Send us an email.

  • This field is for validation purposes and should be left unchanged.

The Dangers of the DOCA

Stipe Vuleta

The Supreme Court of Queensland in Scott & Ors v Port Hinchinbrook Services Limited & Ors [2017] QSC 92 concerned a plurality of dealings around the appointment of an administrator, a Deed of Company Administration (DOCA) and relevant sections of the Corporations Act 2001 (Cth) (Act).

 

Background

The DOCA in this case purported to amend the constitution of Port Hinchinbrook Services Ltd (PHS) in order to endow another entity, Passage Holdings Pty Ltd (Passage) with 76 percent voting rights. The overall objective of the DOCA was to try to place Passage in majority voting control of PHS. This was attempted in a number of ways.

1. Clause 5 empowered the administrator to amend the constitutional clause creating and conferring special rights upon the only special member of PHS;

2. Clause 6 gave the administrator the power to appoint directors of PHS;

3. Clause 7 stated that “control and stewardship of the company will revert to the officers”; and

4. Clause 17 made provision for a constitutional change which would transfer the 76 percent voting control held by the special member to Passage.

 

An email from the director installed by the DOCA gave notice of an Annual General Meeting in which three resolutions were to be voted on. These resolutions implemented Clauses 5, 6, 7 and 17 above.

 

The Decision

The Court was predominately concerned with whether the various and overlapping clauses of the DOCA were effective in giving 76 per cent voting rights to Passage. The Court also considered when and by whom directors could be appointed under the rules of the Constitution and the Act.

 

When does the power to appoint directors cease?

Clause 6 of the DOCA reflects section 442A of the Act which expressly empowers an administrator of a company under administration to appoint a person as a director. Section 435C(1)(b) of the Act states that administration ends when a DOCA is executed by both the company and the DOCA’s administrator. In this instance that administrator executed the DOCA as both the administrator of PHS “on behalf of” PHS, as a voluntary administrator and deed administrator.

 

The Applicants submitted that the administrator did not have the power to appoint new directors under section 442A by arguing that once the DOCA was executed the administrator’s power to appoint directors under section 442A lapsed. Therefore, the appointment of directors was said to be in breach of the Act.

 

The Court rejected this submission by stating that the administrator “continued to hold that power [to appoint directors] until the point in time when the DOCA was executed by both the company and the deed’s administrator…The conclusion of the execution process marked both the end of the administration and the commencement of the DOCA.”

 

Were the Directors valid appointees?

Section 437A(1)(d) of the Act allows the administrator to exercise any powers which PHS could have exercised “if the company were not under administration”. Under PHS’s constitution only members could be appointed directors. None of the directors appointed by the administrator were members of PHS. The Applicants argued that the appointment of these directors was therefore in breach of the Act.

 

The Court contrasted section 437A(1)(d) with the broader section 422A. 442A allows the administrator to appoint directors despite any restrictions inherent in 437A(1)(d). The Court deemed that the broader power under section 422A allows an administrator to appoint a director inconsistent with the Company’s Constitution as, on its proper construction, the section was not intended to restrict this power.

 

The Court noted that this broad interpretation was subject to the fiduciary duties of an administrator under the Act.

 

Provision of 76 per cent voting control

The administrator purported to utilise the DOCA to change the constitution of PHS, giving Passage the 76 per cent voting control previously held by the special member. The Applicants argued that this was contrary to the Act.

 

STIPE VULETA
Director | Litigation – Insolvency & Risk Management
Chamberlains Law Firm
stipe.vuleta@chamberlains.com.au | + 61 2 6215 9100

by