A high profile court case is due to gain traction this month in the NSW Supreme Court, in the matter of City of Sydney Council vs. Streetscape Projects Pty Ltd (Subject to Deed of Company Arrangement).
The City of Sydney Council is seeking to have a DOCA either terminated or declared void. As the largest creditor of Streetscape holding a debt of around $16 million, it is not hard to fathom the motivation to negate the impoverishing return of 3 cents in the dollar, which is entirely dependent on a separate judgment, yet to be made.
What lead to the outcome was an interesting set of events which are the subject of the Council’s application to court. The vote on the DOCA was cast by creditors holding relatively small debts to that of the Council’s whopping debt of $16 million. The Council wanted Streetscape wound up and a liquidator appointed to the company however, the voting result was a deadlock by way of number and value of the votes cast. The tie was broken by the voluntary administrator exercising his casting vote as Chairman in favour of the DOCA.
In a further twist, it is alleged that a former employee of Streetscape procured votes ahead of the critical meeting at which the DOCA was approved. The allegation includes that the company’s former cleaner who was owed $690 and a second creditor owed $1,000 were contacted prior to the creditors’ meeting and advised that their debts would be paid in full if they voted in favour of the DOCA.
If the Council’s application is successful, this will mean that the company will be placed into liquidation. The appointment of a liquidator will then give rise to powers under the Corporations Act to conduct further investigations of the affairs of Streetscape and open the door for potential actions which are available to a liquidator and not available under the DOCA.
So, in what circumstances can a dissatisfied creditor apply to the court to challenge the use of a casting vote to pass a resolution in favour of a DOCA or challenge a DOCA generally?
Section 600B of the Corporations Act provides that in circumstances where a creditor votes against a resolution at a meeting of creditors and the person presiding at the meeting exercises their casting vote in favour of a resolution which is passed, that creditor may apply to court for an order setting aside or varying the resolution.
In addition, in circumstances where the outcome of a resolution is determined by the votes of related entities and where the outcome is contrary to the interests of creditors as a whole or the passing of a resolution has prejudiced the interests of the creditors who voted against the resolution, section 600A of the Corporations Act allows a creditor to apply to the court to have the resolution set aside.
Section 445D of the Corporations Act also provides that a DOCA may also be terminated if a creditor, the company, ASIC or any other interested person applies to the court and the court is satisfied that:
- Creditors were provided false and misleading information on which the decision to accept the DOCA proposal was made.
- The voluntary administrator’s report left out information that was material to the decision to accept the DOCA proposal.
- The DOCA cannot proceed without undue delay or injustice, or
- The DOCA is unfair or discriminatory to the interests of one or more creditors or against the interests of creditors as a whole.
Interestingly there is no statutory time limit for an application to be made under any of the sections referred to. However, parties intending to apply should do so without delay as courts are loathe to set aside DOCA’s which are partially effectuated, or where there has been unexplained delay in making the application.