DOCAS ARE NOT THE EASY WAY OUT!

DOCAS ARE NOT THE EASY WAY OUT!

DOCAS ARE NOT THE EASY WAY OUT!

Section 482 of the Corporations Act allows an application to terminate the liquidation of a company. In Leveraged Capital Pty Ltd (in liq) v Modena Imports Pty Ltd (in liq) [2010] NSWSC 739, it was held that an application under section 482 may require the implementing of a Deed of Company Arrangement (DOCA). This, however, is not generally granted as it is necessary that such orders allowing the company to be released from liquidation should be as much in the public interest as in the interest of creditors bound by the DOCA.

QUICK FACTS

Modena Imports Pty Ltd (Modena) was in the business of importing luxury sports cars. Eventually, Modena incurred a debt of $3 million due to the misconduct of one of Modena's directors.

Modena had further failed to maintain adequate books and records since 2005. The liquidator, therefore, found that Modena could claim insolvency under section 286 of the Corporations Act.

Under initial inspection it was found that Modena had $50,000 for payment towards the liquidator's fees. In the absence of realizable assets, the liquidator recommended a DOCA for the creditors. This DOCA was to be funded by the Australian Corporate Restructuring Services Pty Ltd (ACRS).

The person who ran the ACRS was Mr James Byrnes who had been prohibited by ASIC after his involvement in four failed companies. ASIC was granted leave to participate in the proceedings.

On conducting the cross examination of one of Modena's directors, it was revealed that the company was actually worth $500,000. This paved way towards the likelihood that Mr Byrnes would receive the remaining assets if the DOCA was approved.

COURT'S FINDINGS

The court stated that there are certain requirements for granting an application under section 482. The application should show the circumstances that led to the winding up of the company; the extent to which the credit amount is owed to the creditors; the dispositions of the creditors; and clearly indicate the solvency of the company.

Further, in case there has been any act of non compliance with director's duties, then an explanation for the same must be provided for.

Finally, the application must be consistent with commercial ethics and public interest.

All these factors must jointly prove that it is a positive case - this was not so in the instant case, mainly on account of a breach of directors' duties and on grounds of dishonesty.

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