Reinstating a DOCA following automatic termination?

Duggan, in the matter of Conomi Group Pty Limited (Subject to Deed of Company Arrangement) [2023] FCA 998
When will a court reinstate a DOCA following its automatic termination?

Overview

This case sets out various factors to be considered by a court in determining whether to grant an application that a deed of company arrangement (DOCA) not terminate when it otherwise would have in accordance with its terms (in this case, due to non-payment). Ultimately, the court granted the application, finding that the default in payment under the DOCA had since been cured, no creditors would be prejudiced by the reinstatement of the DOCA and it would be undesirable for the company to pass into liquidation.

Background

Conomi Group (Company) carried on a business of raising funds to on-lend to Alexander Company. Alexander Company in turn invested those funds in Lexium Group and gave security to the Company in the form of shares in Lexium and “Lex Tokens”. Lexium subsequently failed, and Alexander Company’s investment in Lexium was lost. The security given to the Company was worthless.

On 20 October 2021, the Company was placed into voluntary administration and Peter Amos was appointed as Administrator of the Company. Mr. Amos recommended a proposed DOCA – which contemplated a payment of $4,500,000 by Alexander Company, and the contribution of certain cryptocurrency tokens – to the Company’s creditors. The DOCA was executed on 22 February 2022.

One of the conditions precedent to the DOCA’s operation was that Alexander Company make certain payments according to a schedule provided for in the DOCA. Alexander Company made the first several payments, but failed to pay $2,750,000 when due on or before 30 June 2022. In May and June 2022, solicitors for Alexander Company and Mr Amos had corresponded about a potential 3-month extension to the due date for the payment. The solicitor for Mr Amos had represented that Mr Amos was finalising a report to convene a meeting of creditors to consider a resolution to vary the DOCA. However, no such meeting was ever convened or held.

The DOCA provided that it would terminate in the event that: “(i) the payment of the amount xxxxx is not made under clause 2.2(a)(iii) by the Director within 7 days of the due date (or such longer period as the Deed Administrator determine in his absolute discretion)”.

On 17 March 2023, the outstanding amount of $2,250,000 was paid following Ms Duggan’s appointment as the Deed Administrator. Ms Duggan then sought orders under s 447A of the Corporations Act 2001 (a) confirming that the DOCA had not been terminated, and (b) varying the terms of the DOCA to reflect the subsequent events.

The Court’s Decision

Justice Halley acknowledged that there were various issues with the termination provision of the DOCA reproduced above, including that:

• there was no clause 2.2(a)(iii) in the DOCA;

• the reference to “xxxxx” was a placeholder for an amount which was never inserted; and

• the payment obligation was an obligation of Alexander Company, not the Director

Justice Halley nevertheless found that the provision could be interpreted as automatically terminating the DOCA on 1 July 2022, after the $2,750,000 was not paid on 20 June 2022 since the evidence was, at best, equivocal that the deed administrator had agreed to extend the time for payment.

Reinstatement of the DOCA

Justice Halley then considered whether the court has the power to reinstate a DOCA and, if so, whether that power should be exercised here, to the extent necessary.

Section 445C(c) of the Corporations Act provides that a deed of company arrangement terminates if the deed specifies circumstances in which it is to terminate and those circumstances exist.

Section 447A(1) provides that the Court “may make such order as it thinks appropriate about how this Part (Pt. 5.3A) is to operate in relation to a particular company”.

Section 447A(4)(d) provides that a deed administrator can make an application under s 447A(1) for orders in the case of a company that has executed a deed of company arrangement.

Justice Halley found that the power under s 447A of the Corporations Act extends to the making of an order that a deed not terminate, when it otherwise would have terminated: In the matter of Frenchy’s Bread Pty Ltd [2015] NSWSC 2031; Farnsworth v ASIC [2007] NSWSC 866.

Justice Halley was satisfied that an order should be made pursuant to s 447A(1) of the Corporations Act, to the extent necessary, that the DOCA in this case had not terminated for several reasons:

1. Since the time the DOCA may have terminated in mid-2022, Mr Amos and Ms Duggan, as Mr Amos’ successor, and Alexander Company, had substantially proceeded on the understanding that the DOCA remained on foot.

2. Related to the previous point, Alexander Company had since contributed the full $4,500,000.

3. The DOCA was otherwise partly performed, in the sense that one interim distribution had been made to creditors.

4. It would be undesirable for the Company to pass into liquidation and face uncertainty as to whether the funds contributed by Alexander Company could be used in the liquidation. In any event, there would be a real question about Ms Duggan’s ability to pay an equalising dividend to creditors who did not receive an interim distribution.

5. Ms Duggan’s view was that it would be in the interests of creditors for the DOCA to be extended and preserved, and she was not aware of the relief sought having any effect on the accrued rights of any person.

6. Notice of this application had been given to creditors of the Company. 87 responses were received, all of which were supportive.

Variation of the DOCA

Justice Halley then considered whether the DOCA should be varied to reflect the events that occurred since its execution.

Ordinarily, any variation of a deed of company arrangement should be by resolution of creditors under s 445A. However, the Court has the power under s 447A of the Corporations Act to vary a deed of company arrangement (or, more accurately, to cause Part 5.3A to operate as if some provision of the deed were varied) in an appropriate case: In the matter of Derwent Howard Media Pty Limited [2011] NSWSC 1164. The court should be reluctant to exercise this power (and thereby to deprive creditors of their role under s 445A) except in circumstances that are uncontentious, in the sense that no prejudice to creditors is involved.

Justice Halley was satisfied that an order varying the DOCA should be granted for the following reasons:

1. The variations sought did not give rise to any prejudice to creditors.

2. The deficiencies in the drafting of the DOCA were manifest and the variations to correct those deficiencies were uncontentious. The variations were necessary to, among other things, reflect the delays in the receipt of the funds from Alexander Company.

3. The proposed variations were supported by a majority of creditors and by both Alexander Company and Pham Nguyen as parties to the DOCA.

Conclusion

Accordingly, Justice Halley granted the orders substantially in the forms sought by the Deed Administrator.

Judge: Justice Halley

Counsel for the Deed Administrator: Mr JR Anderson
Solicitor for the Deed Administrator: Baker McKenzie

Counsel for Alexander Company and Pham Nguyen: Mr A Gerard
Solicitor for Alexander Company and Pham Nguyen: Hans Kim Lawyer