Can Restructuring Through Voluntary Administration Constitute "Unfair Prejudice"?
Restructuring might involve discriminatory treatment of creditors or a sale of the company’s shares. Administrators of Deed of Company Arrangements ("DoCAs") can transfer a company’s shares for so long as it doesn’t unfairly prejudice the members. DoCAs can be terminated if they are unfairly prejudicial.
What constitutes unfair prejudice? What evidence might need to be adduced to satisfy a court that a transaction is not unfairly prejudicial? These questions are explored in this Client Alert.
A consideration when either:
(a) formulating a Deed of Company Arrangement (“DoCA”); or
(b) the administrator of a DoCA is transacting a sale of the company’s shares under s. 444GA, Corporations Act
is whether there is unfair prejudice.
Is a DoCA unfairly prejudicial?
The issue of whether a DoCA is unfairly prejudicial is important, of course, because it is one of the grounds on which it can be terminated under s. 4445E, Corporations Act.
In a decision published late last year; Shafston Avenue Construction Pty Limited v McCann [2019] FCA1426, the Federal Court reviewed the authorities which have informed the context of the test of unfair prejudice.
As to whether the payment of an amount which is less than the creditor’s claim satisfies the test, the Court said (at [133]):
“It may be accepted that forcing a creditor to accept less than the full amount of its debt will usually be prejudicial to it. However, as the authorities discussed above clearly demonstrate, that prejudice is not sufficient under s. 445D(1)(f)(i). By including the adjective “unfairly” in the expression “unfairly prejudicial”, that subsection requires an applicant to establish that, in all circumstances, the prejudice in question has an element of unfairness associated with it.”
The Court summarised the effect of these authorities in this way (at [51]):
“In respect of the expression “unfairly prejudicial” in s. 445D(1)(f)(i), Cohen J pointed out in Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 at 151, that “the test is not merely discrimination but unfair discrimination or unfair prejudice” and that “[i]n order to consider questions of fairness it is necessary to look at the whole of the circumstances and see if there is overall unfairness in the proposal.”
and then (at [52]):
“Brereton J observed that the relevant considerations included…
… a comparison between the return to creditors under the [DOCA] and that likely on a winding up, and comparative prejudice suffered by differing groups of creditors. The differential treatment of creditors does not necessarily equate to unfair discrimination or prejudice.”
As will be seen when considering the recent case concerned with the transfer of the company’s shares by the administrator of a DoCA, there may need to be extensive enquiries undertaken by the Court to be satisfied that the DoCA is more beneficial for creditors than liquidation.
DoCAs v Schemes
The possibility that a DoCA may discriminate between creditors or classes of creditors, as was recognised by Brereton J in that passage, reflects an important distinction between DoCAs and Schemes. Under a DoCA there can be differential treatment of creditors for so long as each of them or each class or group of them receives no less than they would receive in the event of the company’s liquidation if liquidation, as is usually the case, is the only alternative to the DoCA.
In such a circumstance, creditors can still consider the proposal for a DoCA in any meeting which all of them attend even though there is discrimination between them when it comes to the dividends which they are entitled to receive.
By way of contrast, under a Scheme, that circumstance may require that the creditors be divided into separate classes for the purpose of the meetings which must be convened to agree the Scheme.
DoCAs v liquidation
The consideration that creditors are to receive a higher dividend under a DoCA than may be payable in the event of a liquidation may not be sufficient to resist an application to terminate the DoCA.
In the Shaftson Avenue case, the Court said (at [55]):
“In considering the corresponding benefits to the creditors of a company of a DoCA, as opposed to those that may be gained by pursuing investigations and proceedings in a liquidation, Burley J observed in Britax that an applicant did not need to make out its proposed course of action on the balance of probabilities, but rather that is was sufficient if it satisfies the Court that, by adopting that course, there is a “not unrealistic prospect that there may be a return to creditors on a winding up that is better than under the [DOCA]”, or that there is a “serious case for the recovery of assets in a liquidation”, or that there is a “real prospect” of a greater recovery in a liquidation than under a DOCA (see at [93]-[94]). While Burley J considered that the “interests of creditors” was a primary consideration in such an inquiry, his Honour also included the “public interest… [including] considerations of commercial morality and the interests of the public at large” as considerations (see at [95]).”
On the basis of those authorities, the issues of public interest and commercial morality may weigh heavily where the dividend is small and where there is a negligible difference between the dividend payable under the DoCA and that payable on liquidation. Of course, the Court will also need to be persuaded that there are matters which merit investigation by a liquidator and that there are claims which merit being pursued.
Is a transfer of shares unfairly prejudicial?
Where the administrator of a DoCA proposes to transfer the shares in the company, it may be necessary to consider whether that transaction is unfairly prejudicial to the company’s shareholders.
In the early cases which addressed the powers of a deed administrator under s. 444GA, Corporations Act, such as Weaver v Nobel Resources Limited [2010] WASC 182 and in the most recent case; Re Global Stress Index Pty Ltd [2020] NSWSC 183, the focus of the Court’s attention tended to be whether, in the event of the company’s liquidation, there would be any residual value of its shares which might benefit the shareholders when regard was had to the value of its assets. Moreover, in the earlier cases, particular attention was given to the reliability of the valuation of those assets.
In Re Tucker [2019] FCA 293, however, the Court looked beyond the value of the assets and addressed the question whether there were claims which could be pursued by the liquidator which would augment the value of the company’s assets. Those claims could involve impugning any security which the company had granted, actions against directors for breach of duty and claims which sought to claw back the benefit of any antecedent transaction.
So, when seeking the Court’s approval for a transfer of shares, it can be anticipated that the Court will expect that the administrator of the DoCA will address these broader questions in the evidence which is filed.
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