Ashurst Restructuring Roundup 

DoCA’s: Discriminating between Creditors -Is it for a Proper Purpose

Canstruct Pty Limited v Project Sea Dragon Pty Limited (No. 4) [2024] FCA 112 ("Canstruct")

DoCA's permit discriminatory treatment between creditors without the need to observe the class rules which apply when proposing a Scheme of Arrangement. One limitation which applies, if there is such discrimination, is that it must not be unfairly prejudicial so far as any creditor is concerned. In the ordinary course, that will involve a comparison between the dividend which the relevant creditor will receive under the DoCA and the dividend it could expect to receive in the event of the company's liquidation.

In Canstruct it was held the discrimination must also be for a proper purpose.

In that case, Project Sea Dragon Pty Limited ("PSD") was incorporated as a subsidiary of Seafarms Group Limited ("Seafarms") and as a special purpose vehicle to establish and operate a prawn aquaculture project.

PSD had no income and very few assets. In the circumstances, it relied on Seafarms to fund the payment of the liabilities which it incurred in the course of undertaking the project.

One such liability was in the amount of some $14 million to a construction company. That liability was determined to be owing by PSD as the result of an adjudication under the Construction Contracts (Security of Payments) Act 2004 (NT).

Following the adjudication, Seafarms determined that, whilst it had the resources to do so, it would not continue to fund PSD and PSD entered voluntary administration. Thereafter, with the support of Seafarms, a DoCA was undertaken by PSD which provided for the payment in full of all of the claims of arm's length creditors except the construction company which was to receive a dividend of some 10 cents in the dollar.

The court concluded, on the basis of all of the evidence, that:

"The predominant purpose of the VA and DoCA process was to avoid paying the debt owed to [the construction company]. No other purpose can properly be discerned when the evidence is considered in its totality."

Accordingly, the DoCA was declared invalid as it involved an abuse of the Voluntary Administration procedure.

Importantly, in the context of DoCAs concerned with the preservation and continuation of a company's business, the court in Canstruct observed (at [213]) that; "it is not unfair for a DoCA to discriminate in favour of entities in respect of which the company in administration would likely engage in business for the future. The preservation of commercial relationships can justify the discrimination against creditors who are not relevant to the company's ongoing operation. Here, the discrimination against [the construction company] was sought to be justified on that basis. However, the evidence did not support that contention [to the extent that there were other creditors who were to be paid in full with whom it was not necessary for the company to maintain an ongoing commercial relationship]."