DOCAs that neither duped nor dudded creditors survive another challenge
Decon Australia Pty Ltd v TFM Epping Land Pty Ltd [2022] FCAFC 54 (6 April 2022)
Yates, O’Callaghan and Halley JJ dismissed an appeal from a decision of the primary judge who refused to terminate deeds of company arrangement pursuant to s 445D(1) of the Corporations Act 2001 (Cth) (the Act).
Henry William Lawyers acted for the successful deed administrators.
In this case, the primary judge was largely sympathetic to the judgment calls made by the administrators in putting the DOCAs to creditors.
The Full Court was deferential to the primary judge’s evaluative findings in concluding that there was no basis to set aside the DOCAs.
Two companies known as “TFM” and “KRI” were engaged in developing a residential apartment complex. They entered into a contract with a builder, “Decon”, and its related entity “Vanella” for design, construction and project management services.
In 2019, Decon served a payment claim on TFM and KRI pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW) (the SOPA) for $6,355,352. TFM and KRI omitted to provide a payment schedule within the SOPA-specified time limit. Accordingly, Decon obtained a judgment against TFM and KRI under the SOPA for $6,355,352. TFM and KRI lost both an appeal against the judgment debt and an application to stay the judgment debt, pending the determination of a separate cross-claim relating to building defects against Decon.
In 2020, the sole director of TFM and KRI resolved to place them into voluntary administration.
At second meetings of creditors, it was resolved that TFM and KRI would enter into DOCAs. The only creditors to vote against the DOCAs were Decon and Vanella.
The deed proponent of both DOCAs was “TDH”, who was the ultimate shareholder of each of TFM and KRI. The administrators became the deed administrators.
TFM, KRI and Decon remained involved in litigation relating to the apartment complex.
Decon applied to terminate the DOCAs under the several criteria set out in s 445D(1) of the Act, based on three main complaints:
the creditors’ reports contained materially misleading information or omissions;
entry into the DOCAs precluded investigations into various transactions which Decon said could give rise to further recoveries; and
the DOCAs were unfairly prejudicial to or unfairly discriminatory against Decon (and Vannella) because they did not enable further investigations but enabled the litigation against Decon (and Vannella) to continue.
The primary judge dismissed these complaints. Any errors in the creditors’ reports were immaterial and had been corrected. In the circumstances, it was not worthwhile for the administrators to pursue further investigations into speculative and uncertain causes of action.
Decon appealed to the Full Court.
On appeal in the Full Court
Decon’s Notice of Appeal sought to challenge most of the primary judge’s findings.
Application to amend Notice of Appeal – Section 553C set-off
Decon later sought to amend its Notice of Appeal by raising a new contention that clause 8.1(e) in each DOCA was to be interpreted as meaning that the deed administrators would be unable to apply the usual set-off.
DOCAs usually contain clauses adopting provisions in the Act that apply to liquidations. One of those is s 553C of the Act, which allows a liquidator to set-off a person’s debts owed to the company, against the company’s debts owed to the person.
In other words, Decon claimed that clause 8.1(e) of the DOCAs – instead of allowing the deed administrators to apply a set-off by incorporating s 553C – somehow excluded its incorporation. Decon claimed that this alleged exclusion was unfairly prejudicial to, or discriminatory against it because it would mean that Decon would be unable to exercise any right of set-off in respect of its judgment debt.
The deed administrators, represented by Henry William, dealt with this in the appeal by relying on a Deed Poll executed between TFM and KRI. The Deed Poll acknowledged that TFM and KRI each agreed – regardless of whether or not Decon was correct on its interpretation of clause 8.1(e) – that they would not rely on the DOCAs to contend that any creditor was barred from claiming a right of set-off in any action by TFM and KRI against that creditor.
The Full Court ruled that Decon was not permitted to amend its Notice of Appeal to raise a new contention about the interpretation of clause 8.1(e), especially given that at trial, the deed administrators ran the case on the premise that set-off rights were available. The Court also agreed that it would be inutile to permit Decon to raise this contention, given that the Deed Poll meant that Decon could not suffer any prejudice or discrimination.
Disposing of Decon’s other grounds
The Full Court confirmed that when considering the criteria in s 445D(1) of the Act, a court makes an objective evaluation of the relevant circumstances, viewed as a whole. This means that the House v The King principles applied – meaning that an appellate Court must exercise greater restraint before disturbing the evaluative findings of a primary judge.
The Full Court held that the primary judge properly understood that the statutory task under s 445D when he said that the Court was to consider whether or not there are realistic prospects of a greater recovery under liquidation (and that the administrators were wrong in concluding otherwise) and whether Decon discharged its onus in establishing that fact.
The Full Court dismissed Decon’s contentions in respect of four transactions that Decon said should have been further investigated. For example, one of these transactions was not even within the date of insolvency. Another related to securities given by TFM and KRI to the deed proponent “TDH” – the Full Court found that TDH was a creditor – at best, it might have been relegated to an unsecured creditor, rather than a secured creditor. The Full Court also agreed that errors in the creditors’ reports were not matters that could reasonably be expected to have been material to the creditors in deciding to vote the DOCAs.
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