In Pilot Advisory Pty Ltd1, Pilot- the major creditor of Cloud 92 - successfully applied to the Federal Court to set aside a DOCA relying on the Court’s power to act in “the interests of the creditors as a whole, and in the public interest.”
Pilot assisted Cloud 9 with due diligence ahead of the sale of its business assets. After Cloud 9’s failure to pay Pilot’s invoice, Pilot was successful in proceedings for payment of the outstanding invoice. On 16 May 2018 Pilot issued a statutory demand for the amount of its judgment debt.
Some 2 weeks later, Cloud 9 was placed into voluntary administration by its sole director. By then, Cloud 9 had not traded for 3 ½ years however, it remained in existence primarily to distribute the asset sale proceeds to its creditors and shareholders. Relevantly, the sale proceeds significantly exceeded the value of Pilot’s claimed invoices and were distributed over about 2 years.
Importantly, after entering into administration:
Pilot’s application to set aside the DOCA was predominantly advanced on the grounds of public interest (s 455D(1)(g) of the Corporations Act3) claiming that it was in the public interest to investigate “misconduct in the affairs of the company.”4 Pilot also contended that the DOCA was unfairly prejudicial (s 455D(1)(f) of the Act).
In relation to the public interest argument, Pilot claimed that it was in the public interest to investigate misconduct in the affairs of the company5 and that the former and current directors of Cloud 9 should be orally examined about certain transactions. Pilot claimed that the DOCA:
Pilot had previously offered some $60,000 to fund the public examinations of the directors which would not be treated as a cost of the liquidation but rather, added to the debt it would prove for in the liquidation.
Both the administrators and Cloud 9 opposed the orders sought by Pilot.
The administrators claimed that the chairperson’s reasons for voting in favour of the DOCA were (among other things):
Cloud 9 relied on (amongst other things) the following contentions:
Before exercising its discretion as to whether the DOCA should be terminated, the Court was required to form a view about whether Pilot had made out one of the grounds set out in s455D(1) of the Act.
The Court ultimately determined, after assessing the provisions of the DOCA against the background facts and circumstances, that notwithstanding the objects of Part 5.3A of the Act, the DOCA was unfairly prejudicial and contrary to public policy on the basis that it required Pilot to “forego approximately $880,000 of its judgment debt and preclude it from procuring any scrutiny of the prima facie breaches of the directors’ duties.”6 Relevantly, the creditors whom voted in favour of the DOCA were the directors and shareholders of Cloud 9 as well as its former financial and legal advisors.
In reaching is decision, His Honour set out at :
…most importantly of all, the DOCA, which was the ultimate result of the directors’ course of conduct as outlined above, contains the following provisions. First, clauses which act to shield the directors from the scrutiny that would otherwise occur in a liquidation in respect of their prima facie breaches of duty[…] Secondly, and to compound the above, a clause which conditionally discharges the directors from liability for those breaches of duty[…] And finally, a provision which returns the company to the control of the directors and anticipates it will continue in existence[…]
Following making out of the ground(s) for termination of the DOCA, His Honour exercised his discretion to terminate the DOCA in accordance with s 445D(1) of the Act.
The provisions of that Part 5.3A of the Act were not intended to be used as a device to protect directors from their misconduct in the affairs of a company7. Insolvency practitioners should keep this matter in mind when exercising their judgment for recommending a proposal and also exercising casting votes in favour of DOCAs. Careful consideration should be given to the ultimate effect of a DOCA, particularly where investigations reveal prima facie suspicious transactions which are unsupported by records. The creditor composition voting for/ against the DOCA should also be borne in mind when considering the use of a casting vote.
 Pilot Advisory Pty Ltd, in the matter of ACN 137 806 574 Pty Ltd (Administrators Appointed) formerly Cloud 9 Software Pty Ltd v ACN 137 806 574 Pty Ltd (Administrators Appointed) formerly Cloud 9 Software Pty Ltd  FCA 2171.
 ACN 137 806 574 Pty Ltd (Administrators Appointed) formerly Cloud 9 Software Pty Ltd
 2001 (Cth)
 Pilot Advisory Pty Ltd, .
 Pilot Advisory Pty Ltd, .