Putting a cork in it – Terminating a DOCA without leading to liquidation

Background

McWilliam’s Wines Group Ltd and its wholly owned subsidiary Mount Pleasant Wines Pty Ltd (the Companies) were placed into administration on 8 January 2020.  The applicants, as administrators of the Companies, carried out an extensive sale process which resulted in the Companies entering into a DOCA arrangement in August 2020 with a company named MCW BidCo Pty Ltd (MCW) (the Existing DOCA).

Unfortunately, MCW failed to perform its obligations under the Existing DOCA.  By December 2020, the applicants had formed the view that there was no prospect that MCW would be able to perform its obligations under the Existing DOCA and recommenced the sale process for the Companies.

Pursuant to the terms of the Existing DOCA, the applicants were obliged to call a creditors’ meeting to vote on the future of the Companies.  However, as the recommenced sale process was ongoing, and as the applicants considered that it would not be in the best interests of creditors for the Companies to move into liquidation considering the impact this would have on the Companies’ assets and businesses, the applicants obtained orders from the Court in February 2021 to permit an extended adjournment of the creditors’ meeting to allow the sale process to be completed.

As a result of the sale process, in early April 2021, the applicants entered into a heads of agreement for a sale (Sale Agreement) which was subject to conditions that:

• the applicants obtain orders modifying the application of Part 5.3A of the Corporations Act 2001 (Cth) (Act) such that the Companies would not move into liquidation if the creditors voted to terminate the Existing DOCA and to enter into the proposed alternative DOCA (Alternative DOCA); and
• the creditors in fact vote to terminate the Existing DOCA and to enter into the Alternative DOCA.

The key reasons for this structure were that the applicants were concerned that they did not have sufficient power under the Existing DOCA to give effect to the Sale Agreement, and that the Existing DOCA contained relatively standard terms providing that if the Existing DOCA could not be enforced or effectuated, then the Existing DOCA would have to be terminated with the result that the Companies would be placed into liquidation.

The applicants accordingly applied (amongst other things) for orders pursuant to section 447A of the Act and section 90-15 of the Insolvency Practice Schedule (Corporations) being Schedule 2 to the Act (IP Schedule) to modify the application of Part 5.3A of the Act such that if the creditors voted to terminate the Existing DOCA and to enter into the Alternative DOCA, then the Companies would be bound by the Alternative DOCA without being taken to have passed a resolution that the Companies be wound up.

The applicants put on substantial evidence as to their views on:

• the fact that there was no reasonable prospect that the Existing DOCA could be completed;
• the benefit to creditors under the Sale Agreement and the Alternative DOCA; and
• the prejudice that would be caused if the Companies could not avoid a winding up.

As it turned out, an additional alternative DOCA was also proposed by another interested party, but this did not have any bearing on this aspect of the application save that the applicants sought the same orders in the event that the Companies entered into the additional alternative DOCA.

The Law

Section 447A(1) of the Act provides that ‘The Court may make such order as it thinks appropriate about how [Part 5.3A] is to operate in relation to a particular company.’  It is well understood that the Court’s powers under section 447A are very wide, although they are not but not entirely without limit and a section 447A order must have a nexus with how Part 5.3A is to operate in relation to a particular company and should only be used to achieve one of the purposes for which it was conferred.²

In considering this application, Justice Farrell noted that:

• it appeared that this issue had never been specifically considered before;
• however, there had been cases where section 447A had been used to avoid the consequences of a deemed winding up, including:
  • where a company had failed to execute a DOCA within the requisite period;³ and
  • where a DOCA had terminated and its terms otherwise provided that the company be taken to have been placed into liquidation.⁴

Further, section 90-15 of the IP Schedule provides that the Court may make such orders as it thinks fit in relation to the external administration of the company, including an order determining any question arising in the external administration of the company.⁵

Decision

Farrell J was satisfied that the Court had power to, and should, make orders under section 447A of the Act and section 90-15 of the IP Schedule to:

• alter the operation of Part 5.3A of the Act in its application to the Companies to avoid an immediate winding up upon termination of the Existing DOCA;⁶ and
• ultimately provide creditors with a choice between the proposed alternative DOCAs.⁷

Lavan comment

This case is a further illustration of the willingness of the courts to craft novel but practical solutions using section 447A of the Act (as supplemented by section 90-15 of the IP Schedule) to protect and promote the best interests of creditors.

This is a noteworthy decision both from the perspective of drafters of DOCAs (who might need to consider whether the terms of a DOCA would allow for the transition to an alternative DOCA) as well as insolvency practitioners faced with the prospect of having to seek the termination and replacement of an existing DOCA.