Part 5.3A of the Corporations Act 2001 (Cth) was developed in 1993 upon recommendations from Australian Law Reform Commission for the need for a quick, flexible and cheap way of dealing with a company’s affairs before a prospective winding up occurs.
Deeds of Company Arrangement, or DOCAs, are designed to allow a company to deal with its creditors, with the assistance and guidance of an appointed administrator, with a view to returning to solvency and trading.
Inevitably there has been some criticism of the DOCA regime, particularly that they are open to exploitation by directors seeking a quick and quiet relief from potentially more thorough investigations into their own actions during liquidation. Further there is perceived bias towards secured creditors whose interests are considered in priority.
The global financial crisis saw a number of high profile companies entering into DOCAs, and this in turn created a number of novel scenarios which found their way to Courts throughout Australia.
Of particular interest, the collapse of Storm Financial saw the Commonwealth Bank appointing receivers and managers over the Townsville based investment group. During their initial investigations, the administrators advised creditors that the best course was the have the company wound up. Nevertheless, the administrators provided proposed terms for the DOCA as suggested by Storm’s directors.
The Australian Securities and Investments Commission (ASIC) brought an urgent application to the Federal Court to have Storm wound up prior to the creditor’s having an opportunity to consider the proposed DOCA. The Court was asked to step in for creditors and make the decision to wind up the company, effectively taking the option of the DOCA away from creditors. The application was brought pursuant to s445D of the Corporations Act which allows the Court to set aside a DOCA if it is not in the best interests of creditors.
What makes the Storm case novel is that the DOCA was not yet in place, having not even been voted on by creditors. ASIC argued that the proposed terms of the potential DOCA were misleading and while they appeared to offer an attractive alternative, a DOCA would in fact place creditors in a worse position.
The Federal Court held that this was case, that the materials provided by Storm’s directors were misleading, and as such it was appropriate to wind up Storm. As a result of the collapse of Storm and the massive losses suffered by thousands of clients, the Parliamentary Joint Committee on Corporations and Financial Services held an inquiry which resulted in a large number of recommendations on the way in which financial planners conduct business, the institution of statutory fiduciary duties and increased powers for ASIC.
If you are a creditor facing the prospects of voting on the future of a company, it is always important to seek independent legal and financial advice on your position and priority. Contact our office for further assistance with your position as a creditor, the relative advantages and disadvantages of winding up and DOCAs, as well as general advice on insolvency.