Unsuccessful application by independent creditors to set aside DOCA passed by related creditors
On 4 March 2011, the Federal Court gave judgement in the case of Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (No 2)  FCA 178.
The judgment concerns proceedings brought by the major independent unsecured creditors (Independent Creditors) of companies subject to a deed of company arrangement (DOCA). The companies who had been in voluntary administration, had entered into the DOCA as a result of resolutions carried by the votes of related creditors. The Independent Creditors sought to terminate the DOCA on the basis that it was contrary to the interests of creditors as a whole.
The Independent Creditors alleged that:
- the administrators’ investigations of potential avenues of recovery was inadequate, in that their reports revealed material omissions; and
- it was contrary to the creditors’ interests as a whole that the Independent Creditors’ preference for further investigation in a liquidation should be defeated by the votes of related creditors.
The Independent Creditors were the only creditors who voted against the resolutions that the companies enter the DOCA. Under the terms of the DOCA, the Independent Creditors were entitled to receive an estimated 7.5 to 8.9 cents in the dollar, whilst the secured creditor, related creditors and employee creditors were to receive no distribution. In the event of a liquidation, the Independent Creditors would have received an estimated nil cents in the dollar as dividend.
The Independent Creditors claimed that it was unnecessary for them to establish that a liquidation offered any, or any greater material, benefit to creditors.
Issues in consideration
In reaching a decision, the court considered the following issues:
- whether resolutions to enter the DOCA were contrary to the interests of creditors as a whole;
- whether there were material omissions from the administrators’ reports;
- whether the administrators’ investigations for recovery were adequate; and
- whether there would be greater benefits to creditors in the event of further investigations and pursuit of claims in a liquidation.
Justice Dodds-Streeton of the Federal Court held that, in general, a DOCA should not be terminated on the basis that it is contrary to the interests of the creditors as a whole, unless at least one of two grounds are established:
a. there are reasonable prospects of securing recoveries productive of greater returns to creditors in a liquidation; and/or
b. the inadequacies of the administrators’ investigation and report materially distorted or flawed the statutory process.
In respect of the first ground, the court concluded that, in this case, the Independent Creditors had failed to establish that a liquidation would produce greater returns or offer benefits to creditors beyond those returns and benefits under the DOCA:
- The Independent Creditors led no evidence to contradict the administrators’ findings that there was no likelihood of successful recovery in a liquidation on any of the potential claims identified.
- Further, there was no assurance provided that any further investigations would occur on a winding up, as no sufficiently certain source of funding was identified by the Independent Creditors.
In respect of the second ground, on the evidence, the court could not find that the administrators’ investigations or reports were materially inadequate. It was not shown that the administrators had uncritically accepted at face value the information received from the directors, officers and other parties associated with the companies. Rather, the administrators had apparently independently evaluated the information obtained, searched for inconsistencies and verified it by reference to books, records and other evidence.
Ultimately, the evidence submitted by the Independent Creditors did not warrant the setting aside of the resolutions and the termination of the DOCA.