It had to take the long road but a persistent creditor has been vindicated in its bid to have a deed of company arrangement (DoCA) terminated after the Federal Court of Appeal last week found that the deed had been executed on the basis of materially misleading information.
The impugned information was contained in a Section 530A Report provided to creditors by the administrators of Toddler Kindy Gymbaroo Pty Ltd (TKG) ahead of the second meeting on March 26, 2022.
“The statement in the Administrators’ Report to the effect that it was estimated that unrelated creditors would receive a dividend of 100 cents in the dollar under the proposed DOCA was misleading.” Federal Court of Appeal.
At that meeting creditor Sino Group International (Sino) – whose claimed $5 million proof of debt had been admitted for approximately $161,000 – voted against the DoCA.
Related parties entitled to vote however eclipsed Sino’s admitted claim and administrators Gideon Rathner and Matt Sweeney were duly appointed deed administrators.
In the wake of the court of appeal’s judgment in Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd [2023] FCAFC 110 however, Rathner and Sweeney are dead liquidators walking as Sino and the deed proponent now square off in a contest over their replacement.
In the reasons for finding that the DoCA should be terminated, the court of appeal focussed on various aspects of the Lowe Lippman partners’ 530A, including the differing treatment applied to the competing scenarios of liquidation and DoCA.
“Although identifying assumptions upon which the estimate is based, the statement: “It is estimated that under the proposed DOCA, Participating Creditors will receive a dividend of 100 cents in the dollar” is not qualified,” the judges said.
“There is no statement of the relative probability of the best case scenario eventuating, or the risk that it may not eventuate.
“Further, in relation to the DOCA, there is no comparison between a best case and a worst case scenario. The report gives the reader the impression that the Administrators considered that the best case scenario was the most likely outcome if the DOCA proposal was accepted.”
By contrast, the court of appeal said that the liquidation scenario put before primary judge Stephen Anderson in Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd [2022] FCA 630 “utilised the estimated costs from the worst case scenario ($700,000) whereas the DOCA scenario utilised the estimated costs from the best case scenario ($310,000)”.
Also troubling the appellant court was an aide memoir presented in the primary proceedings based on inconsistent assumptions.
The DOCA scenario was said to be based on an assumption of no future or continuing litigation whereas the winding up scenario assumed there would be further litigation.
The result is a significant win for Sino, it’s lawyers Rigby Cooke and counsel Philip Crutchfield KC and Adam Segal.
When the judgment was delivered last week Rathner indicated to the court that he and Sweeney would act in a caretaker mode until a replacement was installed.
Sino indicated it wanted Deloitte’s Rob Woods appointed but the deed proponent proposed its own nominee and so the parties were directed to take that fight to the appropriate forum.
Given unresolved disputes around proofs of debt and the likelihood of Rathner and Sweeney enforcing their lien in respect of remuneration and costs iNO will be taking a ringside seat.
The position taken by the current External Administrator Mr Rathner, in my view is very appropriate having regard to the criticisms of the report. Too often you see External Administrator’s attempt to keep jobs where there becomes a clear issue of conflict of interest and duty. He is to be congratulated in that respect. The drafting of reports is always very difficult for an External Administrator but it must be remembered the courts expect a high standard of disclosure even though that is done on a limited foundation of information and in a short timeframe. The External Administrator is a gatekeeper intended to provide creditors with sufficient information to enable them to properly consider resolutions to be put before the meeting.