Application of Funds on Failure of a Deed of Company Arrangement

Application of Funds on Failure of a Deed of Company Arrangement

It is often the case that some of the terms of a Deed of Company Arrangement are not fulfilled and as a consequence creditors resolve to terminate the Deed and place the company into liquidation.

But if the Deed Administrator holds funds which have been received during the Deed period, what should happen to those funds?

• Should they be distributed to Deed Creditors as a part payment of what was expected under the Deed?
• Should contributions from the company be made available to the liquidator of the company for distribution to all company creditors (who may include creditors incurred under the Deed)?
• Should contributions from a third party be returned to the third party on the basis that the purpose for which they were contributed has been frustrated?

Just how such funds should be applied has been a question that has worried practitioners since the advent of the V.A. regime nearly thirteen years ago, but now an authorative answer to the question can be found in the case ofLombe V Wagga Leagues Club Ltd.

The Court decided in that case that the key to the question lies in the adoption of Schedule 8A of the Corporations Regulations into almost all Deeds of Company Arrangement. Clause 1 of Schedule 8A states that:

In exercising the powers conferred by this deed and carrying out the duties arising under this deed, the administrator is taken to act as agent for and on behalf of the company (emphasis added).

Because the funds received by the Deed Administrator are received as agent for the company, such funds immediately become the property of the company. Although many Deeds use terms referring to a trust a Deed does not create a trust where Schedule 8A is adopted, the Court found.

It follows from this that any residual monies held by the Deed Administrator must be made available to the liquidator for distribution to all creditors, including creditors incurred under the Deed.

Directors who make contributions to a Deed so as to avoid the problem of a liquidator pursuing damages for insolvent trading should realize that if they do not make all of the payments required under the Deed, they will not get a refund and will still be liable for the full insolvent trading damages.

Paola (TR) v DCT; Paola (SJ) v DCT [2007] NSWCA 108