Setting aside DOCAs and exercising the administrator's casting vote - Insolvency/Bankruptcy

This week's TGIF considers Britax Childcare Pty Ltd, in the matter of Infa Products Pty Ltd v Infa Products Pty Ltd (Administrators Appointed) [2016] FCA 848 which considers setting aside a DOCA and the administrator's casting vote.

FACTS OF THIS CASE

After complex litigation with Britax, Infa Products lost the case and as a direct consequence, appointed administrators.

After an investigation (including a supplementary report), the administrators recommended to creditors that they vote in favour of a deed of company arrangement (DOCA) proposed by the director under which creditors would be paid a proportionate share of $800,000. The largest creditor (Britax) wanted the company placed into liquidation so that certain related party transactions could be investigated and the director pursued for breach of director's duties.

The administrator recommended the DOCA for the following reasons: the ability to recover monies from the company director would be limited, a lack of evidence to support any claim against the director, the outcome of preliminary legal advice on the claims and the administrators' general experience in litigating recovery procedures.

At the creditor's meeting the administrator exercised his casting vote in favour of the proposed DOCA.

Britax contended that the casting vote was wrongly exercised and the DOCA should be set aside, under sections 445D and 600B of the Corporations Act, for the following reasons:

only it would suffer prejudice if the DOCA was set aside and therefore there was an absence of prejudice to any of the other creditors as it agreed to pay the other creditors the sums that they would otherwise receive under the DOCA;
prospects of recovery for creditors would be better in a liquidation because of claims against the director and potentially voidable transactions which were entered into with related entities; and
there is a public interest in investigating the potentially voidable transactions under a liquidation.

DECISION

The Court rejected Britax's application and refused to set aside the DOCA.

Justice Burley found that there was no real prospect that creditors would receive a higher return in a liquidation than under the DOCA and that the claims against the company director and related entities were speculative. On the evidence before the Court, Britax was unable to establish that there was at least a "realistic prospect" of a finding of breach of duty by the director.

The Court also found that the administrators had carefully and thoroughly investigated the relevant transactions and fully reported to creditors before the second creditors meeting.

COMMENT

In determining whether further investigation by a liquidator is warranted, the case highlights the importance of satisfying the court that there must be realistic prospects of success in relation to claims which may result in a better return to creditors in a liquidation. And when considering whether to exercise its discretion, the court will have regard to the creditors as a whole, not merely the views of the largest creditor, even if the largest creditor represented 89% of total creditors.

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