Liquidation vote upheld after administrators reject DOCA

The Supreme Court of Western Australia has dismissed a bid by shareholder-aligned creditors to unwind the liquidation of explosives manufacturer Pheonex Pty Ltd, holding that the company’s administrators were entitled to recommend liquidation over a deed of company arrangement and that no reasonable administrator error had been shown. Justice Howard rejected arguments that the administrators were required to favour a DOCA that would have paid external creditors in full and allowed the business to continue, finding that Part 5.3A of the Corporations Act does not mandate a recommendation in favour of a restructuring outcome where liquidation would preserve the business through an asset sale and better address governance and investigation risks.

The challenge was brought by entities aligned with the Kaker family, the majority shareholders of Pheonex, after creditors voted at a November meeting to place the company into liquidation and proceed with an asset sale, rejecting a DOCA proposed by Black Bear Enterprises as trustee for the Maluka Investment Trust. The DOCA would have seen all non-related creditors paid in full, with related-party claims deferred and resolved through a post-DOCA expert determination process, while leaving the existing shareholder structure largely intact.

The plaintiffs argued that the administrators were bound by the statutory objective in section 435A to recommend a restructuring that maximised the chances of the company continuing in existence, and that creditors were denied an informed vote because the administrators persisted with a liquidation recommendation despite multiple revisions to the DOCA. They sought orders setting aside the resolutions, terminating the liquidation, and compelling a reconvened creditors’ meeting with a fresh recommendation in favour of the DOCA.

Justice Howard rejected that framing, emphasising that Part 5.3A contemplates three normal outcomes and vests the ultimate decision in creditors, not administrators or the Court. The Court held that the statutory objective is satisfied where the business continues through a sale process, even if the corporate vehicle does not, and that administrators are not required to prefer a DOCA simply because it preserves the company’s existence.

The Court found the administrators’ concerns about the DOCA were rational and open to them, including that liquidation would extinguish all liabilities rather than defer related-party claims, allow independent investigation of potential voidable transactions and director conduct, and deliver a near-term return to shareholders that the DOCA did not guarantee. The administrators were also entitled to weigh the risk of ongoing shareholder disputes, potential prejudice to minority shareholders, and the likelihood of legal challenges to the DOCA that could delay distributions and increase costs.

Arguments that the administrators relied on irrelevant considerations, including public interest and minority shareholder impacts, were rejected. Justice Howard held that those factors could reasonably inform an assessment of future viability and litigation risk, and that the administrators’ reports should be read as commercial documents intended to assist creditors in making their own decisions, rather than dissected as if they were reasons for judgment.

The Court also dismissed suggestions of a lack of independence or impartiality, noting that the plaintiffs did not allege actual bias and that disagreement with the administrators’ commercial judgment was insufficient to justify intervention. Having found that the recommendation was one a reasonable administrator could make, the Court declined to interfere with the creditors’ vote, dismissed the application in full, and discharged an interim injunction that had restrained steps in the liquidation process.

Read the decision here.

Professionals involved:

• Wayne Zappia SC of Shoreline Chambers and Conor Breheny of Francis Burt Chambers (instructed by Thomson Geer) for Pheonex Pty Ltd and Andrew Smith and Robert Jacobs of Auxilium Partners as Joint and Several Liquidators of Pheonex Pty Ltd

• Konrad de Kerloy SC and James Sippe of Fourth Floor Chambers (instructed by Iffla Wade) for Explosives Manufacturing Services Pty Ltd, Black Bear Enterprises Pty Ltd as Trustee for the Maluka Investment Trust, and Pepper Solutions Pty Ltd as Trustee for the Kaker Family Trust