Attempting to set aside a deed of company arrangement

19 September 2008

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The Federal Court has recently considered (Irving v Smith [2008] FCA 1391 – 12 September 2008) whether a deed of company arrangement (DOCA) should be set aside on the basis that it was oppressive, prejudicial to, and discriminatory against, creditors of a company.

The facts

Administrators were appointed to Longreach Capital Pty Ltd (Longreach), whose main assets were the former Kenmore Hospital site and adjacent land located at Goulburn in New South Wales.

Longreach had sold part of its Goulburn land to Kenmore Campus Pty Ltd (K-C) and Kenmore Developments Pty Ltd (K-D). A dispute had arisen between K-C and K-D and Longreach which was resolved by the parties entering into an agreement whereby Longreach agreed to pay K-C and K-D $600,000.00. This debt had not been paid when the administrators were appointed, meaning that K-C and K-D were both creditors of Longreach.

In the course of creditors’ meetings that were held between 23 May 2008 and 21 August 2008, two DOCA proposals were received by the administrators – one from Mrs Irving (the plaintiff and at the relevant time sole director of Longreach) and one from a Mr Byrnes. The administrators concluded that they could recommend neither proposal to the creditors but recommended that Longreach be wound up, as liquidation was likely to provide the best return to each class of creditors.

Shortly before a meeting of creditors was held on 5 August 2008, the administrators received a number of new and revised proofs of debt, proxies and debt assignments, including a number of deeds of assignment dated 4 August 2008 whereby K-C and K-D had assigned claims for damages and costs orders to four entities (New Creditors).

The meeting was adjourned until 14 August 2008, when the administrators recommended again that Longreach be wound up. However, a resolution was put to the meeting that Longreach execute the DOCA proposed by Mr Byrnes, and was accepted by a majority. The votes cast in favour of the resolution included K-C, K-D and each of the New Creditors. The DOCA was later executed.

The plaintiff’s submissions

Mrs Irving appealed against the administrators’ decision to allow the New Creditors to vote on the resolution. She argued:

a) that K-C and K-D had split their debt to allow more than one vote for the debt, and although each assignment was the assignment of a whole debt and not part of a debt, that it was not effective to divide a specific debt into individual debts and then assign those individual debts;

b) that once notices were sent out convening a meeting, an assignee could not lodge a proof of debt and vote at the meeting unless the assignment was bona fide and not for the purpose of manipulating the voting at the meeting; and

c) that, even if the New Creditors were allowed to vote, the DOCA should be terminated under section 445D of the Corporations Act (the Act) because it was oppressive or unfairly prejudicial to creditors or contrary to the interests of the creditors of Longreach as a whole. The reasoning behind this argument is that the DOCA did not clearly provide a better return for all classes of creditors.

Decision

Goldberg J found that there was no ground warranting that the DOCA be terminated.

His Honour said that the expression “creditors” in sections 439A and 439C of the Act is not limited to entities to whom a company is indebted either at the date notice is given by the administrators to creditors or the publication of the notice of meeting and “is not given a limited temporal aspect… [there is no rule] which identifies a creditor as being a person who is identified in the books of account of the Company as being a creditor at any particular point of time prior to the meeting at which the right of that creditor to vote is called in question.” Rather, Goldberg J said that “for the purposes of section 439A, creditors in a voluntary administration under Pt 5.3A of the Act were all persons who had debts or claims against a company provable in its winding up.”

Because the deeds of assignment were effective, the chair of the meeting was entitled to count the votes of the assignees of the debts. There was no evidence that the deeds were executed for the purpose of obtaining the voting power to pass the resolution that Longreach enter into the DOCA.

Goldberg J was particularly critical of Mrs Irving’s “inconsistent” submissions – being that she accepted the deeds of assignment were valid but were nonetheless a sham.

As to whether the DOCA was oppressive or unfairly prejudicial or unfairly discriminatory, the test is whether the impact of the DOCA on one or more of the creditors bound by it is one of overall unfairness – it is the effect of the DOCA rather than its purpose which is to be considered and taken into account.

Goldberg J made note that “the creditors were presented with a clear choice based on a reasoned report and analysis… That report and analysis demonstrated that there were a number of assumptions and variable factors which bore upon the extent to which a liquidation would bring a better return for unsecured creditors…”.

Comment

This case demonstrates that an assignee of a debt will have creditor voting rights, even where the debt was assigned after notice of a creditors’ meeting is given, provided the assigned debt is a discrete debt, and the assignment is not for the purpose of manipulating voting rights.

The case also demonstrates that a DOCA will not be oppressive, unfairly prejudicial or unfairly discriminatory towards creditors only because there is a possibility that had the company been wound up there may have been a better result for the creditors. Voting creditors are entitled to make an informed choice on the matter.

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