In brief - Court sets aside DOCA in Helenic v Retail Adventures
The NSW Supreme Court has recently set aside a deed of company arrangement (DOCA) on the basis that it was prejudicial to creditors who voted against it. The court appointed liquidators to the company.
Declaration of interest: CBP Lawyers acted for the plaintiffs in the case discussed in this article and also represent a large number of unsecured creditors of Retail Adventures Pty Ltd (Administrators Appointed).
Retailer goes into voluntary administration
On 23 December 2013 Justice Robb of the Supreme Court of NSW delivered judgment in Helenic Pty Ltd as trustee of the Mastrantonis Trust v Retail Adventures Pty Ltd (Administrators Appointed)  NSWSC 1973.
The case related to the high profile administration of Retail Adventures Pty Ltd (RAPL). In 2009 RAPL purchased the businesses of the Australian Discount Retail Group. By 2012, RAPL operated 268 discount stores throughout Australia under various trading names such as "Go Lo Discount Stores".
RAPL went into voluntary administration in October 2012. The businesses were sold to the secured creditor, DSG Holdings Pty Limited, which was a company related to and shared a common director with RAPL. The businesses continue to trade.
Following completion of the sale of the businesses, the second meeting of creditors of RAPL was convened. Bicheno Pty Limited, the ultimate holding company of RAPL, proposed a deed of company arrangement.
The proposal was that the remaining unsecured creditors of RAPL accept a distribution from a limited deed fund and all claims against directors and third parties be released. It was proposed that the sum of $5.5 million be contributed to the deed fund. The uncertainty of that payment being made was an issue in the case.
Administrators recommend liquidation to maximise return to creditors
If RAPL entered into the proposed DOCA, the administrator estimated the relevant creditors would receive a dividend of 6 cents in the dollar. On the other hand, the administrators estimated that if RAPL was placed into liquidation, creditors would receive between 20.71 cents and 45.12 cents in the dollar from the proceeds of insolvent trading claims and preference recoveries.
The administrators recommended liquidation.
Unrelated creditors seek to have DOCA set aside and company wound up
The resolution to execute a DOCA was passed on the back of largely related party votes. Unrelated creditors with approximately $36 million of debt voted against the DOCA. Approximately $46 million of debt voted in favour of the DOCA. If related party creditors' votes were ignored, the court found that unrelated creditors' votes valued at approximately $11 million voted for the DOCA.
The clients of CBP Lawyers applied to the court to set aside the resolution that RAPL execute a DOCA and for an order that RAPL be wound up.
This application was successful. The court appointed liquidators to RAPL.
Court finds that DOCA's uncertainty and ambiguity increased likelihood of further litigation
The court found that the resolution approving the DOCA was prejudicial to the creditors who voted against the resolution for reasons including that:
- It was highly probable that the dividend that creditors would receive under the DOCA was substantially less than what they would receive if RAPL was placed into liquidation.
- The DOCA did not impose a legally enforceable obligation on the DOCA proponents to pay the sum of $5.5 million.
- There was uncertainty as to what effect any failure to pay that contribution might have on RAPL. This may have had the disadvantageous consequence of changing the date of commencement of the relation back period in which preferences could be recovered.
- The DOCA itself was uncertain and ambiguous, which increased the likelihood of further litigation, which would reduce the return to creditors.
- The DOCA would also result in the release of a charge held by RAPL over DSG to secure certain obligations that may arise pursuant to the sale agreement. This would be to the disadvantage of creditors of RAPL.
Court finds "conscious discrimination" against some creditors
In determining whether the prejudice was unreasonable, the court also considered the possible benefits to the related creditors and other creditors from the proposed DOCA, which included that they would be released from potential insolvent trading claims and other voidable transaction claims.
The court found that DSG had "consciously discriminated" against those creditors of RAPL that it deemed were not necessary for its ongoing trading. Those creditors who were considered "essential suppliers" had received 100 cents in the dollar on their debts from DSG outside of a DOCA. Other creditors were left to accept the distribution under a DOCA.
In the circumstances the court ordered that the creditors' resolution approving a DOCA be set aside and RAPL be wound up.
Court will not accept unreasonable prejudice against creditors
For creditors this decision demonstrates that it is possible to resist being overborne by a large block of related creditors. Whilst the court will accept some level of discrimination amongst creditors in a DOCA on the basis of commercial necessity, for example an essential supplier where the company is trading on, it will not accept prejudice that is clearly unreasonable.
Proponents of a DOCA should consider its reasonableness and certainty
The case is instructive on considerations of unreasonable prejudice to creditors. Some further guidance was received as to how administrators should view DOCA proposals. The court expressed a firm view that "Deeds of Company Arrangement should desirably be absolute, unambiguous and final".
The level of uncertainty in this proposal was a significant factor in the court's decision. The level of certainty in any proposal must be considered in any recommendation under section 439A of the Corporations Act made by an administrator.
When considering the terms of a deed proposal, the proponents (often the directors) should consider at least the following issues:
- Weighing the amount of a contribution against what the administrator thinks it is possible to recover in a liquidation
- The reasonableness of the terms of the proposal, and particularly the certainty of those terms
- Ensuring that the value of related party releases does not greatly exceed any contribution
Decision under appeal and company currently in liquidation
It is important to note that this matter was unusual in that the deed proposal did not require that the business of the company should continue to be operated by the company. The business of RAPL had already been sold to DSG, therefore any benefit to employees in the continuation of RAPL was not a relevant consideration before the court.
The decision is also under appeal. No stay of the winding up was sought so RAPL is currently in liquidation.
|Scott Hedge||Heather Collins|
|Restructuring and insolvency|