By Who’s Authority? – Unfair Preference Recoveries from a terminated DOCA
June 17, 2020
On 15 May 2020, the Federal Court of Australia, in the matter of Ready Kit Cabinets Pty Ltd (In Liquidation) v Deputy Commissioner of Taxation  FCA 632, ordered that payments (“Payments”) made by Ready Kit Cabinets Pty Ltd (In Liquidation) (“RKC”) to the Deputy Commissioner of Taxation (“DCoT”), while a Deed of Company Arrangement (“DOCA”) was in force, were recoverable as unfair preferences.
This decision stems from an application by the liquidators (who were also the former administrators and deed administrators) of RKC for orders that, pursuant to section 588FA of the Corporations Act 2001 (“Act”), the Payments made by RKC to the DCoT during the period in which RKC was subject to a DOCA, were recoverable as unfair preferences.
The DCoT argued that, pursuant to section 588FE(2B)(d) of the Act, the Payments could not be deemed as voidable unfair preferences, as they were made ‘by, or under the authority’ of the deed administrators (“Deed Administrators”).
In turn, the liquidators contested that the Payments could not have been made ‘under the authority’ of the Deed Administrators, as the DOCA did not furnish the Deed Administrators with the power or authority to make the Payments. Instead, the liquidators argued that the Payments were made by the director on behalf of RKC.
The Court agreed with the liquidators, with Justice Middleton finding that the application of section 588FE(2B) should be limited to transactions actually carried out by a deed administrator or by a third party under the authority of the deed administrator.
Justice Middleton further noted that the powers and authority of a deed administrator are strictly provided for in the terms of a DOCA, which in the case of RKC and its DOCA, did not provide the Deed Administrators with the power or authority to make the Payments or undertake other managerial affairs of RKC. In this instance, pursuant to the terms of the DOCA, the power and authority to make the Payments and undertake the managerial affairs of RKC reverted back to the director.
This decision highlights just how impactful the terms of a DOCA can be, not only on creditors of a company which is subject to a DOCA, but also on the liquidators of any company which has had a DOCA terminated.
Moving forward, liquidators are sure to cast a keen eye over the terms of any terminated DOCA, as the simple question of ‘Who has authority in a DOCA?’ may be the difference between a return to creditors and no return to creditors.
About the author
Benjamin Mitchell is our Senior Insolvency Accountant at HLB Mann Judd Insolvency WA. Ben assists the Principal and Director oversees the many insolvency appointments managed by the HLB Insolvency team.
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