DOCAs in need of some pilates?

In the matter of Travis Royce Smith as trustee of the Smith Investment Trust and Ors v Sandalwood Properties Ltd and Ors [2019] WASC 109, the Supreme Court of Western Australia was asked to consider (among other things) whether deferral rights pursuant to various Investment Management Agreements (IMA) and leases could be extinguished and released by a deed of company arrangement (DOCA).

Background

The plaintiffs invested in a variation of the Managed Investment Schemes (MIS) known as the Sophisticated Investment Schemes (SIS) promoted by the Quintis Group. 

The terms of the SIS, set out in the IMA and lease documents, provided for the following investor costs:

• an initial establishment fee payable to Quintis Ltd (Investment Manager);
• an annual property management fee payable to the Investment Manager (AMF);
• an annual lease fee payable to Sandalwood Properties Ltd (SPL) as the lessor of the land (ALF); and
• various other fees payable out of the investors' proceeds of sale.¹

Under the SIS, investors (which included the plaintiffs) could choose to exercise ‘deferral rights’ with respect to payment of the AMF and ALF.  Although the deferral rights varied between the IMAs and leases, ‘in substance the [investors] were entitled by election to make certain arrangements for the payment of the AMF and ALF’.²

The investors’ percentage interest in the gross proceeds of sale would be affected by the choice to either pay the AMF and ALF or exercise their deferral rights, for example if an investor chose to pay both the AMF and ALF, they would then be entitled to an increase in their percentage interest by an amount specified under the IMA.  If the investor chose to instead exercise their deferral rights, the percentage interest would remain the same in order to cover the fees payable.

Timber!

In late January 2018, the Investment Manager and SPL (among others in the Quintis Group) went into voluntary administration (VA) and receivers and managers (Receivers) were appointed shortly after.  The plaintiffs, as growers, were treated as contingent creditors by the voluntary administrators.  A creditors’ meeting was held passing a resolution that each of the companies in the group execute a DOCA which was later executed on 29 June 2018 (DOCA).  The plaintiffs were admitted to proof for voting purposes but did not attend the meeting.³

The DOCA

The DOCA provided that on completion:

• any claim by a creditor is extinguished and released;⁴ and
• all claims by investors under the SIS (including, without limitation, any deferral rights, put options or rights to purchase land) are extinguished and released.⁵

The DOCA also contemplated (among other things):

• completion of a new scheme of arrangement, which was completed on 30 October 2018; and
• the SIO investors being provided with an opportunity to enter into a deed of novation and amendment whereby another entity, Fieldpark Pty Ltd, was substituted for Quintis as the investment manager.Where that occurred, the SIO investors’ deferral right became limited up to 50% of the annual AMF and the ALF (New Arrangement).

Among other things, the scheme and the DOCA saw the recapitalisation of group and the transfer by the Investment Manager of its shareholdings in its subsidiaries to a new entity, Quintis (Australia) Pty Ltd.  The Investment Manager’s rights, but not its obligations under the IMAs were transferred to recapitalised entities. 

The plaintiffs did not accept the New Arrangement. 

On 7 December 2018, the plaintiffs received invoices for ALF in relation to their various investments.  Accompanying the invoices was correspondence that suggested that the deferral rights were no longer available to the plaintiffs.  The invoices were not paid, and default notices were issued threatening termination of the leases if the rent was not paid.

The proceedings

The plaintiffs commenced proceedings on 15 February 2019 for an interim injunction restraining the termination or purported termination of the IMAs and Leases.⁶

The plaintiffs sought (among other things) a declaration that their deferral rights were not extinguished under the DOCA (Declaration) and submitted that the ‘DOCA could not, as a matter of law, be effective to extinguish and release their deferral rights under the IMAs and the Leases’⁷(Primary Claim) because:

• the plaintiffs were not ‘creditors’ of the relevant ‘investment manager’ or SPL for the purposes of section 444H of the Corporations Act⁸ meaning they were not bound by the DOCA;
• even if they were determined to be creditors, the deferral rights did not concern a creditor’s claim arising on or before 20 January 2018 (before the voluntary administrators were appointed); and
• the deferral rights were a right that the plaintiffs had as an owner or lessor in relation to the property within the meaning and for the purpose of s 444D(3) of the Act which meant that the deferral rights were not affected by s 444D(1) of the Act.⁹

The decision

Vaughan J, through extensive analysis of the surrounding case law was satisfied that:

• the plaintiffs were contingent creditors of SPL and the Investment Manager in respect of claims for possible future contractual breach;¹⁰ however
• the plaintiffs’ deferral rights under the IMAs and leases were not, and did not concern, claims of the plaintiffs as creditors for the purposes of section 444H of the Act.

Accordingly, the purported extinguishment and release of the deferral rights in the DOCA did not bind the plaintiffs.  The deferral rights therefore remain in full force and effect and are capable of exercise by the plaintiffs.

Lavan comment

Although the statutory principles governing the DOCA process are well known, this case illustrates the importance of considering not only whether a party is a ‘creditor’ for the purposes of section 444H of the Act, but also whether the party has a ‘claim’ that is capable of being extinguished when crafting a DOCA.