The case of Q.B.I. CORPORATION P/L V PLANTATION RISE P/L [2010] QSC 102 focused on certain issues surrounding a Deed of Company Arrangement (DOCA).


BACKGROUND

• QBI was owed in excess of $300,000 by Plantation Rise and following legal action for recovery, QBI appointed voluntary administrators.
• There was little doubt Plantation Rise was insolvent however it held sufficient assets, in excess of $5million, which would see a full return to all unsecured   creditors.
• As a result, the Company entered into a DOCA.
• The issue that arose in this case was whether the effect of the DOCA was to extinguish the debt owed by Plantation Rise to QBI, such that even if Plantation Rise were wound up, QBI would no longer be a creditor capable of claiming in liquidation.
• Given the DOCA had been effectuated, and QBI’s debt extinguished the issue arose as to whether QBI had standing to bring the application at all.

QUICK FACTS

• Plantation Rise received a DOCA but the administrator advised against this - it would have resulted in a lower return to unsecured creditors than in a winding up action.
• Unsecured creditors stood to gain no return from the DOCA, as contrary to the possibility of a return under insolvency. 
• The creditor who voted against the DOCA, being the applicant in this case, commenced proceedings to set aside the resolution and DOCA, and sought a declaration that the creditors' claims had not been extinguished and applied for an order to wind up the Company. 
  

SUMMARY

The applicant under sec.447A of the Corporations Act 2001 (the Act), applied to the court for the DOCA to be set aside however, sec.600A can also be considered in setting aside a DOCA.


THE DOCA

The Act governs the making, execution, performance, variation and termination of a deed. That said, the Act leaves it to the parties as to what their deed contains and they are mostly free to draft a deed to suit their particular circumstances.

However, this does not suggest that all deeds will be fairly and justly executed to favour all those involved. In the case at hand, the applicant believed the contrary.

HOW IS A DOCA INITIATED?

A DOCA must be accepted by the required majority of the company's creditors at a meeting held during voluntary administration of the company. Agreements not formed under this process are not DOCAs. A DOCA itself will come into force once it has been executed by all of the parties to the deed. This must be done within 21 days after it has been accepted at the meeting.

DECISION

In Wilson J’s view, it was in the best interest of the creditors, for the company to be wound up, as the company was already insolvent. Moreover, the proposal for the Deed showed that creditors would receive a lower return if potential recoveries for voidable transactions and insolvent trading were to be litigated under liquidation.

The court therefore held that the Deed as well as the resolution passing the Deed was to be set aside and the company was to be wound up. 

LESSONS TO BE LEARNED

It is prudent advice for all creditors to carefully review the DOCA before passing a resolution at the creditor’s meeting. If a creditor is unhappy with any aspect of the arrangement, it is important to invoke the protection provided by these sections in a timely and appropriate fashion, such as calling for a casting vote or making sure that you are present at the time of the resolution.

The purpose of entering into a DOCA is that the creditor feels secure knowing it is a better arrangement than the prospect of liquidation. However there are times when commerciality will not be the deciding factor. If a director has been dishonest or caused creditors significant grief, creditors may decide not to accept a proposal.