Deconstructing a DOCA: Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32

In the recent case of Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32 (Decon (No 2)), the Federal Court considered an application by a judgment creditor to set aside deeds of company arrangement entered into pursuant to a resolution of creditors, and also considered the circumstances where an administration would be too complex to justify removal of the current administrators.

Background

Decon Australia Pty Ltd (Decon) obtained a summary security for payments against TFM Epping Land Pty Ltd and Katoomba Residence Investment Pty Ltd (the Companies) in October 2019 for approximately $6.4m.  The Companies brought various appeals and stay applications but were unsuccessful, with the final stay application being dismissed on 19 June 2020 by the NSW Court of Appeal.

On 22 June 2020, Decon applied to the court for orders to wind up the Companies.

On 30 June 2020, prior to the hearing of Decon’s winding up application, the sole director of the Companies resolved to place each of them in voluntary administration and appointed PCI Partners as the administrators of the Companies (Administrators).

In a report to creditors of the Companies, the Administrators recommended the Companies enter into individual deeds of company arrangement (DOCAs) and called a second meeting of creditors (Second Meeting).

On initial application (Decon Australia Pty Ltd v TFM Epping Land Pty Ltd [2020] FCA 1085) (Decon (No 1)), Decon sought:

• an urgent injunction restraining the Companies from holding the Second Meeting, or from executing the DOCAs; and
• permanent relief to:  (1) terminate the administration of each of the Companies; (2) set aside the entry into the DOCAs; and (3) wind up each of the Companies and appointed Deloitte as liquidator of each Company.

On 27 July 2020, Stewart J in Decon (No 1) dismissed Decon’s urgent injunction but granted leave for Decon’s principal claim to be continued.

The Companies subsequently (but prior to the hearing of Decon (No 2)) entered the DOCAs.

At the hearing of Decon’s application for permanent relief, Decon submitted that:

• the Administrators’ reports on which the creditors relied in voting on the proposed DOCAs included information that was materially misleading.  In particular, Decon alleged that its claims against each of the Companies had been incorrectly analysed so as to give it only nominal voting rights by value at the first creditors’ meeting when in fact it should have had majority voting rights by value;
• further, from early 2018 onwards, the Companies had engaged in conduct that included their entry into multiple financial agreements and security arrangements (Agreements), some of which involved related parties and for many of which the purpose and benefit to the Companies was not readily visible.  However, the Administrators did not attempt to discuss, consider, investigate or otherwise analyse the purpose and propriety of the Agreements, including their effect on potential recoveries to creditors; and
• in addition to these matters, the Companies had repeatedly sought to resist payment of the $6.4m judgment debt due to Decon.  Not only was the conduct of the Companies leading up to their administration suspicious and indicative of an attempt to render themselves ‘judgment proof’, but the DOCAs would have the effect of extinguishing the liability to Decon and also provided for the funding of claims by the Companies against Decon.  This meant that Decon was treated differently to other creditors under the DOCAs; and
• finally, the Administrators had recommended that the creditors approve the DOCAs which had been proposed by the Companies’ parent company, which was controlled by the former sole director of the Companies.  The Administrators also noted their view that a possible claim against that director was not considered to be appropriate given litigation risks and low prospects of recovery.  This in Decon’s view raised the question of whether the DOCAs indicated a desire to avoid a frank investigation into the failure of the Companies.

Decon submitted that these matters were directly relevant to whether the administrations should be terminated, the DOCAs should be set aside, and the Companies should be placed into liquidation.

Outcome

McKerracher J considered the facts of the case in detail, and ultimately dismissed Decon’s application, holding that:

• as to the allegation regarding the Administrators’ analysis of Decon’s claim, this fell away as Decon had been admitted for the full value of the judgment debt for the Second Meeting;
• as to the allegation regarding misleading errors and omissions in the Administrators’ report, it did not appear that any of these matters were material to the vote on the DOCAs;
• as to the lack of detailed analysis of the Agreements, the Administrators had acted properly in forming a view that the potential for recovery regarding the Agreements was speculative and largely unknown, and even where there is the potential for recoveries from a liquidator’s investigation into transactions of the Company (such as the entry into the Agreements), this does not preclude creditors from voting in favour of a deed of company arrangement and extinguishing any investigations in circumstances where any potential recovery is speculative and largely unknown;
• in any event, a critical question in this case was whether a liquidation would provide a better return to creditors than the DOCAs, the onus for proving this fell on Decon as the plaintiff, and Decon had not discharged this onus;
• as to the allegation that the DOCAs were oppressive or unfairly prejudicial or discriminatory to Decon, the mere fact that the DOCAs provided for pursuit of cross claims against Decon did not satisfy the test for material prejudice as established by the authorities, there was nothing to suggest that these claims would not also be pursued in a liquidation, and Decon had not been treated as a separate class of creditor to be subjected to adverse conditions; and
• finally, in circumstances where the Administrators were involved in two “factually detailed and complex voluntary administrations”, it would be of detriment to the creditors of the Companies as a whole to have them removed, particularly where their removal would result in a duplication of costs in circumstances where there was limited available funding.

Lavan comment

This decision is a useful example of the courts’ continued approach to Part 5.3A as a “practical” insolvency regime (a point made by McKerracher J at paragraph 121 of Decon (No 2)). 

Once the court was satisfied that the Administrators had not breached their statutory duties in conducting their investigations and in reporting to the creditors and that there were no proper grounds within the ambit of the authorities to set aside the DOCA, the key question became whether the alternative course of action proposed by Decon would result in a superior return to creditors than the DOCAs, and Decon’s failure to address this was a key factor in the decision.

Whether a DOCA can be successfully challenged is a complex question, and Lavan’s experienced insolvency team would be happy to discuss any queries in this area.