Creditors' Trust Deeds - Legislation Required?

Background

The case of Parkview Constructions Pty Ltd v Tayeh and Ors [2009] NSWSC 186 concerned Parkview Constructions Pty Ltd (Parkview)'s application pursuant to section 445D of the Corporations Act (Cth) 2001 (CA) for orders to terminate or set aside a deed of company arrangement (DOCA), on the grounds that the deed was unjust, oppressive, discriminatory and unfair.

Parkview engaged Sydney Civil Excavation Pty Ltd (Sydney Civil) to perform excavation and related works on the Mosman and Killara projects. Disputes arose, and Sydney Civil obtained adjudication determinations for the payment of progress claims from Parkview. In response, Parkview filed an application against Sydney Civil claiming damages of breach of contract (Parkview Claims) for defective works.

Administrators were appointed to Sydney Civil on 24 December 2008. The administrators proposed a DOCA at the second meeting of Sydney Civil's creditors. At which time the Parkview Claims had not been determined.

The terms of the DOCA required all of the DOCA assets and obligations to vest in a creditor's trust deed, subsequent to which the DOCA would terminate.

At the second creditors' meeting the DOCA was approved. Accordingly, all of the DOCA's assets and obligations were vested in the creditors' trust deed and the DOCA was terminated on the same day as the meeting.

Parkview made an application to set aside the DOCA on the basis that its claim had not been determined and accordingly, it was unfairly prejudiced as a result of the execution of the DOCA.

Held

Barrett J dismissed Parkview's application on the basis that as the DOCA had terminated in accordance with section 445C, an order under section 445D could have no force or effect. Effectively, as the DOCA had already 'terminated' he did not have power pursuant to section 445D to then set it aside.

In its submissions in reply, Parkview attempted to enliven section 447A (the 'magic provision') as a method to have the DOCA terminated ab initio, that is, in such a way that it must be regarded as never having had effect.

Barrett J found that it was not open to Parkview to change its argument midway through the proceedings and, in any event, a section 447A application would fail for the same reasons as the section 445D application, that is, that there was no longer a DOCA on foot for Barrett J to terminate.

Barrett J expressed considerable discomfort in ultimately dismissing proceedings, stating:


'[a]dministrators recommending to creditors the adoption of a deed of company arrangement that will give birth immediately to a creditors' trust and then itself promptly die bear a heavy burden of explaining to creditors the implications of the shift from a regime incorporating a court administered scheme of creditor protection to one in which creditors become passive trust beneficiaries.'


Barrett J examined the creditors' trust deed mechanism generally and suggested that the CA required amending in order to regulate creditors' trust deeds and their administration.

Conclusion

As a result of this decision and Barrett J's comments, it is possible that the Corporations Act will be amended to regulate the operation of creditors' trusts deeds.  We will keep you informed of any amendments to the Corporations Act or developments in relation to the operation of creditors' trust deeds generally. 

In the meantime, we recommend that deed administrators provide aggrieved creditors with a reasonable period of time in which to contest a DOCA before the DOCA is terminated, or deed administrators risk being held personally liable for a an aggrieved creditor's loss.


If you have any queries regarding this matter then please do not hesitate to contact Dean Hely on 9288 6772 or Joseph Abberton on 9288 6765.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.