Parallel Parking - How To Reverse A Company From Liquidation Into A DOCA

In the recent decision of In The Matter Of Merchant Overseas Logistics Pty Ltd (In Liquidation) [2022] VSC 154, the Victorian Supreme Court considered an application by the liquidators (Liquidators) of Merchant Overseas Logistics Pty Ltd (in liquidation) (Company) to be appointed as administrators of the Company pursuant to section 436B(2)(g) of the Corporations Act 2001 (Cth) (Act).

The Company went into liquidation as the result of the failure and automatic termination of a deed of company arrangement (DOCA) approved by the Company’s creditors.  A further proposal for a DOCA was received by the Liquidators who then applied for orders that they be appointed as administrators to seek approval for entry into the new DOCA as well as a suite of supporting orders.

The application was granted by the Court, and the decision provides a useful analysis of the various orders that are required to ‘reverse’ a company out of liquidation and into administration and then a DOCA.

BACKGROUND

The Company was incorporated in 2004 and initially traded as an international freight forwarding business before moving into direct shipping in the mining space.  The Company was adversely impacted by the decline in the mining industry commencing in 2015 and was placed into administration on 31 October 2017.  The Liquidators were appointed at that time as administrators of the Company.

The parent entity of the Company, Dos Equis Pty Ltd (Dos Equis), subsequently put forward a DOCA proposal which was approved by the creditors of the Company.  The resulting DOCA was executed on 6 March 2018 (First DOCA).  The Liquidators were appointed as deed administrators under the First DOCA.

The First DOCA required Dos Equis to contribute $1.55m into a deed fund by 28 February 2018.  Dos Equis then sought, and the creditors of the Company approved, an extension of the time for the payment by Dos Equis to 28 August 2018.

However, Dos Equis was unable to raise the required funds in time and the First DOCA automatically terminated on 28 August 2018, resulting in the Company being placed into liquidation and the Liquidators being appointed as the liquidators of the Company.

The Liquidators were unable to make any significant progress in the liquidation between August 2018 and July 2021 due to a lack of funds, but after engagement with the directors of the Company (who also happened to be the directors of Dos Equis) between July and September 2021, Dos Equis put forward a new DOCA proposal which would see participating unsecured creditors receive the same return that they would have received under the First DOCA.

Importantly, Dos Equis then transferred the majority of the required funds for the new DOCA into the Liquidators’ trust account on 12 October 2021 and provided evidence that the remaining funds would be available.

The Liquidators then applied to the Court for orders that they be appointed as administrators of the Company, that the administration process be truncated, and that the liquidation of the Company be stayed from the time that the Liquidators are (re)appointed as administrators and then be terminated after the effectuation of the new DOCA.

DECISION

In considering the application, Justice M Osborne helpfully separated his consideration of the orders sought by the Liquidators into a number of different categories.

Relief pursuant to sections 436B and 448C of the Act

The Liquidators sought leave under sections 436B and 448C of the Act for their appointment as administrators of the Company.

Pursuant to section 436B of the Act, a liquidator can appoint an administrator to the company in liquidation but cannot appoint themselves (or their partner or employee) as administrator without creditor approval or the leave of the Court.

In addition, section 448C of the Act requires that an officer of a company cannot be appointed as an administrator of the company without the leave of the Court, and this section applies to liquidators as officers of the company in liquidation.

M Osborne J confirmed that for the purposes of both sections, the Court must consider whether the liquidator is an appropriate person to be an administrator having regard to whether there is any conflict of interest, threat to independence or anything else offensive to commercial morality in the proposed appointment.  M Osborne J also noted that it is well established that if there is no potential for conflict, and if the liquidator has carried out significant work, then it would be in the creditors’ interests for leave to be granted.

M Osborne J was ultimately satisfied that leave should be granted in this case as there was no risk of conflict, and the Liquidators had carried out substantial work and had an in-depth understanding of the Company and the new DOCA proposal.

Relief pursuant to section 447A of the Act

The Liquidators sought a range of orders under section 447A to alter the conduct of the proposed administration and to remove the need for a first meeting of creditors, to remove the need for the directors to provide reports as to the affairs of the Company, to allow creditors’ meetings to be convened at any time during the convening period and to allow electronic notices and remote attendances for such meetings, and to allow the Liquidators (as administrators) to accept proofs of debt lodged in the liquidation without adjustment or interest.

M Osborne J noted that section 447A gives the Court a wide power to make such orders as it thinks appropriate as to how Part 5.3A of the Act is to operate in relation to a company in administration, and was satisfied that in this case the orders sought should be made as they facilitated the efficient administration of the Company.

Relief pursuant to section 90-15 of the Insolvency Practice Schedule

The Liquidators sought orders under section 90-15 of the Insolvency Practice Schedule (IPS) to remove the obligation on the administrators to require the directors to provide reports as to the affairs of the Company (complementing the section 447A relief noted above), and to remove the obligation on the administrators to investigate and report to creditors on possible recovery actions.

M Osborne J noted that in truth, the application under section 90-15 of the IPS is in fact an application for directions or advice as to the proper course of action to be taken in an administration, and that previous cases have dealt with similar relief under section 90-15 of the IPS as a direction that the administrators would be justified in not taking the identified steps (as opposed to an order that the underlying obligations be removed).

In any event, M Osborne J was satisfied that the relevant relief should be granted in this case as there was no utility in requiring that these steps be undertaken in the ‘second’ administration of the Company.

Stay and termination of liquidation pursuant to section 482 of the Act

Finally, the Liquidators sought orders pursuant to section 482 of the Act that the liquidation of the Company be stayed upon their (re)appointment as administrators, and that the liquidation then be terminated two days after notice is given to ASIC of the effectuation of the new DOCA.

M Osborne J noted that while the Court has a discretion to stay or terminate a winding up at any time under section 482, the onus rests on the applicant to make out a positive case to a stay and there is a wide range of factors to be taken into account including the interests of the creditors and contributories, the solvency of the company or the likelihood of the company returning to solvency if the liquidation is terminated, as well as any public interest issues arising from the application.

Interestingly, in support of the application, the directors of the Company provided a written confirmation that if leave was granted under section 482, and if the new DOCA were to be implemented and effectuated thus returning the Company to their control, the directors would not trade the Company and it would remain as a dormant entity even if the effect of the new DOCA was to extinguish all claims against the Company and to return it to solvency.  The Liquidators submitted that this provided additional comfort to the Court that there could not be any risk or prejudice to the public interest or to future creditors.  

M Osborne J was ultimately satisfied that the orders under section 482 should be made as all interested parties had been notified and no objections had been made, and as the effect of the new DOCA would be to return the Company to solvency.  However, M Osborne J also noted that the decision was based on his finding that the Company would not be used for active trading, nor would it incur new debts if the winding up was stayed under section 482, and that as a result there was no risk to the public interest or to future creditors.

LAVAN COMMENT

This decision provides a helpful analysis of the different orders required (and considerations raised) if a company is to be returned to administration from a liquidation for the purposes of considering a new DOCA proposal.

It is also a useful reminder that a DOCA solution can still be pursued even if the company has passed into liquidation, although this may not be an easy or straightforward task.

If you have any questions about how a DOCA proposal could be implemented in respect of a company already in liquidation, the experienced Lavan team is here to help.