Connections Total Fitness for the Family Pty Limited
(Connections) operated a gym on premises owned by
Selkirk Pastoral Co Pty Limited (Selkirk). The gym
business ultimately failed and ceased trading when administrators
were appointed on 4 October 2013. Connections' assets were
limited to some cash at bank and a $1.1m claim against Selkirk.
A Deed of Company Arrangement (DOCA) was
proposed under which the administrators' existing solicitors
(Meehans) would be paid ahead of employee
entitlements on the basis that Meehans would continue to pursue the
$1.1 claim against Selkirk. Unsurprisingly, Selkirk voted against
the DOCA, but the DOCA resolution passed with the support of a
number of related party proxies.
Selkirk sought orders pursuant to s 600A of the Corporations
Act 2001 (Cth) (Corporations Act) setting
aside the DOCA resolution. A Court can set aside a DOCA resolution
if it is contrary to the interests of creditors as a whole, or has
unreasonably prejudiced particular creditors.
Brereton J set aside the DOCA resolution on the basis that the
proposed DOCA had no benefit to creditors generally and in fact
caused detriment by preferring Meehans.
His Honour noted that DOCAs must promote the purposes of Part
5.3A, but since the gym business no longer existed, the focus must
necessarily be on whether the deed administration would result in a
better return for the company's creditors and members than if
the company was placed into liquidation. The Court will also
consider the comparative prejudice suffered by different groups of
In this case, the proposed DOCA provided considerable benefit to
the directors, in putting an end to any potential insolvent trading
claim and provided considerable benefit to Meehans. The DOCA
provided little benefit and actually caused detriment to creditors,
as their claims would be subordinated to Meehan's claims and
creditors would lose the benefit of potential insolvent trading
Accordingly, his Honour set aside the DOCA resolution and
ordered that Connections be wound up.
This decision cautions against proposing DOCAs that prefer
certain creditors unless there is a clear benefit to creditors as a
whole. It also reminds creditors that there are meaningful avenues
of disputing an unfair DOCA, even after it has been executed.
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.
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