In brief

The Full Court of the Federal Court has affirmed the high standard to be met by any challenge to a Deed of Company Arrangement (DOCA), where the DOCA compromises a commercial dispute with a third party. The court emphasised the DOCA must be shown to be contrary to the interests of the creditors in light of all relevant circumstances. More needs to be shown than a “not unrealistic prospect of a better outcome” if the DOCA were to be terminated and the litigation pursued by a liquidator.

Key takeaways

In the past, some judges have suggested a DOCA can be terminated at the comparatively low threshold that a liqudiator may be “potentially” successful in litigating a claim. This is clearly now not the test. A higher standard is to be welcomed in discouraging opportunistic creditors from challenging DOCAs which have been accepted by creditors, delaying more certain returns under DOCA proposals.

In formulating their recommendation to creditors, administrators should take into account not only the prospects of the company’s own case, but also the potential for a prima facie defence, whether they can obtain funding, delays in any recovery, and any difficulties with enforcing any judgment. This is especially the case where that recovery must be pursued internationally under foreign law.

Aggrieved creditors need to prove more than just a realistic prospect of success in litigation about the compromised claim. They should not delay in bringing any application to challenge the DOCA.
Parties formulating DOCA proposals to compromise disputes should consider emphasising all benefits to creditors, including that of a prompt, inexpensive, and certain outcome, especially where disputed questions of international law arise.

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Partner, Sydney
Email: Maria O'Brien


Partner, Brisbane
Email: Ian Innes