When a company is in danger of becoming insolvent or has entered voluntary administration, a Deed of Company Arrangement (DOCA) may be put into place. A DOCA is a binding agreement between a company and its creditors setting out how the affairs and assets of the company will be dealt with.

However, if the DOCA is subsequently terminated or the company enters liquidation, can a payment made during the course of a DOCA be recovered as an unfair preference?

Justice Middleton considered this question in Yeo, in the matter of Ready Kit Cabinets Pty Ltd (in liq) v Deputy Commissioner of Taxation [2020] FCA 632.


Background

On 11 December 2013 a DOCA was entered into by Ready Kit Cabinets Pty Ltd (Company).

The DOCA included:

  1. management and control of the Company’s day-to-day business affairs were returned to the Director;
  2. a fund was established and controlled by the Deed Administrators which constituted the whole of the property available for distribution to participating creditors;
  3. the Company and Director made certain covenants and undertakings, including in respect of the Company’s compliance with its taxation obligations; and
  4. upon default of the DOCA by the Company or the Director, the Deed Administrators were to convene a meeting of creditors to determine whether to terminate the DOCA and wind up the Company.

Between 28 February 2014 and 16 June 2017, payments were made by the Company to the Deputy Commissioner of Taxation (the DCT), totalling $304,77.15 in discharge of the tax liabilities of the Company (Payments).

Between 11 December 2013 and 5 July 2017, the Company was return to the management and control of the Director and continued to trade.

The DOCA was terminated on 5 July 2017 and the Company entered liquidation.


Issue

Whether the requirements of subsection 588FE(2B)(d) of the Corporations Act have been satisfied, more specifically, whether the Payments were made on behalf of the Company ‘under the authority’ of the Deed Administrators.


Decision

Justice Middleton held that section 588FE(2B) should be limited to apply to transactions actually carried out by a deed administrator or by a third party under an authority given to the deed administrator. He was satisfied that this section could not and should not extend to all transactions contemplated or required by a DOCA as subsection (d) specifies that the provision only applies to transactions ‘by or under the authority’ of the Deed Administrator.

In order for a transaction to be carried out by or under the Deed Administrator’s authority, they must have been given the power to do so in the DOCA. As identified above the DOCA clearly articulated the Deed Administrator’s powers and obligations. In this matter, the terms of the DOCA did not empower the Deed Administrators to conduct the managerial affairs of the Company such as the making of the Payments. Justice Middleton confirmed that the DOCA expressly returned the managerial conduct of the Company to the Director. Accordingly, he found that the payments made by Company were under the authority of the Director pursuant to powers conferred by the Corporations Act and Company Constitution and not by the Deed Administrators. Therefore, the payments were to the DCT were voidable as unfair preferences under s588FE and s588FA.


Comment

When a DOCA requires transactions be entered into on the behalf of a company by a director without the involvement of the Deed Administrators, a Court may hold these transactions to be voidable.

Noting that actions taken by a company under a DOCA may come under the scrutiny of a liquidator, it is crucial that the terms included in DOCA’s are drafted to ensure that actions taken by a company under the DOCA are so by, or with, the clear authority of the Deed Administrators.