When will a Court terminate a Deed of Company Arrangement (DOCA) for ‘some other reason’ under section 445D(1)(g) of the Corporations Act 2001 (Cth) (”the Act”)? In two recent cases, two separate courts have shed light on whether, and when, ‘public interest’ serves as a compelling reason to terminate a DOCA.
Yan v The Won Capital Pty Ltd [2024] NSWSC 758
Facts
In December 2017, Mr Yan loaned $10 million to GR Capital. In October 2018, GR Capital appointed administrators who reported to creditors the preliminary view that GR Capital had been insolvent since at least December 2017. Despite the administrators’ recommendations against the DOCA, creditors resolved on 30 January 2019 that GR Capital execute a holding DOCA allowing time to complete a property development before creditors could take action against GR Capital. Mr Yan commenced proceedings seeking termination of the DOCA under section 445D(1) of the Act to allow a liquidator to investigate insolvent trading claims. Mr Yan offered to provide funding to the liquidator for the investigations. As the limitation period on any insolvent trading claim was about to expire, it became urgent whether the DOCA was to be terminated and a liquidator appointed.
Decision
The Supreme Court of New South Wales (Justice Pike) considered a “smorgasbord” of legal issues, including termination of the DOCA for ‘some other reason’ under s445D(1)(g). His Honour held the scope of this power is “very broad” and includes where the public interest outweighs the interests of creditors. The circumstances warranting termination are not closed, and each case depends on its own facts and circumstances. Ultimately there is a discretion of the Court to be exercised. In this case, there was also a significant delay in the creditor bringing the application to terminate the DOCA (although the proceedings had been on foot for five years for reasons his Honour could not determine!) In balancing the public interest against that of creditors, the Court needed to determine whether creditors would suffer any prejudice if the DOCA was terminated and if the public interest in upholding commercial morality outweighed that prejudice. The Court determined that because the unsecured creditors were unlikely to receive significant returns if the DOCA continued (not least because it was a holding DOCA and any return depended upon variation of the DOCA and was therefore ‘speculative’), the public interest in investigating the insolvent trading claims, with Mr Yan’s funding for the liquidator, was predominant. Consequently, the Court terminated the GR Capital DOCA.
Commissioner of State Revenue v McCabe (No 2) [2024] FCA 662
Facts
In November 2022, the Commissioner of State Revenue (Commissioner) notified a group of entities, collectively known as the Comlek Companies, that they had a payroll tax liability of over $9 million. The Comlek Companies proposed a payment plan, which the Commissioner refused. Subsequently, in December 2022, the Comlek Companies went into voluntary administration and administrators were appointed. In February 2023, a DOCA was executed. The Commissioner, suspecting “deliberate tax defaults and tax evasion”, sought to terminate the DOCA under section 445D(1) of the Act to allow a liquidator to investigate the Comlek Companies’ affairs.
Decision
The Federal Court of Australia reiterated that terminating a DOCA under section 445D(1)(g) of the Act requires balancing the interests of creditors with public interest and commercial morality.
However, in considering the term ‘commercial morality’ the Court (Justice Sarah Derrington) made some interesting comments. Her Honour accepted that there was an “obvious stench to deliberate tax fraud and evasion, which casts a burden on all taxpayers”. However, the Court had not been asked to determine whether this had occurred in the present matter. Her Honour considered that ‘public interest’ includes considerations of commercial morality and that it was not helpful to “disaggregate” the two terms. Further, her Honour cited with approval, authorities which have considered that commercial morality is almost always in fact nothing more than “the public interest in having the law applied in accordance with legislative policy” whilst leaving room for the case of ‘moral obloquy’ which is “so far outside societal norms of acceptable commercial behaviour as to warrant condemnation”. In the end, the Court concluded that continuing the DOCA was not contrary to the public interest because liquidation and investigations would come at considerable cost to creditors. Further, the significant debt owing to creditors was precisely the reason for Part 5.3A of the Act and a DOCA accepted by creditors, and interestingly the Court also made note of the fact that it was “inexplicable” that $7 million of the Commissioner’s $10 million debt was penalties and interest which had been allowed to accumulate over a decade. Critically, by virtue of the DOCA, some of the companies were now solvent and had remained so for over 15 months, employing around 88 employees and trading profitably. In any event, the Commissioner had statutory powers to investigate the suspected tax default and evasion independently of a liquidator. Therefore, the Court determined that whatever public interest existed in investigating potential tax evasion was satisfied by existing and any potential future investigations the Commissioner may choose to undertake. Consequently, the Court did not terminate the DOCA.
Key Takeaways
- These decisions affirm that courts can terminate a DOCA under section 445D(1)(g) of the Act if public interest and commercial morality outweighs the interest of creditors.
- Commercial morality will generally be the same as the public interest in having the law applied in accordance with its intended purposes.
- The Court will balance these considerations with the interests of creditors and other stakeholders, particularly whether creditors would benefit more from the DOCA’s continuation or from liquidation.
The outcomes of these cases illustrate that public interest factors, such as investigating insolvent trading, allowing the restructuring of insolvent companies, and spending creditor money on liquidators will be important considerations when the Court is considering whether to continue or terminate a DOCA on the grounds it is in the public interest.
Read the decisions here: Yan v The Won Capital Pty Ltd [2024] NSWSC 758 & Commissioner of State Revenue v McCabe (No 2) [2024] FCA 662
Matthews Folbigg Lawyers has a specialist team dedicated to Insolvency, Restructuring and Debt Recovery.
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au
