In Australia, the voluntary administration regime set out under Part 5.3A of the Corporations Act (2001) provides an opportunity for an insolvent company, or at least part of its business, to be restructured and rescued. The regime aims to maximise the chance that the company, or as much of its business as possible, will continue to exist or, if this is not possible, that a better return will be obtained for creditors than would otherwise be achieved in a liquidation.
DOCAs and creditors' trusts
In order achieve Part 5.3A's aims, a party must submit a proposal for a Deed of Company Arrangement (DOCA) to the administrators and the creditors pass a resolution in support of that DOCA. Although a DOCA must meet certain requirements prescribed in Part 5.3A, it is a relatively flexible tool through which a restructuring of the company may occur.
DOCAs generally give rise to the creation of a fund that, once collected, is distributed to creditors under its terms, whereby all unsecured and other participating creditors of the company receive a dividend. Once unsecured creditors receive their dividend, their respective claims against the company are extinguished.
Part 5.3A, and usually the terms of the DOCA itself, provides a degree of protection for creditors, including the ability to pass a resolution or seek orders from the court terminating, voiding or varying the DOCA. These rights are often activated when the parties to the DOCA fail to comply with its terms, for example, by failing to make the agreed contributions to the fund from which the distributions to creditors are to be made.
While a company is subject to a DOCA, there often remains a stigma and limitations as to what can be done with the company. For example, the administrator of the DOCA is generally unable to rescue, for the benefit of creditors, any value that may be attached to the corporate shell of a publicly listed company that could otherwise be re-listed following administration.
Accordingly, some DOCAs may be terminated early if a creditors' trust is established. Under this, the funds that are designated for creditor claims will now be administered under the creditors' trust, rather than under the DOCA. Through the transfer of creditors from the company to a creditors' trust, the company's balance sheet is "cleaned up" and a sale of the company, and not simply its assets, can be effected in favour of a purchaser, who will not be bound by the statutory obligations attached to a company that is subject to a DOCA. This further value extracted from the sale can be passed on to creditors in the form of a larger dividend under the creditors' trust.
Concerns attached to creditors' trusts
Use of DOCAs, however, has not been entirely free from controversy. The Australian Securities Investment Commission (ASIC), the national regulator, has expressed concern that the use of a creditors' trust potentially deprives creditors of the statutory protections afforded to them under Part 5.3A in favour of rights as a beneficiary under trust law. Arguably such rights are less robust than the protection afforded to the creditors under Part 5.3A.
The company's administrator is obligated to provide a written report to creditors detailing the company's business, property, affairs and financial circumstances, together with a recommendation as to whether, in circumstances where a DOCA has been proposed, it is in the interests of creditors to pass a resolution in favour of the DOCA or to vote in favour of the company being placed in liquidation and wound up.
When a DOCA proposal contemplates the implementation of a creditors' trust, ASIC's concern has focused on ensuring that sufficient disclosure and information is made available by the administrator to creditors as to the advantages (for example, a greater dividend) and disadvantages (for example, loss of protection under Part 5.3A) of the DOCA. ASIC accepts that creditors are free to make their own assessment of the risks and benefits of the creditors' trust provided they are properly informed and the creditors' trust does not give rise to an abuse of Part 5.3A or is otherwise contrary to the public interest.
To address such concerns, ASIC published ASIC Regulatory Guide 82, 'External administration: Deeds of company arrangement involving a creditors' trust. A guide for registered liquidators appointed under Part 5.3A'. The guide states that a report to creditors should provide sufficient information to enable creditors to understand the DOCA proposal and appreciate the legal and practical implications of, and the specific risks attached to, it, authorising the company to enter into the DOCA. Further helpful guidance was provided by Chief Justice Bergin in Re Bevillesta Pty Ltd  254 FLR 324.
Can a creditors' trust be unwound?
The question arises as to whether, outside of trust law, the creditors under a creditors' trust may still have access to the protections afforded under Part 5.3A in circumstances where, for example, inadequate disclosure of the risks attached to the creditors' trust was given to creditors by the administrator.
In Parkview Constructions Pty Ltd v Tayeh & Ors  NSWSC 186, Justice Barrett considered an application by a creditor to set aside a DOCA that gave rise to a creditors' trust and that had terminated in accordance with its terms, and thereby caused the creditors' trust to be unwound. His Honour determined that the Court could not set aside or reinstate a DOCA that had terminated in circumstances where the rights of creditors had been transferred to a creditors' trust. However, he was not entirely comfortable with being compelled to make this determination:
"This outcome causes me considerable disquiet ... it is a matter for concern, at a public policy level, that the protective aspects of Part 5.3A in relation to Deeds of Company Arrangement, including the role of the Court, can be and have been avoided by the creation through a Deed of Company Arrangement of a parallel but essentially unregulated regime of administration [ie a creditors' trust]".
Justice Barrett's ruling in Parkland was considered to be the end of the issue. However, a recent decision by Justice Brereton in Re Metroland Australia Limited  NSWSC 98 has cast some doubt on the invulnerability of a DOCA that has terminated early upon the creation of a creditors' trust.
The applicant creditor in Re Metroland ultimately failed in its application on grounds that were not related to the issues determined in Parkland. Justice Brereton, however, suggested that but for those other issues, the Court, not being satisfied that the administrator had given proper disclosure in his report to creditors of the consequences of a creditors' trust, would have endeavoured to find a way to set aside the DOCA and the creditors' trust.
Accordingly, in circumstances where an administrator fails to fully disclose matters relating to a creditors' trust, as articulated in the ASIC regulatory guide or in Bevillesta, the court may seek to find a way to unwind the transaction (although the means by which it may do so are unclear, with no suggestion made by Justice Brereton).
What is clear is that for continued use of creditors' trusts, administrators must ensure they fully disclose the legal and practical implications of, and the specific risks attached to, the DOCA and the creditors' trust in the specific circumstances of the restructuring proposal.
'This article was featured in issue 7 of Global Insight, our restructuring group's client e-newsletter. Read the full publication here.
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