The recent decision of Graham v GT Capital Partners [2023] WASC 163 concerned an application by a former director of a company in administration for an injunction restraining the effectuation of a Deed of Company Arrangement (“DOCA”), pending the hearing of an application to set the DOCA aside. The application was heard and determined on an urgent basis, given the DOCA was to take effect after 4.30pm on the day of the hearing.
Background
G T Capital Pty Ltd (“GT”) operated a litigation funding business and, at the time of the hearing, was funding a number of claims. The plaintiff was one of the two directors and shareholders of GT, together with Mr Turco. Following the breakdown of their relationship, Mr Turco made an application for GT to be wound up, and an order was made for the appointment of provisional liquidators. The provisional liquidators subsequently appointed administrators to GT pursuant to s.436B of the Corporations Act (2001)(Cth)(“Act’).
In the administrators’ reports to creditors, the administrators recommended the creditors accept a DOCA proposed by the plaintiff. However, the creditors voted in favour of a DOCA on terms proposed by a proponent associated with Mr Turco, which was ultimately executed.
The plaintiff instituted proceedings seeking orders for the termination of the DOCA and for GT to be wound up. The plaintiff also sought an injunction to prevent the effectuation of the DOCA, pending the outcome of the substantive application.
The grounds
In its application, the plaintiff contended, amongst other things, that:
- the DOCA was discriminatory to certain unsecured creditors;
- there were material omissions from the administrators’ report, and that the information provided to creditors was inaccurate;
- the DOCA permitted an apparently insolvent company to trade; and
- the DOCA was contrary to public interest and offended commercial morality.
The law
Given the application before the Court was for an injunction, the Court had to consider whether there was a serious issue to be tried, and the balance of convenience.
In considering these issues, the Court had regard to s.445D of the Act, which governed the plaintiff’s substantive application. Pursuant to that section, the Court has the power to terminate a DOCA on several grounds, including the following:
- 445D(1) to (c) – where information provided to creditors is misleading;
- 445D(1)(f) – the DOCA is oppressive or unfairly prejudicial to or unfairly discriminatory against creditors, or contrary to the interests of the creditors as a whole;
- 455D(1)(g) – the DOCA be terminated for some other reason.
The Court noted that s.445D involves a two stage process. First, the Court must determine whether one of the grounds referred to has been established. If so, the Court must decide whether to exercise the discretion to terminate the DOCA based on that ground.
In relation to s.445D(1)(g) (termination for some other reason), the Court referred to the following comments made by Beach J in Habrok (Dalgaranga) Proprietary Ltd v Gascoyne Resources Limited [2020] FCA 1395:
“Generally speaking, one should not terminate a DOCA or order a company be wound up if the DOCA will restore to company to financial health and the DOCA does not have the purpose or effect of unjustifiably quarantining third parties from investigation. If the company is trading and it likely that its business will continue, then unless there are real public interest concerns, termination of a DOCA and causing a company to be wound up are inappropriate outcomes. The interests of creditors should be the primary consideration, but they may be outweighed if the DOCA has a fraudulent or wrongful purpose.”
Disposition
In considering whether there was a “serious issue” to be tried so as to warrant the injunction, the Court found the plaintiff had not raised a sufficient basis on which the Court could find that the administrators’ reports were misleading, or that this influenced the outcome of the meeting. This was particularly the case given the administrators had recommended the DOCA propounded by the plaintiff. In all the circumstances, the Court found the plaintiff failed to establish how, if different information had been provided, this would have resulted in a another outcome.
In relation to the alleged differential treatment of creditors, the Court noted such treatment may be acceptable, provided the creditors who are less favourably treated receive more than in a liquidation, and there is a proper basis for the discrimination. The Court observed it is usually harder to establish unfair discrimination where creditors are better off under a DOCA than in a liquidation. The Court noted that judges have not treated discrimination between continuing and non-continuing creditors, and between larger and smaller creditors, as contrary to the Act where there is a commercial basis for this.
In all the circumstances, the Court found that the information provided to creditors was that the return under either DOCA was better than in a winding up. Moreover, while there was some differential treatment of creditors, there was no serious issue to be tried.
Finally, in relation to the “balance of convenience,” while the the Court accepted that a failure to grant the injunction would render the plaintiff’s substantive application nugatory (as the DOCA would take effect), the Court held this was largely attributable to the plaintiff’s inordinate delay in prosecuting the application. Accordingly, the application was denied.
Conclusion
The case of GT is a timely reminder of the difficulties that will be faced by an applicant which fails to prosecute an application for injunctive relief in a timely manner. Further, the case highlights the obstacles that will need to be surmounted by an applicant seeking to have a DOCA set aside, particularly where the return to creditors is greater than in a winding up (as will almost invariably be the case).
