By whose authority? Court deems payments made under a DOCA to the DCT voidable as unfair preferences

In Yeo, in the matter of Ready Kit Cabinets Pty Ltd (in liq) v Deputy Commissioner of Taxation,[1] the Court considered whether payments made to the Deputy Commission of Taxation (DCT) by a director of the company, required under a Deed of Company Arrangement (DOCA) were recoverable as unfair preferences.

The case turned on whether the payments could be considered under section 588FE(2B)(d) of the Corporations Act 2001 (Cth) (the Act) as payments made by the company with the authority of the deed administrators which would allow the DCT to retain the payments.

The facts

In October 2013, Andrew Reginald Yeo and Gess Michael Rambaldi were appointed as joint and several administrators of Ready Kit Cabinets Pty Ltd (Company).

A DOCA was signed on 22 December 2014 and provided that:

• daily management and control of the Company would be returned to the director, Marion Posadowski (Director);
• a fund was established and controlled by Messrs Yeo and Rambaldi (as Deed Administrators) which constituted the whole of the property available for distribution to participating creditors;
• the Company and the Director made certain covenants and undertakings, including paying the Company’s taxation obligations; and
• the Deed Administrators would call a meeting of creditors to determine whether to terminate the DOCA and wind up the Company if there was a default under the DOCA.

Between December 2013 and July 2017, the Company was returned to the management and control of the Director and continued to trade.

Even though the Company incurred further taxation liabilities with the DCT in the sum of $403,000.76 between February 2014 and July 2017, it only made payments to the DCT totalling $304,772.15 (Payments).

With the Company having failed to comply with its ongoing taxation obligations and the terms of the DOCA, on 5 July 2017, creditors resolved to terminate the DOCA and appoint the Deed Administrators as liquidators (we will continue to refer to the liquidators as the Deed Administrators for the sake of consistency).

At this time, the estimated amount of unsecured debts owed by the Company exceeded $652,000 (excluding the Payments if voidable).

The Deed Administrators commenced proceedings against the DCT seeking to recover the Payments as unfair preferences under section 588FA of the Act.

In determining whether the Deed Administrators could claw back the Payments from the DCT, the Court considered section 588FE(2B)(d) and whether the Payments were made on behalf of the Company by or under the authority of the Deed Administrators. It was agreed that the Payments were not made or caused by the Deed Administrators but the case turned on whether the Payments were made under their authority.

Arguments of the Deed Administrators and the DCT

In summary, the Deed Administrators contended that even though the DOCA may have required the Company to comply with its taxation obligations, this did not mean that Payments were made “by, or under the authority of” the Deed Administrators. Rather, the DOCA did not give the Deed Administrators the authority to make the Payments and it was the Director that had the authority under the Act, the DOCA or the Company’s constitution to make the Payments.

In contrast, the DCT argued that the DOCA specifically contemplated and required the Payments to be made. In those circumstances and where:

• the Company (through the Deed Administrators) agreed to those terms of the DOCA; and
• the Deed Administrators acted as the Company’s agent under the DOCA and were bound by its terms;

the DCT contended that the Payments were made with the authority of the Deed Administrators.

The DCT further argued that its position was supported by consideration of the explanatory memorandum and recommendations in the June 1998 and November 2008 reports of the Legal Committee of the Companies and Markets Advisory Committee (CAMAC Reports) and was consistent with the object of Part 5.3A of the Act because it maximised the chances of a company or its business, continuing in existence.

Decision

In considering the Deed Administrators’ and DCT’s arguments, the Court noted that the language of section 588FE(2B)(d) of the Act was clear and did not necessitate a reference to explanatory memorandum or the CAMAC Reports to aid with interpretation.

The Court also considered that it was important to go back to basic principles before examining the issue further and noted that:[2]

• the powers of a director are suspended upon appointment of administrators and revived upon entering into a DOCA; and
• a deed administrator (as opposed to an appointed voluntary administrator under Part 5.3A of the Act) derives power solely from the terms of any DOCA being administered and may only have daily managerial powers of a company if provided for under the DOCA.

The Court observed that some clauses of the DOCA required the Director to obtain consent from the Deed Administrators before taking certain actions.

Significantly, the DOCA did not require their consent before the Payments were made and further, did not empower the Deed Administrators to make the Payments, conduct the daily management of the Company or override the Director making the Payments.

Ultimately the Court found that the relevant terms of the DOCA provided that Payments were made by the Director and not “by, or under the authority of” the Deed Administrators. The Deed Administrators could therefore claw back the Payments from the DCT as unfair preferences.

Key takeaway

This case highlights that the unfair preference provisions extend to payments made to an unsecured creditor which are contemplated and required by the DOCA but which are made by a company and its director.

It is a timely reminder to ensure that DOCA terms are carefully considered and drafted to ensure that actions taken by a company under the DOCA are done so either directly by, or with, the clear authority of the deed administrators failing which, those actions could subsequently come under scrutiny by a liquidator.

Authored by:

Susan Forrest, Partner
Caitlin Milligan, Solicitor