TGIF 6 September 2024 – DOCA no longer shields against investigations into wrongdoing

This week’s TGIF considers a recent Federal Court of Australia decision (Commissioner of State Revenue v Gleeson, in the matter of Dalma Form Specialist Pty Ltd (subject to deed of company arrangement) [2024] FCA 908). The Court ruled that the deed of company arrangement (DOCA) should be terminated on the basis that it would prevent crucial investigations into widespread allegations of tax fraud and other causes of action against the company.

Key Takeaways

• Where there are sufficient facts to support allegations of unfair preferences, uncommercial transactions, and fraudulent activity, an administrator’s preliminary findings may be sufficient to terminate a DOCA and allow for further investigations.
  
  
• There is a strong public policy argument for terminating a DOCA to allow a public examination of individuals alleged to have been involved in widespread tax fraud.
  
  
• A genuine intent to continue trading will not be satisfied unless a DOCA includes terms for how the business will operate following administration. Mere references to resuming trading activities in the recitals will be insufficient.

Background

Dalma Form Specialist Pty Ltd (Dalma Form) is a company that provides formwork services on construction projects. The Commissioner of State Revenue (the Commissioner) is a creditor of Dalma Form, with a proof of debt (POD) exceeding $11 million for unpaid payroll tax. At the second creditors’ meeting, the Commissioner’s POD was admitted for $1 for voting purposes. The Commissioner commenced proceedings before Justice Markovic.

In December 2023, Bruce Gleeson and Daniel Robert Soire, (the Administrators) were appointed to Dalma Form. The Administrators were subsequently informed by the Australian Taxation Office (ATO) that Dalma Form were suspected of being part of a larger group of over 30 companies allegedly involved in defrauding the ATO of $150 million in unpaid taxes over the past 15 years. Additionally, the Administrators identified several potential claims that could be pursued by a liquidator if Dalma Form was ultimately wound-up in insolvency.

The key issues before the Court were:

• Should the Administrators’ decision to admit the Commissioner’s POD for $1 be overturned?
  
  
• If so, should the creditor’s resolution supporting the DOCA be invalidated?
  
  
• Should the DOCA be terminated?

While the Court acknowledged that the questions surrounding the POD were novel and of interest, it determined that resolving these issues was not essential for deciding whether the DOCA should be terminated.

The Court's judgment primarily addressed the third issue, focusing on the factual circumstances surrounding Dalma Form. This included potential obstructions to investigations into Dalma Form’s financial affairs and impediments to recovery actions for claims being investigated by the Administrators.

Intent to trade

A key factor in the Court’s decision was whether Dalma Form would continue operating, in line with the objectives of voluntary administration in section 435 of the Corporations Act 2001 (Cth) (Corporations Act). The Court criticised the proposed DOCA for lacking operative provisions that would ensure Dalma Form’s survival post-administration.

The peculiarities of Dalma Form – including its lack of employees, reliance on sub-contractors to undertake work, and apparent cessation of trading before entering voluntary administration – suggested there was no genuine intent to continue trading. The Court found that evidence of purported ongoing work, on the basis of a broadly drafted contract for two residential properties, was unconvincing - particularly in the absence of any evidence from Dalma Form’s sole director.

Termination of the DOCA

Most notably, the Court considered the outcome of the Administrators’ investigations. These had uncovered various potential causes of action including unfair preferences, uncommercial transactions, illegal phoenixing, breach of directors’ duties and widespread allegations of tax fraud across a 15-year period.

In conducting this investigation, the Administrators did not have access to all books, records and emails, and could not fully assess the strength of several of the claims. However, the Court acknowledged that the opportunity for the Chief Commissioner to show that there was genuine practical need to conduct further investigation was limited.[1] 

To satisfy the Court, it was sufficient that the Administrators set out the facts identified in the course of their investigations to support their ‘preliminary views and/or suspicions’.[2]  The Administrators were not required to establish the success of these causes of action or their likelihood of success.

Conclusion

In exercising its discretion to terminate the DOCA, the Court also noted that several creditors who supported the DOCA were either related to, or otherwise associated with, Dalma Form. Therefore, for the reasons identified above, the Court determined that the Commissioner satisfied the criteria specified in sections 445D(1)(e) and (f)(ii) of the Corporations Act and made orders overturning the DOCA.

Comment

This case serves as a stark warning that Courts will not enforce a DOCA in circumstances where it would otherwise shield companies or individuals from public examination and recovery proceedings. While it will depend on the facts of each case, it is not always necessary to demonstrate that the alleged causes of action would be made out or have any genuine prospects of success.

The Federal Court did however leave the door open on whether to admit the Commissioner’s POD for the reduced amount of $1. While the Court ultimately found it was unnecessary to decide on the issue, it indicated that such evidence would weigh in favour of an order to terminate the DOCA. Therefore, administrators should be aware that this type of conduct has faced criticism from the Court and may influence the Court’s discretion in future decisions.

^{[1]  Commissioner of State Revenue v Gleeson, in the matter of Dalma Form Specialist Pty Ltd (subject to deed of company arrangement) [2024] FCA 908, [163].}

^{[2]  Commissioner of State Revenue v Gleeson, in the matter of Dalma Form Specialist Pty Ltd (subject to deed of company arrangement) [2024] FCA 908, [164].}