Australia: Commercial morality and deeds of company arrangement

HG Alert: 28 January 2014
Last Updated: 29 January 2014
Article by Liam Prescott

A recent Queensland Court of Appeal judgment has highlighted the vulnerability of deeds of company arrangement approved by related-party creditors in certain circumstances.

In Promoseven Pty Ltd v Prime Project Development (Cairns) Pty Ltd (Subject to a Deed of Company Arrangement) & Ors [2013] QCA 405, the Court of Appeal held that a deed of company arrangement should be terminated because it precluded an investigation into the questionable affairs and related-party transactions of a company under administration.

The interests of related-party creditors and the recommendation of the administrators were outweighed by "commercial morality", which dictated that a deed of company arrangement could not remain in place when it has been forced upon minority creditors by other creditors related to the subject company with the consequence of avoiding scrutiny of its directors and officers.

This marks a landmark shift away from previous rulings, which have prioritised the entitlements to creditors over public interest considerations.

Partner Liam Prescott and solicitor Joel Borgeaud explore the decision in more detail below.

How the decision affects creditors and company directors

The Court of Appeal's decision draws a stark comparison with the decision of the Court below (attached). Priority was given by the Court of Appeal to the public interest and the interests of unrelated creditors to ensure that advantage could not be taken of the statutory external administration process offered by deeds of company arrangement which, if allowed to stand, would have prevented a public review of the affairs of the company and the conduct of its directors. The likely dividend to unrelated creditors was seen to be of secondary importance.

The Promoseven decision also comes as a timely reminder to company directors about the risks associated with entering and performing related-party transactions. Whilst it is not uncommon for related-parties to deal with one another, directors must ensure that such transactions are both commercially justifiable and transparent.

The decision provides guidance as to the Court's reluctance to allow a deed of company arrangement to remain in place where:

  • the majority of creditors adopting the deed are related to the subject company;
  • the assets of the subject company involve dealings with related-parties;
  • there is an apparent lack of commerciality and transparency which is not explained by directors or officers of the subject company;
  • the conduct of the subject company's directors and officers may otherwise be the subject of external scrutiny in the absence of the deed; and
  • it appears that the deed is being used to preclude an investigation into the affairs of the subject company.


Promoseven Pty Ltd (Promoseven) was a creditor of Prime Project Development (Cairns) Pty Ltd (Prime) which was placed into administration in May of 2013. As a result of a series of complicated and questionable related-party transactions, the only substantial asset held by Prime at the time it went into administration was a debt owed to it by a related-party.

Nine of Prime's eleven creditors were related-parties (by directorships and shareholdings) and they voted to adopt a deed of company arrangement which would see unrelated creditors receive a return of between 4.3 to 7.4 cents in the dollar, but would also extinguish any possibility of an investigation into the affairs of Prime, including the public examination of its directors.

The issue before the Court was whether the deed of company arrangement should be terminated pursuant to section 445D of the Corporations Act 2001 (Cth) on the basis that it produced an injustice, namely, precluding an investigation into the related-party dealings of Prime.

The decisions

The Court below primarily had regard to the objects of Part 5.3A of the Corporations Act 2001 (Cth) (found in section 435A) which provides that an insolvent company should be administered in a way which results in a better return for creditors than the result of an immediate winding up. The Court was satisfied that an investigation into the affairs of Prime would, even if successful, result in a lower or no return for all of Prime's eleven creditors (evidence which the Court said was unchallenged).

The Court refused to terminate the deed of company arrangement because the public interest consideration did not outweigh the rights of unrelated creditors to receive a return in satisfaction of their respective claims. In arriving at that conclusion, the Court also appeared to take into account the fact that Promoseven had not committed to funding the liquidation should the deed be terminated, but that it was only willing to consider such an option.

On appeal, the Court of Appeal concluded that the original decision failed to engage in a proper consideration of the authorities relating to the public interest and, in particular, the termination of deeds of company arrangement which offend commercial morality by precluding public investigation into improper corporate dealings.1 Had proper consideration been given, the related-party dealings of Prime would have been looked at with greater scrutiny.

The Court of Appeal examined Prime's related-party transactions and concluded that they were on uncommercial terms which lacked transparency and warranted investigation. Particular emphasis was placed on the fact that no director or officer of Prime had provided any evidence as to the commercial justification of the related-party transactions.

As to section 435A and the objects of Part 5.3A of the Corporations Act 2001 (Cth), the Court of Appeal identified those creditors related to Prime and excluded their interests from consideration when determining whether public interest factors outweighed the harm that might be caused to creditors if the deed was to be terminated. The Court of Appeal adopted this approach by reference to section 600A of the Corporations Act 2001 (Cth).

In its concluding remarks, the Court of Appeal was critical of the deed of company arrangement being forced upon the minority creditors by those creditors related to Prime, saying:

"...the circumstances surrounding Prime's transfer of its interest in the mortgage to Refund is such that an investigation by a liquidator should not be prevented by the related parties to Prime forcing a deed of company arrangement on the other creditors. The apparent lack of commerciality in that transaction...are such that a public examination of the affairs is warranted, and the institution of claw back litigation may prove to be warranted. It detrimental to commercial morality to dispense with the opportunity which the winding up law provides for the investigation of the affairs of Prime." (at paragraph [84] of the judgment).

Finally, in allowing the appeal and proposing that orders be made terminating the deed of company arrangement, the Court of Appeal dismissed any concern about Promoseven's lack of commitment to fund the liquidation, saying that it is not uncommon for creditors first to demand an investigation before committing funds to litigation.


1The authorities referred to are: Deputy Commissioner of Taxation v TMPL Pty Ltd (2011) 289 ALR 69, Emanuele v Australian Securities Commission (1995) 63 FCR 54 and Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235.

© HopgoodGanim Lawyers

Award-winning law firm HopgoodGanim offers commercially-focused advice, coupled with reliable and responsive service, to clients throughout Australia and across international borders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.