Director’s DOCA is set aside
HopgoodGanim Lawyers recently acted for R.W Pascoe Pty Ltd in successfully setting aside the deed of company arrangement (DOCA) proposed by Crimson Fresh Produce Pty Ltd.
In this article Partner Darrell Jardine and Senior Associate Jess Owen look at the Federal Court’s decision in R.W. Pascoe Pty Ltd v Crimson Fresh Produce Pty Ltd (subject to deed of company arrangement)  FCA 705 and highlight that a Court will not allow a DOCA to stand, where its effect is unjust, it is contrary to the interests of creditors, and it has been entered into for an improper purpose.
A DOCA is a versatile tool.
When a company is in administration, a director or another party, can put forward a DOCA proposal to unsecured creditors, as an alternative to liquidation.
At their best, they can provide creditors with benefits that would otherwise be unavailable if a company were wound up.
They can allow a company under financial stress to return to solvent trading and avoid the delay and expense of liquidation.
On the other hand, DOCAs can also sometimes be entered into for improper purposes, without the best interests of the creditor or the company in mind.
The defendant company in this case operated a produce growing and export business in and around Mildura.
The company appointed administrators in November 2022, in circumstances where a number of creditors had taken legal action against it.
The total value of the unsecured debt at the time of the administrator’s appointment was about $1.8 million.
The administrators in their reports to creditors made a number of adverse findings, including that the company had been trading at a loss since 1 July 2018 and that the financial position of the company was, in part, due to poor management.
There was a potential claim against the company’s sole director, Mr Padia, for insolvent trading worth approximately $1.8 million.
A few days before the second meeting of creditors, Mr Padia put forward a DOCA proposal, which, in effect, provided that the company would be returned to the director and that the director would use the company’s own assets (from the sale of certain crops under cultivation) to pay $200,000 into a “Deed Fund.”
After the deduction of administration fees, unsecured creditors were, at best, likely to receive about 2.35 cents in the dollar, pursuant to the terms of the DOCA.
The administrators recommended that the creditors should reject the DOCA and place the company into liquidation.
Despite this, a slim majority of creditors by number voted in favour of the DOCA.
One of the creditors in the minority, R.W. Pascoe Pty Ltd, applied to Court for the DOCA to be terminated on the following grounds:
Ultimately, the Court agreed that the DOCA should be terminated on the basis of each of the grounds relied on.
His Honour, Justice Derrington, was influenced, in particular, by the fact the Company had ceased trading and that, as a result of the DOCA, Mr Padia would be protected from the liquidation process.
His Honour stated (at ), “a significant factor is that the DOCA under consideration does not contemplate in any way, shape or form the continuation of Crimson Fresh. Indeed, the company ceased trading prior to the administration, and there is no suggestion that it is to trade in the future...”
“Moreover, an important consequence of the DOCA being entered into is that Mr Padia, in his capacity as a director, will be shielded from the processes of liquidation. This includes, in particular, the powers that might be brought to bear by a liquidator engaging in public examination and then pursuing recovery proceedings in respect of director-related transactions or insolvent trading” .
It was also significant that the applicant (and other creditors) would only recover a very small amount, “if anything”, on the terms of the DOCA.
Justice Derrington stated (at ), “Its [the plaintiff’s] opportunity to recover a greater amount of its entitlement would be substantially enhanced if the company was placed into liquidation and the investigative processes under that regime were to occur”.
Typically, applications to terminate DOCAs involve some element of procedural unfairness (for example, creditors related to the director have participated in the vote, or creditors have been misinformed prior to the vote).
This case was unique because the Court did not refer to any element of procedural unfairness in its judgement.
It was not in dispute that a majority of creditors by number had voted in favour of the DOCA.
Nevertheless, the Court was not prepared to allow the DOCA to stand, in circumstances where it had been entered into for an improper purpose, even if the majority of creditors by number were in favour of it.
His Honour stated (at ) “Here, no part of the DOCA is directed towards the continuation of the company. In fact, the company has ceased trading, and there is no suggestion that it is intended to trade ever again. Part 5.3A of the Corporations Act is not intended to assist companies in this position. The process of administration, and the execution of a DOCA, should not be used as a de facto winding up for the purpose of avoiding the real and important consequences of a properly conducted liquidation.”
For more information please contact Partner Darrell Jardine or Senior Associate Jess Owen from HopgoodGanim’s Dispute Resolution and Litigation practice.