Home Insights TGIF 29 November 2019: Repouring the cement: Federal Court terminates DOCA
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TGIF 29 November 2019: Repouring the cement: Federal Court terminates DOCA

This week’s TGIF considers the decision in Adelaide Brighton Cement Limited v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No 4) [2019] FCA 1846, where the Court terminated a deed of company arrangement in circumstances where the administrators had not undertaken sufficient investigations.

Background

On 4 November 2017, administrators were appointed to Concrete Supply Pty Ltd.  

During the second meeting of creditors of Concrete Supply Pty Ltd, a resolution was passed to execute a deed of company arrangement (DOCA).  As chairman of the meeting, one of the administrators used his casting vote to approve this resolution.

The plaintiff in this proceeding was Adelaide Brighton Cement Limited (ABCL), a creditor of Concrete Supply Pty Ltd.  ABCL had supplied approximately $32 million of cement to Concrete Supply Pty Ltd, but had only been paid $20 million.  Concrete Supply Pty Ltd denied liability for this $12 million shortfall on the basis that ABCL had provided them with a rebate.  However, Concrete Supply Pty Ltd could not identify any written or oral agreement in support of this rebate and had not applied it uniformly across all of its purchases from ABCL.

ABCL commenced proceedings seeking termination of the DOCA pursuant to s 445D of the Corporations Act 2001, on the basis that the investigations of the administrators and the Second Report to Creditors were inadequate and that the administrator had improperly exercised his casting vote.   ABCL also sought a number of other remedies, including a declaration that Concrete Supply Pty Ltd had failed to maintain adequate books and records in contravention of s 286 of the Corporations Act 2001.

Decision

In a lengthy judgment, Justice Besanko found, relevantly, that the DOCA should be terminated and the resolution passed at the second meeting of creditors that Concrete Supply Pty Ltd enter the proposed DOCA be set aside.

Inadequate investigations  

This decision was largely based on the finding that investigations made by the administrators into the affairs of the company were inadequate, primarily due to insufficient inquiries into the alleged rebate.  A range of factors indicated that the claimed rebate was unusual, including the lack of agreement detailing its terms, the fact that it was claimed as a range of percentages rather than as a set amount, and the manner in which Concrete Supply Pty Ltd had applied the rebate to only some purchases from ABCL.   These matters raised doubt as to the entitlement of Concrete Supply Pty Ltd to the rebate and should have prompted investigation by the administrators.  

Other factors suggesting that investigations had been inadequate were the lack of estimate of the value of directors’ assets in the Second Report to Creditors and mistakes in the report regarding a debt owed to Concrete Supply Pty Ltd by a related company.

Justice Besanko found that as a result of these inadequate investigations, the information contained in the Second Report to Creditors could be considered false, misleading, or involving material omissions.  These errors could reasonably be expected to have been material to the decision of the creditors to execute the DOCA, allowing for termination of the DOCA under s 445D.  

The lack of sufficient investigations meant that the administrators should have sought an extension in the convening period or an adjournment of the second meeting of creditors.   In the absence of these efforts, the Second Report to Creditors should have been heavily qualified as unable to express a final view on a range of matters.

Exercise of the casting vote

The administrator’s exercise of the casting vote was also found to be flawed as a result of the inadequate investigations.  He exercised his vote in favour of the DOCA on the basis that the proposed DOCA was expected to provide a higher return to creditors than liquidation of Concrete Supply Pty Ltd.  While this would normally be a relevant consideration, in this case the analysis of which outcome would provide a greater return to creditors lacked a proper basis due to the inadequate investigations.  

Additionally, the administrator expressed a belief that the general view of the creditors was to accept the DOCA, as 31 votes were made in favour compared to only 8 against.   However, this was erroneous as those 8 minority votes controlled a significant majority of dollar value (93.65%).   Justice Besanko found that while there is no rule that the wishes of the value majority should prevail, they are an important factor, particularly where the value majority is as overwhelming as it was in this case.

Failure to maintain books and records

Finally, Justice Besanko found that ABCL was entitled to a declaration that Concrete Supply Pty Ltd failed to maintain adequate books and records in contravention of s 286.  This declaration was sought in relation to the $12 million shortfall owed by Concrete Supply Pty Ltd to ABCL, as the books and records of Concrete Supply Pty Ltd only showed a liability of approximately $2 million.  

The defendant submitted that a failure to comply with this section would only result from a severe absence of records; in other words, a company would not fail to comply with s 286 despite errors in its record keeping and accuracy unless there was such a severe absence of records.  Justice Besanko did not accept this position, instead finding that a failure to record a major liability is a contravention of this section.  Indeed, his Honour suggested that any failure to record any liability other than one which is de minimis would be a contravention of the section.  

Comment

This decision is a reminder that, where there is insufficient information for an administrator to express the requisite opinions in the report to creditors, it is prudent to apply to the Court to extend the convening period, or alternatively to adjourn the second meeting of creditors.  

Despite time and costs pressures in the lead up to the second meeting of creditors, the Courts will intervene if it appears that the administrators’ investigations are inadequate.

The decision also highlights the care that must be taken in using a casting vote to break a deadlock at the second meeting of creditors, particularly where there is division between the numerical majority of creditors and the majority in value.  As this decision illustrates, the Courts will set aside a resolution where there are deficiencies in the process adopted by the person exercising a casting vote.


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