Key Takeaways

The decision provides useful guidance as to how the voluntary administration and DOCA process can be utilised to restructure a company’s debts. It is important that a DOCA must be for a proper purpose, even if the creditors might be likely to receive more from the DOCA than in a liquidation scenario.

Background

PSD was a special purpose vehicle that was established in 2015 to construct and operate a major prawn aquaculture project spanning five operational sites in Western Australia and the Northern Territory.

PSD did not have any income of its own, did not own any substantial assets and was entirely reliant on ad hoc funding from its parent company Seafarms Group Limited (Seafarms).

PSD engaged Canstruct Pty Ltd (Canstruct) to carry out construction works at one of its sites. Subsequently, a dispute arose as to the amount PSD was to pay Canstruct for those works. On 3 February 2023, Canstruct obtained an adjudication determination against PSD in the amount of $14 million.

On 14 February 2023, PSD was placed into administration.

On 17 February 2023, Seafarms entered into a funding agreement with the administrators for the sum of $1.65 million to allow PSD to continue to operate.

On 13 March 2023, Seafarms submitted a DOCA proposal to the administrators which provided that:

1. Seafarm would provide the sum of $3.5 million to the deed fund
2. From this amount, approximately $2 million would be available for creditors
3. Employee claims and “Small Claim Creditors” would receive 100c in the dollar
4. The remaining funds would be paid to “Balance Creditors”, which was Canstruct, and who would receive a return of 10 – 11 cents in the dollar.

On 14 March 2023, the administrators issued their report to creditors which recommended the DOCA and advised that creditors (including Canstruct) would receive more under the DOCA than if PSD was placed into liquidation.

On 21 March 2023, at the second meeting of creditors of PSD, the creditors resolved to approve the entry into the DOCA, which was subsequently executed on 23 March 2023.

On 5 April 2023, Canstruct commenced proceedings seeking to set aside the DOCA for a range of reasons including:

1. The DOCA was unfairly prejudicial and unfairly discriminatory against Canstruct
2. Entry into the DOCA was an abuse of process and an abuse of the provisions of Part 5.3A of the Act and
3. Effect could not be given to the DOCA without injustice.

Decision

The first instance judge accepted the arguments advanced by Canstruct and held:

1. The predominant purpose of the use of the administration process and of the DOCA was to avoid PSD having to pay the adjudication debt to Canstruct
2. This purpose was improper and alien to the purposes for which the use of Pt 5.3A was permitted, and was not a bona fide attempt to use Pt 5.3A to achieve an arrangement by which PSD could continue in existence and by which creditors could obtain a better outcome than in a liquidation
3. The DOCA was unfairly prejudicial to or unfairly discriminatory against Canstruct and
4. Effect could not be given to the DOCA without causing injustice.

On appeal, the Court upheld the first instance decision and noted that PSD had not demonstrated grounds on which the decision should be set aside.

Notably, at [136] the Court stated:

..the primary judge’s reasoning… was that a purpose of expunging a particular creditor’s debt which was unwanted, while paying all other arm’s-length creditors in full before restarting operations in an almost identical position to the pre-DOCA state save for the existence of the particular unwanted debt, was alien to the objects of Pt 5.3A. I respectfully agree with the primary judge’s reasoning. Such a purpose stands in stark contrast with the broad statement of objects of Pt 5.3A set out in s 435A …… and finds no support in any of the provisions of Pt 5.3A

The judgment highlights the caution that ought to be employed with respect to DOCAs involving unequal treatment of creditors which need to be assessed with regard to the justification for the unequal treatment. Otherwise, a DOCA remains at risk of being set aside.