Link to Decision

 Key Takeaways

• When a deed of company arrangement (DOCA) is terminated, the parties bound by the deed will be released from any future obligations they have under the deed: s445H of the Corporations Act 2001 (Cth) (Act).
• Parties who contribute to a deed fund must ensure that any contractual right to a refund of those funds will accrue prior to or otherwise survive termination of the DOCA, otherwise the funds will vest in the company.
• Consider incorporating terms into the DOCA that the funds are held on trust for the funder and ensure that any court orders terminating a DOCA expressly ‘carve out’ any terms of the deed that give rise to the right for a refund if the DOCA is terminated.

Brief Facts

Seafarms Group Limited (SFG) was the parent company and owned all of the shares in Project Sea Dragon Pty Ltd (PSD). PSD went into voluntary administration.

SFG contributed $1.4M to fund the voluntary administration of PSD and a further $3.5M to meet its obligations as proponent of the deed fund under PSD’s DOCA.

SFG’s contributions were subject to the terms of a Funding Agreement and a DOCA.

PSD’s DOCA was terminated by order of the Federal Court of Australia and PSD was placed into liquidation.

SFG applied to the Supreme Court of Queensland for orders compelling PSD’s Deed Administrators to repay to it the funds that it had contributed under the Funding Agreement and the DOCA.

The liquidators and a major creditor of PSD opposed the application. They argued that SFG’s contributions had become the property of PSD and SFG was not entitled to a refund.

Judgment

The Court considered the terms of the Funding Agreement and the DOCA. It also considered the impact of the termination of the DOCA on the parties’ rights in light of s445H of the Act.

SFG relied on the terms of each agreement and argued that the Administrators' obligations to repay the contributions to SFG survived the termination of the DOCA because they had either accrued prior to the termination of the DOCA, or were subject to a condition of the DOCA being terminated.

In the alternative, SFG argued that the Administrators or PSD held the deed fund contribution on trust, either for the benefit of the Deed Administrators and dividend creditors in the event the DOCA was fully performed (as was expressly provided for by the DOCA), or on trust for SFG in the event that the DOCA could not be fully performed.

The Court had regard to the express terms of the Funding Agreement and the DOCA.

The relevant clause of the DOCA was as follows:

(c) If this Deed is terminated by order of the Court or by Creditors resolution:

(ii) The Proponent Contribution (if it has already been paid), will no longer be payable and if the Proponent Contribution has been received, the Administrators shall refund it less payment of any unpaid Administrators Trading Liabilities, Remuneration or Costs and less any other amounts distributed by Administrators to Creditors, in accordance with the terms of this Deed.

The Court concluded that the right to a refund under this clause of the DOCA accrued either at the same time as, or after, termination of the DOCA, so it was not a right that had accrued prior to the termination of the DOCA. The right was also contingent on the termination of the DOCA, so it was a ‘post-termination’ right. In both scenarios, the right to the refund was a future right extinguished by s445H of the Act when the DOCA was terminated.

The Court also declined to find that the funds were held on trust.

The DOCA included terms to the effect that the deed fund contribution was paid to the Administrators as agent for PSD and that the Deed Administrators must hold all property in the Deed Fund on trust for the benefit of the Deed Administrators and the dividend creditors in accordance with the terms of the DOCA.    

The Court said that the express terms of the DOCA did not establish a trust and that it would “strain the construction of the DOCA” to do so. The Court observed that there were no terms in the DOCA identifying the capacity in which the Administrators received the deed fund contribution or requiring the Administrators to keep the deed fund contribution separate from company funds, which would have supported the intention to create a trust.

As for the Funding Agreement, the Court observed that the termination date had not accrued under that agreement and this was sufficient to dispose of its claim as SFG did not yet have a claim to repayment under the agreement.

The Court concluded that the SFG’s contributions were property of PSD and SFG was not entitled to any refund.

The Court acknowledged that the outcome for SFG was unfair and unintended but said that it was not for the Court to re-write the DOCA or impose a trust to achieve a fairer outcome.

The Court said that SFG could have better protected its interests by ensuring that the terms of the DOCA expressly created the trust. It could also have asked the Federal Court to ‘carve out’ the refund clause so that it survived the termination of the DOCA.

Implications

This was a very bitter outcome for SFG. The decision underscores the importance of ensuring that stakeholder interests, such as funders, are adequately protected when drafting deeds of company arrangement and that when you are faced with an application to terminate a DOCA, consideration is given to whether any future rights under the DOCA need to be ‘carved out’ of any termination order, to protect stakeholder interests.