A recent court decision in Australia highlights how directors can be held financially liable for insolvent trading despite entry into a deed of company arrangement (DOCA). The decision also highlights a possible gap in New Zealand's voluntary administration legislation.
A criticism of voluntary administration in Australia has been the perception that in practice it has often been for the benefit of directors, to protect them from investigation by a liquidator and/or claims by creditors. This is because in most cases entry into a DOCA will avoid the company going into liquidation. The DOCA will often also provide for payments made to creditors under the DOCA to be in full and final settlement of the creditors' claims. In this way directors avoid the scrutiny which would occur if the company went into liquidation.
However the decision of the Court of Appeal in Victoria in Elliott v Australian Securities & Investment Commission demonstrates that in Australia, entry into a DOCA does not necessarily avoid directors being liable to pay compensation for insolvent trading. Elliott, along with a number of other defendants, was a director of companies which went into voluntary administration owing debts totalling more than A$3 million. The companies entered into DOCAs which compromised the claims of creditors. Subsequently, the Australian Securities & Investment Commission (ASIC) brought proceedings against the directors under the Australian Corporations Act for insolvent trading.
ASIC sought orders requiring the directors to pay compensation. An argument that the Court had no jurisdiction to order compensation because the companies had entered into DOCAs was rejected by the Court. The Court stated that so far as the dividends payable under the DOCAs did not fully repay creditors, the creditors had still suffered loss and damage because of the companies' insolvency.
Accordingly in Australia entry into a DOCA will not necessarily avoid directors being liable for insolvent trading.
In New Zealand, the Registrar of Companies does not have the power to bring proceedings against directors for insolvent trading or seek compensation from directors if a DOCA is in place. Under the Companies Act 1993, a director may be liable for conviction and a penalty if, with the intent to defraud a creditor, they do anything that causes material loss to any creditor, or if they carry on business or induce credit by way of fraud.
Accordingly in New Zealand, except in limited circumstances, entry into and compliance with the DOCA will most likely avoid directors being liable for insolvent trading. Given this, it will be important for creditors in New Zealand when making a decision on a DOCA to consider what information has been provided by the administrator as to the company's affairs and possible causes of action. Under section 239AE of the Companies Act 1993 a voluntary administrator is required to investigate the company's affairs and form an opinion about whether it would be in the creditors' interests for the company to execute a DOCA. The voluntary administrator must also report to creditors as to the outcome of their investigations together with a recommendation at the 'watershed meeting'.
Relevant to a creditor's decision on a DOCA, will be whether the DOCA, either through directors and/or shareholders contributing or giving up claims, provides for a better return than would be achieved in a liquidation. If so, creditors may consider that the DOCA offers a better return than the uncertainty of any actions which might be brought against directors and recoveries under those actions.
It remains to be seen whether amendments will be made in New Zealand to provide for proceedings to be brought against directors for insolvent trading as in the Elliott case discussed above.
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