The voluntary administration regime offers great flexibility. This leaves it open to abuse by directors and related entities seeking to avoid legitimate debts, scrutiny of their conduct or to obtain a direct benefit for themselves.
Results Legal recently successfully obtained orders terminating a voluntary administration on behalf of a client in the Supreme Court of New South Wales.
Notably, in granting the relief sought, the court considered the interests of the minority creditor.
Background Facts
In December 2013, judgment was entered against the company in favour of our client for $1.64 million. During February 2014, the director placed the company into voluntary administration.
The director subsequently proposed a deed of company arrangement (DOCA) which would grant ordinary unsecured creditors a return of six cents in the dollar, and benefit the director and his related companies by avoiding the appointment of a liquidator. If a liquidator were to be appointed, the liquidator would:
• pursue some $13 million of debts owing to the company by related entities;
• examine the transfer of over 100 trademarks by the company to related entities; and
• investigate the company’s affairs and the director’s conduct.
It was a certainty that the DOCA would be approved at a meeting of creditors on the votes of related creditors controlled by the director and his family.
The Court Proceedings
Our client applied to terminate the voluntary administration prior to the second meeting of creditors at which the DOCA would be considered.
The court made the following observation regarding the DOCA proposal:
“even if one looks at the interest of creditors generally, there is nothing in the proposed deed of company arrangement for the benefit of the related creditors who propose to vote in favour of the deed. The only apparent benefit in the deed is for the unrelated creditor, who does not support it.”
The Court considered that that related creditors had agreed not to receive any distribution from the proposed DOCA, and held that the common practice of related creditors agreeing not to prove in the DOCA is fraught with danger as it increases the dividend to unrelated creditors whilst providing additional grounds for an unrelated creditor to challenge the proposal.
In relation to the director’s conduct, the Court held that:
“The only person who will benefit from the deed of company arrangement is in substance Mr Gerard, who will avoid the prospect of companies in which he has a very substantial interest from being pursued for debts owed to Sales Express; he will also avoid examination of his conduct in connection with the transfers of the trademarks; and he will avoid any investigation of the solvency of the company and when in truth it became insolvent.
It can only be to procure substantially those benefits for him that the related creditors under his control would endeavour to foist the deed of company arrangement on the unrelated creditor Rank Arena.
The provisions of Pt 5.3A were not intended to enable directors, through their control of the majority of creditors, to avoid having their conduct of the affairs of the company scrutinised, at least where the unrelated creditors desire that to happen…”
The court found that the administration was an abuse of the provisions of the Corporations Act 2001.
The court ordered that the administration end and placed the company into winding up.
The liquidators appointed are currently investigating the Company’s affairs, the director’s conduct and are seeking to realise debts owing to the company.
Expert Insolvency Advice
If it were not for the creditor acting swiftly to take expert legal advice, the director’s DOCA proposal may have succeeded, and the related entities would have benefited against the wishes of the only unrelated creditor.
The take away point is that the court will consider the wishes of minority creditors in relation to the company’s affairs. Minority creditors should not assume that their voice will not be heard against the vote of related creditors.
If you encounter a director attempting to misuse the administration provisions for their own benefit, or require any insolvency law advice, it is important to seek advice from a specialist without delay. Failing to act swiftly can result in the loss of rights.
A link to the judgment In the matter of Sales Express Pty Ltd (Administrators Appointed) [2014] NSWSC 46 is HERE.
ALSO READ: Minority Creditor Terminates Director Friendly Voluntary Administration
