alternative to s.600A to set aside a DOCA. S.447A permits the courts to make orders that alter how voluntary administrations of a company operate in relation to a particular company. S.447A may be used where a company already under voluntary administration is about to enter into the liquidation phase.
S.447A of the Act provides the court with a unique power that allows it to mould the voluntary administration process to suit the needs of individual companies. The enactment of the federal corporation’s statute in 2001 has brought into question whether this power fits within the constitutional limitations that are imposed on federal law-making powers. The suggestion has been raised recently that the power is so broad that it is constitutionally invalid.
The real issue for concern was that, in the DOCA having been effectuated, the debt of QBI had been extinguished and thus any standing it had to bring an application (particularly to wind up) had thus evaporated.
The submission made by the applicant was that the effect of Sec.445H of the Corporations Act 2001(“the Act”) was that the debt would not be extinguished on setting aside the DOCA because only those rights and obligations arising under the statute by operation of the deed fall away on termination of the deed.
The Court considered whether rights had been accrued since the end of the administration, because an order setting aside the DOCA might have been inconsistent with the rights created in the intervening period. The Court concluded that it was “most unlikely” that rights had accrued since the DOCA was effectuated and the director of the Company had become bankrupt.
Ultimately, pursuant to Sec.447A of the Act, the Court held that:
- the resolution passing the DOCA was to be set aside;
- the DOCA was also to be set aside from the outset;
- the company was to be wound up;
The Court held indeed that it was only those provisions of the statute implied into a DOCA that were saved by 445H. In the event the DOCA was terminated/set aside then the provisions of the DOCA itself were set aside. So, notwithstanding the apparent discharge of QBI’s debt by the DOCA, once the DOCA was set aside, the provisions providing for that discharge were also set aside.
That issue notwithstanding, the Court also held that QBI had standing to bring the application under ss.600A(3) and 447A.
The resolution was passed in favour of the deed, which was contrary to the interest of the creditors as a whole, as the payments that were supposed to be made to the administrator would have definitely resulted in the unsecured creditors receiving little or no dividend and the only person benefitting from this deed would have been the administrator.
This resolution when passed was effected by a vote of a related creditor of Plantation Rise ( the wife of the director). If she had not voted, the resolution would not have been passed as the applicant, being the second largest creditor of Plantation Rise, voted against the resolution.
Moreover, the proposal of the deed was designed as to protect the director and other concerned parties from voidable transactions and as such the proposal was abusive of the operation of Part 5.3A of the Act.
The deed was therefore considered to oppressive, unfair and inequitable in the interest of the applicant. However if Plantation Rise were wound up then the applicant would recover a significant portion of his unsecured debt.
In Wilson J’s view, in light of the above reasons, it was in the best interest of the creditors that the company be wound up.
CONCLUSION AND LESSONS TO BE LEARNED
It is prudent advice for all creditors to carefully review the DOCA before passing a resolution at the creditor’s meeting. If a creditor is unhappy with any aspect of the arrangement, it is important to invoke the protection provided by these sections in a timely and appropriate fashion, such as calling for a casting vote or making sure that you are present at the time of the resolution.
The purpose of entering into a DOCA is that the creditor feels secure knowing it is a better arrangement than the prospect of liquidation. However there are times when commerciality will not be the deciding factor. If a director has been dishonest or caused creditors significant grief, creditors may decide not to accept a proposal.