In the decision of Britax Childcare Pty Ltd, in the matter of Infa Products Pty Ltd v Infa Products (Administrators Appointed)  [2016] FCA 848, Burley J gave a useful analysis of factors the Court considers in an application to set aside a Deed of Company Arrangement.

Background

As a consequence of Infa Products Pty Ltd (Administrators Appointed) (ACN 092 222 994) (Infa) losing long-standing, patent infringement proceedings against Britax Child Care Pty Ltd (ACN 006 773 600) (Britax), Messrs Krejci and Karam were appointed as joint and several administrators of Infa (Administrators).

At the major meeting of creditors, the Administrators  recommended that creditors vote to require Infa to execute a Deed of Company Arrangement (DOCA) under which a deed fund of $800,000 would be established. All of the creditors, save for Britax, voted in favour of the resolution.

Britax then requested that a poll be taken pursuant to regulation 5.6.2.1 of the Corporations Regulations 2001 (Cth).  The chair ultimately exercised his casting vote as chair of the meeting in favour of the resolution.

After the meeting, Britax commenced proceedings against the Administrators and Infa under section 445D and section 600B of the Corporations Act 2001 (the Act), seeking that the DOCA be terminated and/or that the resolution passed at the meeting  be set aside and that liquidators be appointed to Infa.

In the course of the matter, Burley J expressed the view that that the Britax’s application should be dismissed and consent orders were made to that effect on 29 September 2016.

Britax’s position

Britax raised a number of arguments in support of its application:

1. no other creditor of Infa other than Britax would suffer prejudice if the the DOCA was terminated;
2. there were prospects of a better recovery for creditors in a liquidation because of potential claims against Infa’s director, Richard Horsfall, in respect of a number of transactions; and
3. it was in the public interest to investigate the above transactions in a liquidation.

In the course of proceedings, Britax paid $45,000 into Court.  This was the amount which Britax submitted that the remaining unsecured creditors of Infa would be entitled to under the DOCA.  Britax submitted that if it was successful in the proceedings, the unsecured creditors could still receive payment out of the funds it paid into Court and therefore, would be no worse off if the DOCA was set aside.

In respect of Britax’s second and third arguments, Britax raised its concern over a number of transactions involving Mr Horsfalls which Britax asserted amounted to breaches of his duty as director of Infa.  It should be noted however that Britax failed to provide any clear particulars of the asserted breaches, apart from simply asserting that there were breaches of director’s duties that would lead to recoveries.

Decision

As for Britax’s first argument, Burley J said that there was no basis for Britax’s suggestion that no other creditor would suffer any prejudice if the DOCA was set aside.

His Honour noted that while Britax had a large dollar value compared to other the other creditors, it could not be assumed that the other creditors voting in favour of the DOCA were “behaving commercially irrationally or otherwise to protect interests other that their own”.  Furthermore, His Honour noted that Britax’s submission somewhat overemphasised its role in the context of the creditors of  Infa.

In considering the recovery prospects of the transactions pertaining to Britax’s second and third arguments, Burley J was not satisfied that Britax’s evidence did enough to prove that further investigation by a liquidator would yield sufficient prospects of success in litigation against Mr Horsfall to warrant setting aside the DOCA.

In His Honour’s view, it did not appear that the public interest required that a liquidator investigate the said transactions, particularly in circumstances where there were no clear potential breaches identified by Britax.

Summary

In summary, when  considering whether a DOCA should be set aside at least 2 factors are relevant.  Firstly, when considering the prejudice caused to creditors, the Court will have regard to the interest of creditors as a whole, not just the interests of the moving creditor, even if it is the largest creditor in value.  Secondly, in considering whether it is appropriate for further investigations to be conducted by a liquidator, the Court will need to be satisfied of a realistic prospect that the relevant proceedings would be successful rather than a mere subjective suspicion.

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