From time to time we see section 439A reports with proposals for the company to enter into a deed of company arrangement (“DOCA”) on the basis that “related parties” will not participate in the DOCA fund.

In most cases the term “related parties” is used without any further definition of the term.

Sometimes the term “related parties” is used by reference to section 9 of the Corporations Act 2001 (Cth.) (“the Act”). This occurs most often in relation to proposals indicating that the “related parties” will not participate in the distribution of the DOCA fund.

Whilst the Act has a definition of “related party” in section 9, that definition is not apt to be used in the external administration process. This is because the definition in section 9 is applicable only to chapter 2E of the Act which deals with related party transactions involving public companies.

Sometimes we also see the term “related entity” used in section 439A reports and DOCA proposals in lieu of the term “related party”.

The term “related entity” is also defined in section 9 of the Act. Unlike the term “related party”, the term “related entity” has the following very expansive definition including a:-

1. promoter of the body;
2. relative of such a promoter;
3. relative of a spouse of such a promoter;
4. director or member of the body or of a related body corporate;
5. relative of such a director or member;
6. relative of a spouse of such a director or member;
7. body corporate that is related to the first-mentioned body;
8. beneficiary under a trust of which the first-mentioned body is or has at any time been a trustee;
9. relative of such a beneficiary;
10. relative of a spouse of such a beneficiary;
11. body corporate one of whose directors is also a director of the first-mentioned body; and
12. trustee of a trust under which a person is a beneficiary, where the person is a related entity of the first-mentioned body because of any other application or applications of this definition.

This is an extraordinarily wide, all-encompassing, definition. In particular it covers all lineal members of the director’s family, which will include cousins and other relatives who the director may never have met or may be estranged from. It also includes:

• any shareholder and all lineal members of the shareholder’s family; and
• all lineal members of the family of the spouse of any director; and
• all lineal members of the family of the spouse of any shareholder.

Section 444A of the Act provides that where a company’s creditors resolve that the company execute a DOCA, the administrator of the company must prepare an instrument setting out the terms of the deed. Section 444B(6) of the Act provides that when executed, the instrument becomes a deed of company arrangement. Section 445A of the Act provides that a DOCA may be varied by a resolution passed at a meeting of the company’s creditors convened under section 445F, but only if the variation is not materially different from a proposed variation set out in the notice of the meeting.

The combined effect of sections 444A, 444B(6) and 445A is that the terms of the DOCA must be the same as the proposal for the DOCA that the creditors voted for at the major meeting of creditors. If the DOCA is not the same as the proposal for the DOCA that the creditors voted for at the major meeting of creditors then it is arguable that the instrument that is executed is not a DOCA. At the very least it is arguable that the instrument, if executed, should be set aside as a DOCA because it is not the same as the proposal the creditors voted for at the major meeting of creditors.

It is often assumed that when DOCA proponents make reference to related parties or related entities that they usually have in mind a restricted class of persons, usually the director(s), the director(s) spouse and children and companies within the same corporate group. Whilst this may be the case, because of the potential problems of not correctly defining the class as discussed above, we suggest that when finalising DOCA proposals for inclusion in the administrators’ section 439A report, administrators should rather than use the term “related party”, instead use the term “non-participating creditor” and then list by name each person and corporation who will not have a claim against the DOCA fund. This will avoid any confusion and any suggestion that the DOCA that is ultimately executed is not the same as the proposal for the DOCA that the creditors voted for at the major meeting of creditors. It will also avoid parties unintentionally being excluded from having a claim against the DOCA fund.

By way of example:

A construction company that is in administration puts forward a DOCA proposal that is accepted by creditors. The DOCA proposal and the resulting DOCA that is executed states that any related entity of the company is excluded from having a claim against the DOCA fund. One of the company’s creditors is John Smith t/as ABC transport. The term related entity is defined by reference to section 9 of the Act. One of minority silent shareholders of the construction company is Tom Smith. Tom is the estranged grandson of John Smith. John & Tom have not spoken for over 15 years and John had no idea that Tom is a shareholder of the construction company. However because of the use of the expansive definition in section 9, John Smith is excluded from having a claim against the DOCA fund.

If the administrator of the DOCA pays a dividend to John Smith without knowing that it should be excluded, they could be criticised for making a payment contrary to the terms of the deed and the deed proposal.  However, if the administrator does identify the issue and rejects the proof, they may face an argument from John Smith that no agreement was made whereby John Smith would not prove for a dividend under the DOCA.

Careful drafting and the early provision of legal advice can help protect a deed administrator from this kind of risk.