DoCA disaster as liquidators seize deed funds

From iNO’s perspective, one of the fundamental flaws in the deed of company arrangement (DoCAs) concept is that control of the company returns to the same person or persons who ran the company into the ground in the first place. Por que?

In the matter of Antqip Hire Pty Limited (subject to deed of company arrangement) (in liquidation) [2020] NSWSC 487 an exceptional example of this frequently fatal contradiction is revealed.

Cor Cordis partners Alan Walker and Ozem Kassem were appointed as voluntary liquidators of Antquip Pty Ltd and Antquip Hire Pty Ltd by a resolution of the companies’ sole director Anthony Russell in May 2019.

At that point the companies had been subject to DoCAs for approximately five years, with Hall Chadwick’s Richard Albarran, Blair Pleash and David Ingram appointed deed administrators in 2014.

“The deed proponent has effectively terminated the DOCAs for his own benefit, being to reduce his personal exposure to the secured creditor under his personal guarantee by remitting the deed fund to the secured creditor and leaving the unsecured creditors with nothing. A great deal of time and expense has been wasted in the meantime.” Justice Kelly Rees.

Those DoCAs had been endorsed by creditors after the Hall Chadwick trio in their capacity as the companies’ administrators had twice recommended that Russells’s proposed deeds represented a better return than liquidation.

The first recommendation came on February 28, 2014 but the creditors weren’t easily seduced, voting to adjourn the second meeting for 25 days so as to investigate the companies’ assets and Russell’s director penalty notices.

The minutes of that meeting record that the ATO sought further information on the ownership of 103 assets and objected to the following clause in the proposed DOCAs:

‘Any dividend paid to the ATO will be first applied to the reduction of the Director’s personal liability to the ATO’.

On 4 April 2014, Albarran, Pleash and Ingram issued a supplementary 439A report, again recommending entry into the DOCAs.

On May 8 the DoCAs came into effect and they were appointed deed administrators, control of the companies reverting to Russell.

In fairly short order two significant events occurred. Russell refinanced, paying out secured creditor Bibby Financial Services and bringing in Joe and Domenic Morello via their National Funding Group. And the companies stopped trading.

Anyone wondering whether the deed funds were reliant on the companies continuing to trade? Yep.

Fast forward to 2019. No distributions have been made, Russell is resolving to wind up the companies and Walker and Kassem are appointed liquidators. Creditors waited five years for a dividend of precisely zero. Justice Rees observations are instructive.

“How the level of secured debt came to more than double since 2014 is not the subject of evidence but appears to have come as something of a surprise to the deed administrators,” the judge noted.

More germane to the issue of DoCAs and their fatal flaws however is her honour’s comments in respect of the director the critical responsibility administrators have in adequately conveying deed risk.

“This case underscores how important it is for the second report to creditors to explain the commercial risk inherent in approving entry into a DOCA where there is a delay in the constitution of the deed fund and a continuing exposure to the ongoing trading fortunes of the company in the meantime,” she said.

“The deed proponent has effectively terminated the DOCAs for his own benefit, being to reduce his personal exposure to the secured creditor under his personal guarantee by remitting the deed fund to the secured creditor and leaving the unsecured creditors with nothing. A great deal of time and expense has been wasted in the meantime.”

Justice Rees’ findings came as a result of Walker and Kassem applying to the court for declarations that they had been validly appointed and that they had the right to relieve the deed administrators of the remaining deed funds. Support INO’s continued chronicling of the insolvency sector.