In the recent decision of Sino Group International Ltd v Toddler Kindy Gymbaroo Pty Ltd  FCAFC 110, the Court concluded that an administrators’ report issued to creditors was misleading in nature and terminated the deed of company arrangement (DOCA) approved by the majority of creditors.
This case reinforces the consequences of failing to carefully and fully disclose relative returns under a DOCA in contrast to a winding up.
Administrators had been appointed to Toddler Kindy Gymbaroo Pty Ltd (Gymbaroo) under s 436A of the Corporations Act (Act)
In advance of the second meeting of creditors, an administrators’ report recommended a DOCA which estimated returns of 100 cents in the dollar. The administrators contrasted this outcome with a winding up scenario with an estimated dividend to creditors in the range of 33 to 42 cents in the dollar.
The DOCA was approved by a majority of creditors in both value and number and was executed on 28 March 2022.
Following execution of the DOCA, certain dissenting creditors sought orders from the Court terminating the DOCA under section 445D and/or section 445G of the Act, or alternatively pursuant to section 75-41 of the Insolvency Practice Schedule (Corporations) 2016 (Cth).
The initial application of the dissenting creditors was unsuccessful leading to an appeal to the Full Court of the Federal Court of Australia.
The Full Court considered it appropriate to exercise its discretion to order termination of the DOCA, on the basis that the administrators failed to qualify the statement that creditors would receive a dividend of 100 cents in the dollar in contrast to the qualification given in relation to a winding up scenario of 33 to 42 cents in the dollar. On that basis creditors would have the impression that the 100 cents in the dollar return was more than likely. The Court found a worst case for the DOCA scenario was 38 cents in the dollar with a best case of 100 cents in the dollar.
The Full Court terminated the DOCA and ordered costs against the Administrators. In doing so the Court considered not just the interests of creditors but the public interest as well.
In the process of preparing a creditors report, it is vital that administrators include all appropriate information to allow creditors to make an informed decision about any proposed recommendation with thorough estimates while avoiding conclusive language.
Whilst administrators are not required to present every provision of a proposed DOCA in the report, any key terms considered material to the decision to vote for or against the DOCA must be provided.
Administrators also need to appreciate the potential costs consequences of defending a DOCA that is terminated by the Court.
Like the immortal phoenix rising from the ashes, a new company, often just established, might arise from the winding-up of a failing company. When that new company's officers and directors are essentially the same of the failing company, and the new company resumes business activities of the now defunct company, what is known as "phoenix activity" might be in play.
The holiday season is just around the corner, and there's no doubt that one of the most anticipated events on your company's calendar is the annual Christmas party.