Streamlining recovery from corporate insolvency

A DEED of company arrangement enables a company to give its creditors a better return than they would receive in liquidation and allows the company to return to financial stability, free of any further claim by those or any other creditors arising prior to the execution of the DOCA.

A DOCA does, however, have some negative consequences. 

Potential investors and/or joint venturers may be reluctant to become involved with the company because of its flagged insolvent past – companies subject to DOCA must give notice of that fact on all documents. 

Also, companies subject to DOCA are precluded from listing or re-listing on the Australian Stock Exchange.

Creditors trust deeds are increasingly being used to limit the duration of negative consequences of DOCAs by facilitating the early release of companies from deed administration. 

If implemented correctly, creditors trust deeds allow companies to have creditors claims adjudicated in the trust rather than by the deed administrators. 

The company’s DOCA can, therefore, be terminated early (prior to the payment of dividends) and the company is free of its DOCA and may explore wider commercial opportunities as a result.

The key characteristics of the creditors’ trust arrangement are that:

• The company and/or third parties transfer assets to the trust;
• The creditors agree to make their claims against the monies held by the trust in lieu of their claim against the company and the creditors cease to be creditors of the company and become beneficiaries of the trust;
• Once all necessary documents have been executed and conditions fulfilled, the creditors’ claims against the company are released and the DOCA terminates; and
• The trustees administer the adjudication of the beneficiaries’ claims in exactly the same manner as if the beneficiaries were creditors and the trustee was a deed administrator.

The change in status of creditors from creditors of the company to beneficiaries of the trust has significant legal and practical consequences for those parties and the procedure involved. 

Once a DOCA is terminated and a creditors trust deed brought into effect, beneficiaries can no longer bring applications pursuant to the Corporations Act.  Therefore, beneficiaries who wish to complain of the decision of the trustee must do so pursuant to the Trustees Act (WA) or the trustee legislation of the state or territory concerned.

The basis of an application by a beneficiary under the Trustee Act would be that the trustee had failed to properly exercise his/her discretion.  

There is little guidance in this area as the courts have not yet heard an application to challenge a trustee’s rejection of a beneficiary’s claim in this context.  

With the increased use of creditors trust deeds, this is not likely to remain the case for long.

The creditors’ trust deed needs to clearly set out what the trustee must take into account in exercising his/her discretion so that a court can make a clear determination of whether the discretion has been properly exercised. 

It is also desirable for creditors’ trust deeds to include an arbitration clause to give beneficiaries the option of a quicker and cheaper resolution of their complaints.

In summary, if creditors trust deeds are carefully and correctly drafted, they provide a versatile mechanism for accelerating a company’s release from its DOCA without prejudice to the proper adjudication of creditors’/beneficiaries’ claims.

Tony Heaver-Wren, associate – 9288 6920

Dean Hely, partner – 9288 6772

Phillips Fox