Ruling highlights Australian courts’ approach to deed of company arrangement termination applications

In the case between Queensland’s Commissioner of State Revenue and the administrators and creditors of insolvent engineering, electrical and labour hire services business Comlek Group, the Commissioner sought to terminate a pooled DOCA - which was entered in relation to a group of 20 companies, described as Comlek Companies, in Queensland on 9 February 2023 - and wind up the Comlek Companies. Pinsent Masons acted for the Administrators and then the Deed Administrators of the Comlek Companies.

In or around 2008, a partnership was established between Donaldson (Mackay) Pty Ltd as trustee for the Donaldson Family Trust and Simon Gallagher - later replaced by Simon Gallagher Pty Ltd - as trustee for the Gallagher Family Trust. This was known as the Comlek Partnership, which operated the Comlek Business, an engineering, electrical and labour hire service business. The Comlek Companies were incorporated from time to time and, as early as January 2007, conducted, or were otherwise in connection with the Comlek Business. In about May 2010, there was a corporate restructure.

In September 2013, three entities within the group of Comlek Companies were deregistered. The deregistered entities had not lodged any returns to the Commission in respect of payroll tax despite having outstanding liabilities at the time of deregistration. On 28 September 2022, the total payroll tax liability - including unpaid tax interest - for the deregistered entities was AU$1,483,541 (US$991,909). However, various other payroll tax assessments were recorded as having been issued for financial year periods between 1 July 2015 and 30 June 2022.

On 26 and 27 September that year, the Commissioner issued default assessment notices and reassessment notices for each of the Comlek Companies - except for four of the companies - and the Comlek Partnership relating to financial years ending 30 June 2010 to 30 June 2022 inclusive. The total liability was AU$10,073,318 and had not been recorded in the books of the Comlek Companies.

Following this, between 28 September and 5 October 2022, the Commissioner issued notices of investigation under the Tax Administration Act 2001 (Qld) (TAA) to a majority of the Comlek Companies. Those notices stated the Comlek Companies formed a ‘group’ for the purposes of Pt 4 of the Payroll Tax Act 1971 (Qld) (PTA) and formed a reasonable belief that said the companies had engaged in deliberate tax default and business structuring, with other companies in the group, to avoid detection and payment of payroll tax. The Commissioner relied on section 51A of the PTA, and section 47 of the TAA for imposing joint and several liability of each member of the group of Comlek Companies.

On 5 December 2022, the directors of the Comlek Companies resolved to place the Comlek Companies into voluntary administration and to appoint Andrew McCabe and Joseph Hayes as voluntary administrators in line with section 436A of the Corporations Act 2001 (Cth).

The Commissioner lodged proofs of debt with the administrators for each of the Comlek Companies, which were admitted in full for voting purposes in the sum of AU$9,365,924.01.

During the voluntary administration period, some of the directors of the Comlek Companies proposed a deed of company arrangement (DOCA) - a formal arrangement which, if voted in favour of by creditors of a company in administration, binds the company and creditors and governs the affairs of a company. Under the DOCA proposal, the Commissioner would receive 60% of the DOCA fund and the remaining 40% of the DOCA would be shared among the other creditors of the Comlek Companies, except for excluded creditors. The DOCA proposal provided that control of Comlek Companies reverted from the administrators to its directors upon execution of a DOCA, which included trading entities with over 140 employees at the time the report was issued. The deed administrators prepared a report to creditors dated 11 January 2023 which included a recommendation for creditors to approve the DOCA proposal.

On 18 January 2023 - the day before the second meeting of creditors of the Comlek Companies - representatives of the Commissioner met with McCabe. In that meeting, the Commissioner’s representatives informed the administrators that the Queensland Revenue Office would be unable to vote in favour of the DOCA proposal. The administrators sent a letter following that meeting which set out why they would exercise their casting vote in favour of the directors’ DOCA, in line with the recommendations set out in their report, and invited the Commissioner to provide an indemnity in the amount of AU$430,000 in order to consider any adjournment of the second meeting of creditors.

The Commissioner responded to the administrators at 10:20pm that evening, informing them that the Commissioner had concerns that the return to the Commissioner under the DOCA proposal was unfairly discriminatory and there existed matters concerning public interest and commercial morality that strongly indicated why it was appropriate for the Comlek Companies to be placed into liquidation. An indemnity to adjourn the meeting was not provided.

On 19 January 2023, the administrators recommended that creditors vote in favour of the DOCA proposal. The majority of creditors voted in favour of the DOCA proposal but the majority creditor - in value – which was the Queensland Revenue Office, voted against the resolution. As a result, there was a deadlock in voting and the chairperson of the meeting, McCabe, exercised a casting vote in favour of the DOCA proposal. Accordingly, that resolution was passed. The Comlek Companies entered a pooled DOCA on 9 February 2023.

On 17 March 2023, the Commissioner commenced proceedings in the Federal Court of Australia seeking orders in line with sections 445D and 447A of the Corporations Act to terminate the DOCA and for the Comlek Companies to be wound up. The Commissioner also sought an order that the exercise of the casting vote of McCabe be set aside in line with section 75-42 of the Insolvency Practice Schedule (Corporations) 2016.

The Court’s decision

The Federal Court of Australia concluded at a contested trial which ran for two weeks - with expert evidence - that the DOCA should not be terminated and the casting vote should not be set aside.

In making its decision, the Court considered whether the termination of the DOCA was in the public interest. It also considered whether there had been misleading information or omissions in the report containing the DOCA proposal and whether the DOCA was unfairly discriminatory.

In determining whether the termination of the DOCA was in the public interest, the Court found that – based on the evidence - the Commissioner had not sufficiently established that the DOCA had not been in the public interest. Reasons provided by the Court included the fact that trading entities within the group of Comlek Companies were solvent and had been trading solvently for roughly one year and three months since the DOCA was voted on, and the Commissioner had waited until almost two months after the second meeting of creditors to commence proceedings.

One of the Commissioner’s primary contentions was that the report contained information that was false and misleading because it failed to disclose key information that would have impacted the creditors’ decision about whether to vote in favour of the DOCA proposal. This included matters relating to payroll tax, matters regarding the insolvency of Comlek Companies and insolvent trading claims, and matters regarding company books and records.

The Court found that the Commissioner had failed to sufficiently establish that there had been false or misleading statements in the report. It held that, while the Commissioner had established that there had been an omission - in the form of failure to inform the creditors of the Commissioner’s allegations regarding tax defaults and tax evasion by Comlek Companies - on the basis of the administrators’ reasonable concession during cross-examination, the Court concluded that it would not exercise its discretion to terminate the DOCA.

In determining whether the DOCA was unfairly discriminatory, the Court considered the Commissioner’s contention that all other creditors would fare better than the Commissioner under the DOCA than they would in a liquidation. Citing previous cases, the Court noted that – among other things, it was not necessary that the DOCA provide strictly equal dividends for it to be seen as non-discriminatory, as long as the creditors received a better return under the DOCA than they would if the Comlek Companies were immediately wound up.

The Court also declined to set aside the casting vote exercised at the second meeting of creditors, noting that there was no evidence or suggestion that McCabe had acted dishonestly or in a way that had not been in line with the best interests of the creditors as a whole.

The Commissioner’s application was dismissed with costs.

Practical considerations when a deed of company arrangement is challenged

Assessing whether it would go against public interest to allow a DOCA to continue depends on the facts and evidence established in each case. Relevant considerations include whether a company subject to the DOCA is solvent, the period they have been trading solvent since the DOCA was voted on, and whether the termination of the DOCA would have an adverse effect on employees of the company.

A statutory creditor would need to consider whether it would be in the public interest to terminate a DOCA, particularly if it has statutory powers to run its own investigations. Courts are less likely to accept a public interest argument if the statutory creditor has run its own investigations and there are remedies available to it for breaches of law.

If the asset pool available for potential claims will not change with an earlier insolvency date and there are no available insurance policies to take effect, establishing an earlier date of insolvency to pursue insolvent trading claims will not be seen to serve the public interest.

As demonstrated in this case, a party looking to challenge the exercise of a casting vote at a second creditors meeting would need to establish that the chairperson’s decision-making process in exercising the casting was dishonest or not in line with what they believed was in the best interests of the creditors.

Crucially, evidence of misuse of the Part 5.3A process – the voluntary administration process set out in the Corporations Act - must be established to terminate a DOCA. Depending on the facts of the case, a director that has given evidence of genuine reasons for approaching administrators and seeking its voluntary administration is more likely to have their evidence favoured when allegations are made against them that a DOCA goes against the purposes of Part 5.3A of the Corporations Act.