Choose your own adventure. A tale on varying Deeds of Company Arrangement
In the recent decision of Diakos and Others v Pacific Steel Constructions Pty Ltd (subject to DOCA) (ACN 100 940 145) and Others  FCA 645; 160 ACSR 561, the Federal Court of Australia considered an application pursuant to section 447E of the Corporations Act 2001 (Cth) (Act) made by a number of interested parties to vary the terms of various DOCAs in place for a group of companies.
The discretionary considerations relevant to a Court’s determination of a section 444E application are well settled and were recently summarised by Middleton J in Hastie Group v Multiplex Constructions Pty Ltd (formerly Brookfield Multiplex Constructions Pty Ltd) (No 2)  FCA 1344. However, the Court found in Diakos that the factual matrix and the nature of the subject application did not easily fit with any of the factors referred to in Hastie.
Pacific Steel Constructions Pty Ltd, Equipment Plus Pty Ltd, Boom Lift Pty Ltd, Maxim Steel Pty Ltd, PRB Fabrication Pty Ltd, PSC Property Management Pty Ltd and Sydney Management Pty Ltd (all subject to Deeds of Company Arrangement (DOCAs)) (together the Companies) were placed into voluntary administration, and voluntary administrators were appointed over them.
The voluntary administrators expressed the view that it was in the creditors’ interests for DOCAs to be entered into, rather than each of the Companies proceeding to liquidation. The primary rationale for this was that it would achieve a more timely and certain return to creditors, and also ensure the continuation of the employees’ employment in the respective Companies.
At the second creditor’s meeting, the creditors of the Companies resolved to execute DOCAs, which duly occurred. The DOCAs provided for a refinancing of the secured creditors, cash contributions from directors of the Companies and otherwise returned control of their operations to their respective directors. After the execution of the DOCAs, the incoming financier delayed, adversely impacting upon the DOCAs being effected as the refinance was a significant component to the completion of the contemplated transactions.
The applicants, who including the Chief Financial Officer of the Companies, Mr Diakos, and thier directors, applied for leave to commence a proceeding against the Companies to vary the terms of the DOCAs so as to accommodate the delay encountered with the incoming secured creditors, pursuant to sections 444E and 447A of the Act. Specifically, the applicants sought a variation to the terms of the DOCAs to facilitate a one month delay in the performance of the terms which impacted upon the entry into the incoming financier’s loan documentation and also the “Final Dividend” to be paid pursuant to the terms of the DOCAs and the associated creditors’ trust deeds.
The applicants were each persons bound by the DOCAs and therefore required leave of the Court under section 444E of the Act to bring and proceed with the application against the Companies to vary their terms.
The primary focus of any leave application pursuant to section 444E is whether the grant of leave would further Part 5.3A of the Act, that is, to maximise the chance of the Companies continuing in existence or, if that is not possible, to administer the Companies in such a way as to result in a better return for creditors than the immediate winding up of the Companies. Courts also have power, pursuant to section 447A of the Act, to vary a DOCA; however, they are generally reluctant to exercise that power except in limited, uncontentious circumstances.
The Court observed that the proposed variation to the DOCAs would leave the creditors of the Companies in the same ultimate position. That is, the date of the payments contemplated in respect of the “Final Dividend” would ultimately occur at the same time as originally intended under the terms of the DOCAs and associated creditors’ trust deeds.
The Court also observed that there was no identified prejudice to creditors of the Companies and the proposal to vary the DOCAs was preferred to the immediate winding up of the Companies. The Deed Administrators of the DOCAs confirmed, that they did not take issue with the application, considered that the proposed extension of time under the DOCAs (and corresponding reduction under the creditors’ trust deeds) to be in the best interests of the creditors . They also maintained that the DOCAs provided for a greater estimated return for each class of creditor than a liquidation.
Importantly, the Court was satisfied that the orders sought in the application pursuant to section 447A of the Act would further the objectives of Part 5.3A of the Act.
DOCA variations may be achieved by resolution of creditors pursuant to section 445A of the Act. Plainly, it would be more efficient and cost effective for a resolution to be passed by creditors to vary the terms of DOCAs * particularly where the proposed variation is, as was the case in Diakos, uncontroversial, did not cause any identified prejudice and where the Deed Administrators were satisfied that the variation was in the interests of creditors.
The judgment does not reveal whether there were reasons as to why section 445A of the Act was not utilised by the applicants, and instead an application was brought pursuant to sections 444E and 447A of the Act.
Where it is impractical, or not possible, to pass a resolution pursuant to section 445A of the Act to vary the terms of DOCAs, creditors (or insolvency practitioners) may apply to the Court for orders pursuant to sections 444E and 447A of the Act to vary DOCAs if there is no prejudice caused to the creditors by the proposed variation and provided that the variation furthers the objectives of Part 5.3 of the Act.