© 2012 Reed International Books Australia Pty Limited trading as LexisNexis. Ancillary for Australian Insolvency Law 2nd ed by Symes and Dun

Suggested answer to end of chapter problem, and Examiner’s tips - by Christopher Symes
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Chapter 9 – Deeds of Company Arrangement Example problem Sheilabeerite Skip Pty Ltd was a waste removal company whose directors appointed Ben as their administrator. The second meeting of creditors in June has agreed to a DoCA of nine months’ duration with Ben as deed administrator. The DoCA proposes to sell some collection areas in which the company operated but that were considered unprofitable. This would mean reducing the current workforce by four drivers. It also proposes that the company move to a service contract with each of its customers and drop the casual one-off service it offered to anyone who rang or otherwise approached the company. The DoCA contained a clause that employees would discount their long service leave entitlements by 50 percent in an attempt to assist the restructure. Ben has had no experience administering a DoCA with such a clause and he is uncertain of the expectations of him as administrator. Another clause in the DoCA provides that unsecured creditors will be paid proportionately over the nine months. Creditors such as the fuel suppliers are wary of continuing to supply Sheilabeerite Skip Pty Ltd, fearing that a company in its situation is a bad credit risk. To overcome this Ben proposes to apply to the court under s 447A(1) to seek permission for the company to delete the phrase, ‘subject to a deed of company arrangement’ from its name believing this will help restore confidence in the company. The company conducts some business in Perth and some creditors from there have contacted Ben wanting to know why he did not propose a creditors’ trust to follow a DoCA. Ben’s firm is going to promote him to its Johannesburg office at Christmas time. Outline if it is possible to change a deed administrator during the life of the DoCA. Pimba Bank is a secured creditor of Sheilabeerite Skip Pty Ltd and did not exercise its rights during the decision period. While it did not vote for the DoCA it has developed a major concern about the ability of the DoCA to Australian Insolvency Law 2nd edition Ch9 Answers and Tips Page 1

© 2012 Reed International Books Australia Pty Limited trading as LexisNexis. Ancillary for Australian Insolvency Law 2nd ed by Symes and Dun

provide a turnaround in the financial matters of Sheilabeerite Skip Pty Ltd. Can it now decide to enforce its charge? Advise Ben. Suggested answer Providing that Ben is a registered liquidator he can be validly appointed as an administrator. It is commonly the case that the voluntary administrator is further appointed as deed administrator: s 444A(2). The contents of a deed are varied depending upon the specific circumstances of the company. Here the clauses to reduce staff and change trading terms and ways the company chooses to organise its business will all be appropriate. Schedule 8A of the Corporations Regulations is merely a guide but does contain useful draft clauses that many deeds incorporate. The clause that employees will discount their long service leave is not going to be valid without the steps required in s 444DA that seek the employees’ approval. This is because the leave must be at least equal to what they would have been entitled to if the property were applied in accordance with ss 556, 560 and 561. These eligible employee creditors cannot be disadvantaged like this and Ben should immediately take steps to seek the court’s direction or reconstitute another creditors’ meeting that follows the eligible employee creditors’ meeting. A company which has entered into a DoCA must set out in every public document the words ‘subject to a deed of company arrangement’ after the company’s name where it first appears on documents. These words must be included until the DoCA terminates: s 450E(2). It is possible for the administrator to go to court to seek permission for the words to be removed from the company’s name using s 447A(1). Precedent cases such as Re Brashs Pty Ltd (subject to a deed of company arrangement) (1994) 15 ACSR 477 would suggest more than just disquiet from suppliers will be needed to win such approval from the courts. Ben is unlikely to be able to convince a court to waive this requirement. Creditors’ trusts are possible after the DoCA is completed and they have been used to substitute the creditor for a beneficiary. They have disadvantages for creditors as the trustee is not subject to the Corporations Act. ASIC has published objections to the use of such mechanisms1 although courts will support them if the creditors are fully informed of the risks involved and the sound reasons for implementing them. It would appear that it was Ben’s
1

ASIC Regulatory Guide 82, External administration: Deeds of company arrangement involving a creditor’s trust, May 2005.

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© 2012 Reed International Books Australia Pty Limited trading as LexisNexis. Ancillary for Australian Insolvency Law 2nd ed by Symes and Dun

judgement that a creditors’ trust would serve little purpose here as for example this is not a company having involvement with the share market. Ben could explain to these creditors from Perth that they may be exposed to greater risks as beneficiaries in a creditors’ trust. The change of DoCA administrator is possible and if Ben is required to move countries it would be appropriate to conduct a creditors’ meeting to release him as the original appointee and give creditors the ability to vote on a new administrator: ss 445A, 445F. Where a secured creditor is kept fully informed of the progress of the administration and does not act to enforce his or her charge either before or during the administration he or she can still move to enforce his or her charge after the execution of the DoCA. Section 444F(1)(b) will apply and the deed administrator may make application under s 444F(7)(b) to the court for an order restricting the secured creditor from realising or otherwise dealing with the security: s 444F(2). This order is subject to s 444F(3) which provides that the court may only make an order under s 445F(2) if satisfied that the realisation would have a materially adverse effect on achieving the purposes of the DoCA, and the creditors’ interests will be adequately protected having regard to the DoCA, the terms of the order and any other relevant matter. Pimba Bank could consider if there has been an event of default yet it should consider that it may be stopped by the court from enforcing its charge. Examiner’s tips Revision should be undertaken on the following: the effect of the DoCA on creditors generally; variation and termination of DoCA; the court’s powers. It is unlikely that DoCAs would consist of a major part of an examination, however, that is not to say that the legal issues are unimportant. Three areas that could feature in an exam are the setting up of the DoCA and its administrator, the contents of the DoCA and the variations that are possible once it is established. Whilst the contents of a DoCA are dictated by the particular circumstances of the company it is helpful to appreciate the usual features to demonstrate the student’s knowledge. All insolvency law examinations have some focus on the role of the person performing the administration and even in a DoCA the role of the deed administrator is the subject of legal issues.

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© 2012 Reed International Books Australia Pty Limited trading as LexisNexis. Ancillary for Australian Insolvency Law 2nd ed by Symes and Dun

Variation and termination of DoCAs are matters that round off the corporate rescue study and again it is important to show how an administrator is subject to creditors’ and the court’s control.

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