When is a DOCA not “the” DOCA?

Administrators and directors should be careful when executing a Deed of Company Arrangement (DOCA) that the terms of the deed they are signing are identical, or substantially in the same form, as the deed specified at the creditors’ meeting. Failure to do so can lead to unwanted litigation and, worse, the DOCA potentially being declared void altogether.

Creditors’ meeting

The administrator of a company under administration must convene a meeting of creditors, under s 439A of the Corporations Act 2001, at which the creditors will vote on how the company is to be dealt with.

It is common for the directors of the company in administration to propose that a DOCA be executed, which usually allows the company to return to trading whilst providing a better return to creditors than if the company was liquidated. Section 439C provides that at the creditors’ meeting, a company may resolve to “execute a deed of company arrangement specified in the resolution”.

Often what happens in reality is that the administrator will circulate details of the proposed DOCA to creditors in the notice calling the meeting. At the meeting, creditors and directors can suggest amendments to the proposed DOCA, after which it can be voted on and approved. After the meeting, the administrator will usually go away and draft the formal documents, which will then be executed by the directors and the administrator.

The DOCA ultimately executed should, under s 439C, be in terms of the deed “specified in the resolution” that was approved at the creditors meeting. However, what happens if the terms of the executed document are different to those approved at the meeting?

In the matter of Re Recycling Holdings Pty Ltd [2015] NSWSC 1016, creditors were offered a DOCA including a term that, if litigation undertaken by the company failed to return enough funds to pay each creditor 100 cents in the dollar, they would then have an option to vote to terminate the DOCA.

The creditors voted in favour of the resolution and the administrator, as usual, went away to prepare the formal deed. However, the DOCA executed by the parties failed to include the key term allowing the creditors to vote to terminate the document.

Ultimately the Court held that because the DOCA that was executed was different to what was proposed at the creditors meeting, s 439C had not been complied with and therefore the DOCA was not in accordance with Part 5.3A of the Corporations Act 2001. Brereton J remarked:

“’The deed’ referred to in s 444A(3) must mean the deed “specified in the resolution“ as mentioned in s 439C. A deed that did not accord with the resolution would not be “the deed“. Section 444B provides that where an instrument is prepared under s 444A, the company and the deed administrator must execute it and when so executed, it becomes a deed of company arrangement. Accordingly, a deed that does not accord with the terms of the creditors’ resolution at the s 439A meeting is not entered into in accordance with or compliance with Pt 5.3A.”

What’s the remedy?

The Court has a range of options under s 445G to deal with a DOCA that does not comply with Part 5.3A:

  • It may declare the provision or deed to be valid despite the contravention of Part 5.3A, if it is satisfied that:
    • the provision was substantially complied with; and
    • no injustice will result for anyone bound by the deed if the contravention is disregarded; or
  • It may declare the particular offending provision, or even the deed as a whole to be void; and
  • Where it declares the provision void, the Court can make an order to vary the deed, but only with the administrator’s consent.

In Recycling Holdings the Court declared the offending provision to be void but, in the circumstances, made an order varying the deed and substituting in a new provision. That order was made to:

“bring the deed into conformity with what the creditors’ meeting intended and meet the justice of the case while avoiding the consequence of declaring the deed wholly void — which would not accord with that intention.”

However, it is not always possible for the Court to make such neat orders that will cure a non-compliant DOCA.

In Eastmark Holdings Pty Ltd (receivers & managers appointed), Re [2015] NSWSC 1437, a DOCA was executed that included, amongst other things, terms giving certain releases to third parties that had not been included in the proposed DOCA and had not been discussed at the creditors meeting. The Court held that it was never the intention of the creditors to agree to such releases and therefore those particular terms were void and were to be severed from the DOCA.

Lessons for administrators

In order to avoid the possibility of executing a deed that does not comply with Part 5.3A, administrators should consider how they can ensure that their DOCA is indeed the DOCA “specified in the resolution”. Such steps might include:

  • circulating a fully drafted proposed DOCA to creditors attached to the notice of meeting;
  • taking detailed and accurate minutes of the creditors’ meeting, including any proposed changes to the DOCA that might be raised verbally; and
  • ensuring that any amendments raised at the meeting are drafted and inserted into the proposed DOCA, and that creditors are satisfied with those amendments, before they vote to approve it.

In the two cases discussed, it was ultimately possible for the Court to cure the non-compliant terms and allow the DOCAs to continue to operate. However, Supreme Court litigation was required in each matter, undoubtedly causing considerable inconvenience and expense for the companies, directors, creditors and administrators alike.

Further, if a term is declared void but that term is critical to the operation of the DOCA as a whole, it may not always be possible to vary or substitute a curative term, and the entire DOCA could be declared void. Such an outcome would be disastrous for all parties involved.

In these situations the old adage that “prevention is better than cure” is especially applicable. With careful planning and preparation before a creditors meeting, and accurate record keeping at the meeting itself, administrators should be confident that their DOCA will properly reflect the wishes of the creditors and continue to operate as intended.

The information published in this paper is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.