Taking the blue pencil to DOCAs

On 5 May 2020, the NSW Supreme Court handed down a very interesting decision about deeds of company arrangement—not the large and complex deeds that ordinarily attract focus and commentary, but just the basic "here's some money, now give me my company back" deeds, that we're used to seeing at the small end of town.

The decision—In the matter of Antqip Hire Pty Limited (subject to deed of company arrangement) (in liquidation) [2020] NSWSC 487—covered a heap of really interesting points, including:

• how DOCA clauses should be interpreted—what rules apply;
• what a DOCA can and cannot do;
• whether a DOCA fund is company property, or is held on trust for creditors;
• whether the situation's different if the DOCA purports to establish a special trust; and
• how to tell whether what the DOCA establishes is actually a special trust or not.

Interpreting a DOCA

With regard to construction of DOCA clauses, the court concluded that DOCAs are to be interpreted using the rules applicable to legislation, not contracts, because DOCAs have force by virtue of statute, a feature they share with subordinate legislation.

The court described this conclusion as “perhaps unfortunate” noting (somewhat unkindly) that DOCAs “generally… appear to be prepared by accountants and insolvency practitioners rather than lawyers”, are “frequently ill-drafted”, and “certainly fall short of the standards of excellence of statutory draftspersons”. Ouch!

What DOCAs can and cannot do

The conclusion that DOCAs are interpreted the same way as subordinate legislation led to the possibility that DOCA provisions may be found to be ultra vires (exceeding their authority) if they go beyond what the Corporations Act 2001 (Cth) intended DOCAs to be able to do. This conclusion resulted in the court finding it could, if necessary, take a “blue pencil" to the offending clause—re-writing the clause so as to bring it back within scope.

In the course of the decision the court made reference to some of the specific things that DOCAs have been found not to be able to do, such as abrogating guarantees (although Gypsum Industries v Dalesun affected this) and, more generally, "ousting the operation of the Corporations Act".

This case—what the court found

In this case, a provision in a DOCA purporting to restrain the appointment of a liquidator was found not to have the effect it was seemingly intended to have. This was partly because of contradictory provisions within the DOCA, but also because the scheme of the Corporations Act was to encourage the directors of insolvent companies to appoint a liquidator, and this provision of the DOCA cut across that scheme.

This apparent inconsistency could, the court said, be resolved by pencilling in the words “subject to the Corporations Act” to the start of the offending clause. The ultimate outcome was that the court found that the clause did not prevent the company's director appointing a liquidator after it became insolvent a second time.

The DOCA fund

Having concluded that the company was validly wound up, it fell to be determined whether the DOCA fund ($3M+) was held on trust for DOCA creditors alone, or should be handed over to the liquidators to be dealt with in the winding up.

This question was complicated by a suggestion in the DOCA that the DOCA fund was held on trust. However, the DOCA did not quite go far enough. As a result, the court differentiated the arrangement from a conventional creditors' trust, where:

• the company is divested of any legal or beneficial interest in the DOCA fund; and
• creditors cease to be creditors of the company upon establishment of the trust.

These factors were lacking here. The court held that, despite the attempt to create a trust, the DOCA fund must be relinquished to the liquidators—subject to the DOCA administrators' lien for fees and costs.

All in all, the decision is replete with information useful to those formulating and drafting DOCAs, and will serve as useful guidance to those advising DOCA proponents and administrators moving forward.

Needless to say, if you need a really excellent DOCA put together, I know a guy... ;-)

Piper Alderman's Jonathan Hidayat acted for the liquidators. Ten years ago, I acted for the liquidators in Jick Holdings, an authority referenced repeatedly (15 times) in this decision.

?