Ashurst Restructuring Roundup

Deeds of Company Arrangement – Insured Claims 

Destination Brisbane Consortium Integrated Resort Operations Pty Ltd as Trustee v PCA (Qld) Pty Ltd (subject to a Deed of Company Arrangement) [2024] QSC 178 ("Destination Brisbane")

In Destination Brisbane two questions, which concerned the entitlements of insured creditors under a DoCA, arose for consideration in the context of an application for judicial advice:

(a) would the Court exercise its power under s447A, CA to vary the terms of a DoCA so as to cure a possible defect in its drafting?

(b) whether insured creditors should bear the costs, including general administration costs of the company, associated with their insurance litigation by reason of that litigation being ongoing, from a specified point in time at which the administration of the company would otherwise likely have come to an end had it not been for that ongoing insurance litigation?

Variation of DoCA

Section 445A, CA provides:

"A deed of company arrangement may be varied by a resolution passed at a meeting of the company's creditors, but only if the variation is not materially different from a proposed variation as set out in the notice of the meeting."

The Court in Destination Brisbane accepted that, as a general proposition, "administration is a creditor driven process and any variation should ordinarily be left to the creditors to determine"; Destination Brisbane at [35].

However, it appeared that, whilst there was general agreement by creditors to a DoCA that creditors with insured claims would enjoy the same priority as if the company had been wound up and s562, CA would apply, the terms of the DoCA may not have reflected that agreement.  In that circumstance, the Court did not consider that a proposal by the administrators to convene a meeting under s445A, CA was a just or efficient way to proceed to incorporate s562 (Destination Brisbane at [9]).  Rather, the Court was prepared to exercise its power under s447A, CA to order an amendment to the DoCA so that its terms reflected what was intended in respect of the priority entitlements of insured creditors.

Those priority entitlements were to be identical with the entitlements which insured creditors would have enjoyed in the event that the company was wound up and which are defined by s562, CA as follows:

"(1) Where a company is, under a contract of insurance… entered into before the relevant date, insured against liability to third parties, then, if such a liability is incurred by the company (whether before or after the relevant date) and an amount in respect of that liability has been or is received by the company or the liquidator from the insurer, the amount must, after deducting any expenses of or incidental to getting in that amount, be paid by the liquidator to the third party in respect of whom the liability was incurred to the extent necessary to discharge that liability, or any part of that liability remaining undischarged, in priority to all payments in respect of the debts mentioned in section 556."

Whilst it was not necessary for the Court in Destination Brisbane to decide the matter, it is submitted that, absent such a provision in the DoCA, it would have been liable to be terminated by the Court on an application by insured creditors under s445D(1)(f), CA on the basis that it was unfairly prejudicial to those creditors to the extent that they would have received less under the DoCA than they would have received in the event of the company's liquidation.

The decision is also a useful reminder that Schedule 8A, Corporations Regulations, being the prescribed provisions in DoCA's, does not expressly incorporate s562 into DoCA's and that a provision reflecting that section should be incorporated into DoCA's to avoid the risk of it being challenged on the application of creditors with insured claims.  

Costs of administration

The administrators also proposed that there be a variation of the DoCA that would in effect see (some of) the insured creditors bear the costs, including general administration costs of the company, associated with their insurance litigation by reason of that litigation being ongoing, from a specified point in time at which the administration of the company would otherwise likely have come to an end had it not been for that ongoing insurance litigation.

Judicial advice was sort by the administrators as to whether they would be justified in convening a meeting of creditors to consider a variation of the DoCA to that effect.

The Court was not prepared to give that advice for a number of reasons including:

(a) insured creditors are just like uninsured creditors to the extent that they are both unsecured creditors, and as such, as a matter of general principle, they should not be treated differently in the administration: Destination Brisbane at [41];

(b) "there may ultimately be a benefit to unsecured creditors in permitting insured creditors' claims to be resolved out of the administration process": Destination Brisbane at [42]; 

(c) "… the administrators' proposal in its terms is inconsistent with s. 562 of the CA of which the insured unsecured creditors should have the benefit.  That section allows a deduction for certain expenses from the money the company receives from the insurer but does not otherwise require the creditor to pay those expenses": Destination Brisbane at [45]; and

(d) there is a real risk that the costs mechanism if passed at a creditors' meeting would be liable to be set aside or cancelled "on the basis that the varied DoCA puts certain categories of creditors in a worse position than they would have been in under a liquidation scenario": Destination Brisbane at [46]