Funding Voluntary Administrations and a Proponent's right to recover deed contribution – What happens when the DoCA is Terminated?

Seafarms Group Limited v McKinnon [2025] QSC 45 (Seafarms)

Summary

In Seafarms, Project Sea Dragon Pty Limited (PSD) entered a DoCA having previously been in voluntary administration. Its parent company, Seafarms Group Limited (SFG) had contributed financing under a Funding Agreement (Funding Agreement) towards the conduct of the voluntary administration of PSD (Interim Funding Amount) and then made a financial contribution (Proponent Contribution) to the DoCA deed fund for creditors.

The terms of the DoCA made provision for the repayment of the Interim Funding Amount, and for the return of the Proponent Contribution, if the DoCA was terminated.

The DoCA was terminated by the Court and SFG brought an application seeking to recover both the Interim Funding Amount and the Proponent Contribution under the terms of the DoCA.

The Court held that those amounts could not be recovered under the terms of the DoCA as it ceased to have any operative effect once it had been terminated.

The rights to the repayment of those amounts had not accrued at the time the DoCA was terminated. Moreover, a provision in the DoCA which purported to effect the continuing operation of its provisions, including as to repayment or return of funds, notwithstanding the DoCA's termination, is not effective.

Also, the Court did not find that the funds were subject to any express trust in favour of SFG which may have facilitated the return or repayment of the amounts claimed by it. The Court left it open for SFG to pursue repayment of the Interim Funding Amount solely under the terms of the Funding Agreement.

The decision supports a person's right to recover funding that is provided during a voluntary administration despite entry into a DoCA, subject to appropriate provisions in the funding agreement, and also for the return or recovery of that funding and any separate DoCA deed fund contribution under the terms of the DoCA if funds are properly made the subject of an express trust. 

Detailed consideration

Introduction

PSD entered into a DoCA having previously been in voluntary administration.

Its parent company, SFG:

(a) contributed financing under a Funding Agreement towards the conduct of the voluntary administration of PSD; and

(b) made a financial contribution to the DoCA described as a proponent contribution for the purpose of establishing a fund from which, amongst other payments, payments to PSD's creditors would be made.

The DoCA was terminated by the court under s 445D, Corporations Act (CA).

SFG brought an application seeking to recover both the Interim Funding Amount and the Proponent Contribution.

Were the Interim Funding Amount and the Proponent Contribution repayable under the terms of the DoCA?

Clause 12.2(c) of the DoCA provided:

"If this Deed is terminated by the order of the Court or by Creditors resolution:

(i) the Interim Funding Amount (if it has not already been repaid), less payment of any unpaid Administration Trading Liabilities, Remuneration or Costs will be immediately repaid by the Administrators (subject always to the Administrators having sufficient available cash to make such repayment and subject to the terms of the Funding Agreement …); and

(ii) The Proponent Contribution (if it has not already been paid), will no longer be payable and if the Proponent Contribution has been received, the Administrators shall refund it less payment of any unpaid Administrators Trading Liabilities, Remuneration or Costs and less any other amounts distributed by Administrators to Creditors, in accordance with the terms of this Deed."

By its terms, that clause could only operate, so far as concerned the repayment of:

(a) so much as was owing in respect of the Interim Funding Amount; and

(b) the Proponent Contribution;

once the DoCA had been terminated.

It was held that those amounts could not be recovered under the terms of the DoCA as it ceased to have any operative effect once it had been terminated by order of the court. In that regard the rights to the repayment of those amounts had not accrued at the time the DoCA was terminated. Rather, it was a right which was contingent upon the termination of the DoCA and only accrued at that time.

In reaching that conclusion the court held [at [47]:

"The Full Federal Court terminated the Court DOCA on 1 November 2024. The DOCA could have no effect after that time to create any new right. In accordance with s. 445H of the CA, the termination of the DOCA did not affect the previous operation of the DoCA. Section 445H of the CA provides: 'The termination or avoidance, in whole or in part, of a deed of company arrangement does not affect the previous operation of the deed'".

The court [at 48] also cited with approval the judgment of Barrett J in Lombe v Wagga Leagues Club Ltd in the course of which his Honour observed: 

"I have previously expressed the opinion that it is implicit in s 445H that, upon termination of a deed of company arrangement, the several persons initially bound by the deed (that is, the creditors referred to in s 444D and the other persons mentioned in s 444G) cease to be bound as to their future conduct, rights and liabilities …".

The court noted that there was a provision in the DoCA which was to the effect that certain clauses survived the termination of the DoCA. However, that provision did not apply to clause 12.2(c). That said, the Court opined that, having regard to the effect of the termination of the DoCA, such a provision, even if it had applied to clause 12.2(c), would not have been effective to preserve its operation having regard to the effect of s 445H CA.

One consideration to be noted is the obiter observation of the court [at 54]:

"The Federal Court could have been asked to consider orders carving out of its termination of the DOCA any termination of the operation of clause 12.2(c) of the DOCA but that did not occur. The whole of the DOCA were terminated."

Was the Proponent Contribution held by the administrator subject to a trust?

SFG argued that the Proponent Contribution, was held in the first instance, on trust for the administrators of the DoCA and the creditors entitled to be paid a dividend under its terms in the event that the DOCA was fully performed, and, in default of the DoCA being fully performed, on trust for SFG.

Importantly, so far as concerns the practical implications of the decision in Seafarms, the Court held that it would have been possible for the DoCA to be drafted so as to impress the Proponent Contribution with a trust in the way for which SFG argued. However, that result was not achieved in the case of the DoCA under consideration having regard to its proper construction.

Was the Interim Funding Amount recoverable from the administrators under the Funding Agreement?

Whilst the DoCA made provision for the repayment of the Interim Funding Amount, it was held by the court that it did not, as a matter of construction, discharge the obligations of the administrators under the Funding Agreement. That is to say there could be no objection, as a matter of principle, to each of a funding agreement and a DoCA both providing for the repayment of funds advanced by third parties to finance the conduct of an administration. The challenge for SFG was that the obligation on the part of the administrators of PSD to pay the Interim Funding Amount under the Funding Agreement had not crystallised.