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Terminating a DOCA

28/07/2013

DOCAs promising large dividends years into the future are effectively worthless unless there is a clear demonstration that the promise can be fulfilled on time.

In Commonwealth Bank of Australia v C2C Developments Pty Ltd [2013] NSWSC 724, the New South Wales Supreme Court considered some factors that the Court will take into account when exercising its discretion to terminate a deed of company arrangement under section 445D(1) of the Corporations Act 2001

In late 2008, C2C Developments Pty Limited was placed into voluntary administration. Its creditors of C2C Developments resolved that a DOCA should be executed. The DOCA required $690,000 be paid to the deed administrator by December 2011 for distribution to creditors.  It also promised a greater dividend to those creditors who did not  enforce .

The DOCA contained a provision that the Court said was “rather odd”, namely; that any creditor that had the benefit of a personal guarantee from the director was entitled to an double dividend if they released the director from his personal guarantees.

The deadline for payment was missed and the creditors resolved to amend the DOCA to defer payment until September 2012.  When that later date also passed without payment, the creditors voted in favour of further amendment increasing the payment to $1.2 million on the basis that payment was deferred until December 2013.

One of the creditors applied to have the DOCA terminated.  The Court did so on the grounds that:

  1. notwithstanding the resolution of creditors, the variation was not effective until the deed administrator executed a deed of variation,
  2. it follows that the variations never took effect, so the failure to pay $690,000 on time was a material contravention,
  3. the failure to pay to the deed administrators for four and a half years was an injustice and an undue delay for the purposes of the Corporations Act; more so in the absence of evidence establishing that the payment was likely to be paid at that time,
  4. the DOCA was oppressive, unfairly prejudicial or inimical to the interests of the creditors as a whole in that it prevented claims against the director and others for what appeared on the evidence to be uncommercial transactions or preferences and
  5. the discriminatory provision favouring creditors who released the director’s guarantees was oppressive, unfairly prejudicial or inimical to the interests of the creditors as a whole.
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