08 December 2016
In a recent matter involving the appointment of BRI Ferrier’s Peter Krejci and Robyn Karam as voluntary administrators, a major creditor (by value) challenged the deed of company arrangement (DOCA) incorporating a creditors’ trust that had been accepted by vote of all other creditors (by number) and the administrators’ casting vote.
Infa Products Pty Ltd was a child car-seat manufacturing company that had operated in the Australian market. However, approximately five years before the voluntary administration (VA) appointment it had sold its business operations to a related company, Infa Secure Pty Ltd. Shortly before the administrators’ appointment, the remaining business assets and intellectual property were also sold.
Britax Childcare Pty Ltd, a major creditor and primary competitor, had brought a series of legal claims against Infa Products, relating to various alleged breaches of intellectual property. The litigation ran for a number of years until Infa Products was no longer financially able to defend the case, at which point it sought to appoint voluntary administrators.
Britax was clearly frustrated that Infa Products had been placed into voluntary administration when they were so close to the end of the protracted intellectual property litigation. Furthermore, upon realisation that Infa Products had sold many of its assets, Britax took offence at the asset disposal transactions, and alleged that they had not been undertaken for a proper purpose or for proper value.
A substantial portion of the administrators’ efforts were spent investigating and reporting on the asset disposal transactions, so that creditors could be properly informed when deciding the fate of Infa Products.
The VA appointment and vote for a DOCA
When the administrators were appointed in December 2015, Infa Products’ balance sheet included only cash, debtors and liabilities.
The administrators immediately undertook a proper and thorough investigation of the company’s affairs and the conduct of its officers, including the previous asset disposals. They concluded that, while there may have been potential claims against the director and related parties, a liquidation was unlikely to result in a higher return to creditors as compared to the proposed DOCA.
In accordance with the objectives of Part 5.3A of the Corporations Act, they were obliged to recommend the DOCA.
The second creditors’ meeting ended in a deadlock on the vote, with all minor creditors voting for the proposed DOCA and Britax (the largest creditor by value) voting for liquidation. This meant the administrators had to exercise a casting vote and did so in line with their recommendation in favour of the DOCA.
Legal proceedings against the administrator
Following the vote and execution of the DOCA, Britax brought legal proceedings to overturn the DOCA and the conduct of the administration. It obtained an injunction preventing the deed administrators from executing the creditors’ trust pending the outcome of the proceedings.
Britax asserted that a liquidator may have been able to pursue actions against Infa Products’ director, including claims for accessorial liability against related parties. It also asserted that the administrators’ investigations were insufficient and that they had wrongly exercised their casting vote to carry the DOCA.
To not prejudice the other creditors, Britax offered funding to cover the projected dividend of those creditors under the DOCA. Further, to support the asserted claims in a liquidation, Britax offered limited funding for a liquidator to conduct further investigations.
The court subsequently scrutinised the administrators’ investigations, reporting and their views formed as a result of their investigations.
During the proceedings, the deed administrators as defendants maintained a predominantly ‘neutral’ position, acting for the benefit of all creditors including Britax, and informing the court as to the facts and their views.
In July 2016, the court ruled overwhelmingly in the administrators’ favour, vindicating them in respect of the work they conducted and their recommendation in favour of the DOCA.
The judge, in effect, found that the administrators had conducted complete and thorough investigations of the relevant transactions and had fully reported their findings to creditors. In some regards, he thought that the administrators may have even been optimistic in terms of some of the potential claims that may have been brought in a liquidation, which in the absence of any contradictory expert evidence from Britax, suggests the DOCA represented even greater comparative value.
The judge was therefore not satisfied that there was a realistic prospect of a case against Infa Products’ director succeeding in a liquidation. He concluded that the administrators were correct to exercise their casting vote in favour of the DOCA.
Ultimately, the judge dismissed the application by Britax, lifted the injunction preventing the creditors’ trust from being executed and awarded costs in favour of the deed administrators and Infa Products.
Lessons from the case
This case demonstrates that while the courts provide a forum for review, just because a creditor with overwhelming value may have a particular view (and possibly an underlying commercial agenda), this does not necessarily dictate the outcome of the administration.
By undertaking a proper process, with a thorough investigation, the administrators were able to reach a reasonable outcome for all creditors in the circumstances – an outcome that stood up to scrutiny and concluded many years of litigation.
Reflecting on the pitfalls of long-running litigation, it’s worth noting that Britax may have been able to settle their claims with Infa Products in the lead-up to the administration. This, with the benefit of hindsight, would have represented a far better financial return than Britax is now faced with, having lost the challenge to the DOCA and being the subject of an adverse costs order.
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