Antqip Hire highlights the importance of drafting a DOCA carefully and properly communicating to creditors the commercial risks
The case of Antqip Hire was brought by the liquidators of two related entities (Antqip Pty Limited and Antqip Hire Pty Limited).
Orders were sought to determine:
- Whether the existing DOCAs, signed in 2014, precluded the company director from appointing a liquidator
- Whether the deed funds were held on trust for the creditors who approved the DOCAs or whether they must be transferred to the liquidators for the benefit of the secured creditor
Justice Rees of the Supreme Court of New South Wales found that the liquidators’ appointment by the company director (during the course of the deed administration) was valid, and the deed funds should be dispersed to the secured creditor. This meant that the unsecured and priority creditors received nothing.
The case highlights the importance of:
- Carefully drafting DOCAs and considering their future impact on all stakeholders; and
- Ensuring that creditors understand the commercial risks involved in approving a DOCA, especially in cases where there is continued exposure to the trading fortunes of the company while the deed fund is populated.
Background
In the matter of Antqip Hire Pty Limited (subject to deed of company arrangement) (in liquidation) [2020] NSWSC 487 (Antqip Hire Case) concerns two companies which executed deeds of company arrangement (DOCAs) in 2014.
These companies were Antqip Pty Limited (Antqip), a construction business providing wet and dry plant hire, civil contracting, tilt tray services and courier services, and Antqip Hire Pty Limited (Antqip Hire), which provided commercial labour hire services to companies including Antqip. Mr Russell was the sole director, secretary and shareholder of each company, and had been since 2010.
On 3 February 2014, voluntary administrators were appointed to each company under section 436A of the Corporations Act 2001 (Cth) (Act). At that time, Antqip owed $12.9 million to secured and unsecured creditors, including their financial lender, the ATO, trade creditors and the Office of State Revenue. Antqip Hire owed $2.5 million to unsecured creditors.
On 28 February 2014, the liquidators issued a report to creditors recommending a proposed DOCA put forward by Mr Russell. Under the proposal, a deed fund was to be established from which dividends would be paid to priority and ordinary unsecured creditors, with the secured creditor, Bibby Financial Services, expressly excluded. The dividends were to come from the future trading profits of both Antqip companies.
In April 2014, a supplementary report prepared by the liquidators projected the return to creditors as:
- 22 cents in the dollar for Antqip and 33 cents in the dollar for Antqip Hire under a DOCA scenario, contrasted against
- 0 to 14 cents in the dollar for Antqip and 0 to 9 cents in the dollar for Antqip Hire under a liquidation scenario.
Unsurprisingly, the creditors agreed to the DOCA.
The companies continued to trade over the next five years. In that time, they paid into the deed funds as agreed but also incurred further debt.
In 2019, the decision was made to enter liquidation. At that point, the deed funds were almost completely funded, being just $153,000 short of the agreed-upon $3.7m.
However, the companies’ liabilities had more than doubled, from $14.5m to $30m. Notably, the original $2.3m owed to the secured creditor had now swelled to $5m. The largest creditor, the ATO, was now owed $10m.
In July 2019, the director of both companies appointed liquidators, contrary to the terms of the DOCA. The liquidators requested that the deed fund be made available so the funds could then be paid to the secured creditor as per standard priority rules.
The effect would be that the priority and unsecured creditors would receive nothing.
This case was brought by the liquidators seeking orders that:
- They were validly appointed notwithstanding the terms of the DOCA
- They were free to distribute the deed funds for the benefit of the secured creditor (and, indirectly, for the benefit of Mr Russell, who was the guarantor of the companies’ obligations to the secured creditor)
In turn, the deed administrators sought declaratory relief that monies paid to them under the DOCAs were held on trust by them as deed administrators for the benefit of the creditors and should be distributed in accordance with the terms of the DOCAs.
The judgement
Justice Rees concluded that the companies’ appointment of liquidators was valid, and the deed funds should be paid to the liquidators.
She acknowledged that it was an “unpalatable result”:
- Unsecured creditors would have received between 8 and 14 cents in the dollar if they had placed the companies in liquidation in 2014 but would now, five years later, receive nothing
- Mr Russell effectively terminated the DOCAs for his own benefit, being to reduce his personal exposure to the secured creditor under his personal guarantee by remitting the deed fund to the secured creditor
Should DOCAs be construed as legislation?
The case raises the importance of drafting a DOCA properly.
DOCAs have statutory force by reason of sections 444B, 444D, 444G and 444H of the Act. They do not operate as a contract in their own right: if the DOCA does not comply with the requirements under the Act, it cannot separately bind the parties.
Therefore, Justice Rees considered that “DOCAs should be construed as statutes or, more precisely, as subordinate legislation.”
A problem arises where the DOCA is not drafted well enough to stand up to such a construction. As Justice Rees observed: “DOCAs are often drafted in urgent circumstances where the proponent of the DOCA is experiencing financial stress such that DOCAs are frequently ill-drafted and certainly fall short of the standards of excellence of statutory draftspersons. Also, generally, DOCAs appear to be prepared by accountants and insolvency practitioners rather than lawyers.”
The judge did not say that the DOCAs in the Antqip Hire Case were ill-drafted, but they clearly did not enact the intention of the creditors.
Clause 25 of the DOCA purported to restrain the companies and Mr Russell (as sole director and shareholder of the companies) from appointing a liquidator but imposed no restraint on anyone else.
Clause 11 of the DOCA specified that the deed administrators should be provided with timely information to enable the deed administrators and deed creditors, and not Mr Russell, to decide whether the DOCAs should be terminated and the companies go into a creditors’ voluntary winding up.
One of the eight instances of default under Clause 11, which would entitle the administrators to call a creditors’ meeting to decide whether to wind up the company, was if:
“… the Directors of the Company convene a meeting to consider passing or the Directors pass a resolution under any section within Parts 5.1 to 5.6 of the Corporations Act …”
From these two Clauses, it is clear that the creditors intended that the administrators and creditors would be the ones to decide if the companies should be put into liquidation, and not Mr Russell.
However, Mr Russell was still able to pass a resolution under Part 5.5 of the Act (voluntary winding up).
Notwithstanding the wording of Clause 25 of the DOCA restraining the companies and Mr Russell from appointing a liquidator, the Court held that the Clause did not in fact constrain him from exercising his statutory right under Part 5.5 of the Act. It merely gave the administrators the right to invalidate the appointment of liquidators and replace them with one of their choosing.
Strict rules of construction apply to contracts, deeds and statutes. Where a statutory right and a contractual right conflict, rules govern which one takes precedence.
It is, unfortunately, far too possible to introduce ambiguities into a hastily drafted document such as a DOCA. It is therefore useful to have a lawyer assist with, or review, your DOCA or other legal documents before formalising them.
Are deed funds held on trust?
As a secondary issue, the judgement also underlines the fact that deed funds are not automatically held on trust for creditors.
The liquidators sought orders that the DOCAs be terminated, and the funds held by the deed administrators be distributed by the liquidators. As discussed above, this would mean that the priority and other unsecured creditors would not receive a dividend.
The deed administrators opposed termination on various grounds, including that the funds were held on trust for those creditors entitled to receive a dividend under each DOCA.
While it is established case law that monies paid into a deed fund can become subject to a trust (see, for example, Lombe v Wagga Leagues Club [2006] NSWSC 3), it is not automatic. In Lombe, Barrett J acknowledged that a DOCA may be capable of creating a trust by specifically divesting property of the company and settling it upon a trustee to be held upon defined trusts, but segregating part of the company’s property so that it became a fund to be applied by the deed administrator as the company’s agent in accordance with the DOCA did not, of itself, give rise to a trust “unless it can clearly be seen that the company has divested itself of the legal and beneficial interests in its property”.
Justice Rees found that in this case, there was no trust because the companies were not divested of all legal and beneficial interests such that the creditors became the beneficial owners as in Lombe.
Therefore, the deed funds were held to be the property of the companies and should be remitted to the liquidators for distribution.
How might the judgement affect you as an administrator?
The Antqip Case highlights the importance of explaining to creditors the commercial risks inherent in a DOCA. It also underlines how crucial it is that the DOCA be drafted properly, such that it stands up to careful scrutiny.
It seems clear that the unsecured creditors in Antqip agreed to the DOCA in the belief that they would:
- Realise a better return than if the company went into liquidation
- Have priority over the secured creditor
- Retain the power to decide – along with the deed administrators and excluding the director Mr Russell – when and whether to enter liquidation
It is unlikely that they would have agreed to wait a lengthy five years if they were aware that the company could be put into liquidation without their involvement; still less if they knew that the deed funds were not in trust for them but could be distributed in favour of the secured creditor.
At the second creditors’ meeting, administrators should make sure that the commercial risks of any proposed DOCA are communicated. This is especially true when the proposal for a company to continue to trade exposes the creditors to the possibility that the liabilities will increase.
Further Information
For more information about this case or for assistance in drafting DOCAs, contact Trevor Withane: