Federal Court terminates 'deed of company arrangement' prejudicial to creditors

The court found that the arrangement would shield the company director from liquidation

Federal Court terminates 'deed of company arrangement' prejudicial to creditors

The Federal Court has decided to terminate a Deed of Company Arrangement (DOCA) that would involve injustice and prejudice to the creditors.

In a recent case before the Federal Court, R.W. Pascoe brought an application seeking orders for the termination of a Deed of Company Arrangement (DOCA) entered into by Crimson Fresh Produce, operator of a produce growing and export business in and around Mildura in Victoria. The court noted that Fresh Produce held few assets and owned no real property. It conducted its fruit-growing business on land leased from other entities. Any assets it owned, such as farming machinery and the like, were subject to securities it had granted in favour of various entities.

Crimson Fresh's administrators delivered a report to creditors indicating that Crimson Fresh appeared to be insolvent, it had ceased to trade before it was put into administration, any return to unsecured creditors was unlikely, and there was no proposed deed of company arrangement, such that the administrators proposed a winding up.

The administrators' report noted that unreasonable director-related transactions might have been entered into and that there was a potential claim against the company's sole director for insolvent trading worth approximately $1.8m.

The sole director submitted a DOCA, proposing that he contribute $200,000 to constitute a "Deed Fund." However, the court noted that, in reality, the money to constitute the fund was to be sourced from the company's assets and not from the director himself. The court stressed that the money would be derived from the net proceeds from selling certain crops, then under cultivation. Those crops were growing on land owned by other companies controlled by the company director, and there existed a very real question as to whether the company would recover $200,000 in net proceeds from those crops or anything. In effect, any recovery under the DOCA was contingent upon the outcome of that farming venture. Further, the court found that the amount available to meet the company's indebtedness to creditors would be minimal and estimated to be around 2.35 cents in the dollar.

The parties asked the Federal Court to resolve the issue of whether the court should set aside the DOCA. The court acknowledged that the Corporations Act empowers the court to terminate the DOCA if the court is satisfied that the deed would result in injustice or undue delay or if the deed is oppressive or contrary to the interests of the creditors. The court explained that the element of injustice could be established if the effect of the deed would be to avoid a proper investigation of relevant transactions.

Furthermore, the court noted that the determination of whether a DOCA is oppressive or unfairly prejudicial is made by reference to the creditors' right to be paid, to have the company wound up, or to have the company administered in a way that will see creditors paid from the company's property.

The court found that the DOCA does not contemplate the continuation of Crimson Fresh in any way, shape, or form. The court pointed out that the company ceased trading before the administration, and there is no suggestion that it would trade in the future. There was also no indication that the DOCA sought to rehabilitate Crimson Fresh as a trading entity. Furthermore, the court emphasized the DOCA would shield the company's sole director from liquidation.

The court emphasized that if the DOCA proceeds and the company director constitutes a Deed of Fund, the creditors will recover only 2.35 cents in the dollar, if anything, and will forego the balance. The court pointed out that the creditors might recover more of their entitlement if Crimson Fresh was placed into liquidation, and the investigative processes under that regime would occur. 

The court said there were sufficient grounds to conclude that giving effect to the DOCA would involve injustice to the creditors, as there would be no proper investigation of the "avoided" transactions identified by the administrators. The court also confirmed that the DOCA is unfairly prejudicial as the creditors are generally denied the opportunity to pursue the available processes in liquidation.

The court ultimately ordered the DOCA to be terminated and the company to be wound up in insolvency.

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