Deed administrator under a Deed of Company Arrangement

Sometimes the survival of a company and an eventual return to creditors can only be achieved by a change in the company’s shareholding. No problem arises if all the shareholders are on board with the proposed change, but what is the position if one shareholder disagrees with what is proposed or places unreasonable conditions on their agreement? Fortunately the legislation provides a solution to such a situation.

Section 444GA of the Corporations Act 2001 provides a mechanism for the transfer of shares in a company by the Administrator of a Deed of Company Arrangement (DOCA). The administrator may effect such a transfer if he or she has obtained the written consent of the owner of the shares or the leave of the Court. Subsection 444GA (3) states that the Court may only give leave if it is satisfied that the transfer would not unfairly prejudice the interests of members of the company.

These provisions provide the mechanism for a DOCA to be proposed that involves or requires the transfer of shares from one party to another. This could be required prior to capitalisation or retirement of debt or in exchange for the injection of additional funding in order to provide an improved return to creditors.

In order to establish that “the transfer would not unfairly prejudice the interests of members of the company” it must first be established what interests the members hold. In the event that the company is insolvent at the time of appointment of an administrator, it would follow that there is limited, if any, financial interest that the member holds.

In the matter of Midwest Vanadium the Court set out principles to be applied when determining whether the compulsory transfer of shares would “unfairly prejudice the interests of members of the company”:

• Does any residual equity exist that, if a transfer occurred, existing shareholders would be prejudicially deprived of?
• Where only one shareholder is holding out, the Court can take into account that the other shareholders have agreed to the transfer.
• The unfairness of any prejudice should be assessed in light of “the scheme of Pt 5.3A of the Corporations Act, the interests of the other creditors, the company and the public generally”.
• If a company is insolvent, then a transfer of shares would not prejudice the shareholders, let alone unfairly prejudice them.

So where does this leave us from a restructuring perspective? What it means is, we have the ability to factor into a DOCA a change in the ultimate control of an entity.

It is conceivable that the following scenarios may benefit from such provisions:

• A dead lock between shareholders, where by those who are prepared to make the best return to creditors can control the company’s future.
• The involvement of a “White Knight” type investor, who is prepared to accept a parcel of shares in exchange for contributions into a DOCA.
• A company in its establishment or growth phase that has experienced cash flow shortages and requires additional capital investment or a capitalisation of debt for equity.

Whilst these circumstances do not arise frequently, in cases that they have arisen the entitites have:

• Held specialised assets such as intellectual property or plant and equipment
• Have a strong industry reputation and brand in the market place
• Circumstances where a minority shareholder may not be willing to inject any additional capital into the company, but is blocking the capital raising process
• A buyer for the company who wishes to recapitalise the company but to do so requires control.