What is a Creditors’ Trust?
A creditors’ trust in the context of a Deed of Company Arrangement (DOCA) is a legal mechanism used to accelerate a company’s exit from external administration. Although this article only focusses on creditors’ trusts in the context of DOCAs, creditors’ trusts are not exclusive to DOCAs and they may be used in other contexts, including Personal Insolvency Agreements.
Under the terms of a DOCA which contemplates a creditors’ trust, claims by creditors which are bound by the DOCA are compromised and transferred to a trust created at or around the time the DOCA is entered. Ordinarily, the DOCA is effectuated immediately upon its execution or shortly thereafter, at which time the trust takes effect. At that time, the company ceases to be in external administration and, importantly, the company is no longer required to use the notification ‘Subject to Deed of Company Arrangement’ on its public documents, which it would otherwise be required to do by s 450E(2) of the Corporations Act 2001 (Cth).
Subject to the terms of the DOCA and the Creditors’ Trust Deed, each creditor formerly bound by the terms of the DOCA becomes a beneficiary of the trust and the fund that would ordinarily have been created pursuant to the DOCA to pay creditor claims is paid to the trustee for the trustee to use to pay to creditors, as if the creditors were to be paid through the DOCA process.
When Should a Creditors’ Trust be Used?
Although creditors’ trusts have been described as “ingenious” (Re Open Telecommunications Ltd (subject to Deed of Company Arrangement) [2003] NSWSC 1198, [4] per Hamilton J), they should be carefully considered before being deployed. As Barrett J remarked in Parkview Constructions Pty Ltd v Tayeh and Others [2009] NSWSC 186 (at [76]):
Administrators recommending to creditors the adoption of a deed of company arrangement that will give birth immediately to a creditors' trust and then itself promptly die bear a heavy burden of explaining to creditors the implications of the shift from a regime incorporating a court administered scheme of creditor protection to one in which creditors become passive trust beneficiaries.
The categories of case where a creditors’ trust may or should be used are not closed. Fundamentally, a creditors’ trust may be an appropriate mechanism where it assists a company emerge from voluntary administration and promotes a better return to creditors than a:
1. DOCA which, without the creditors’ trust, cannot or does not promote a better return to creditors; or
2. liquidation.
Despite that, in any case where a creditors’ trust is proposed, administrators should exercise caution to ensure its use is not an abuse of process. The implementation of a creditors’ trust may be an abuse of process where, for example, the trust is adopted as a mere artifice to allow a company to avoid a reference to the fact that it is subject to a deed of company arrangement or where the trust is adopted as a simple expedient to promptly remove it from external administration and, therefore, the protections afforded by Part 5.3A of the Corporations Act 2001 (Cth). Such a proposal would be antithetical to the objects outlined in s 435A of the Corporations Act 2001 (Cth). So too would a DOCA proposal involving the use of a creditors’ trust that enables the company to trade on insolvently.
Although there are differences in view about when the use of a creditors’ trust is permissible (see, eg, Re Bevillesta Pty Ltd [2011] NSWSC 417; (2011) 84 ACSR 215 and Australian Securities & Investments Commission Regulatory Guide 82), administrators who receive a DOCA proposal which contemplates a creditors’ trust should, at the very least:
1. explain the commercial and legal reasons why a DOCA proposal contemplates a creditors’ trust;
2. explain the risks to, and consequences for, creditors voting in favour of a DOCA proposal that contemplates a creditors’ trust; and
3. express an opinion about whether the proposal is in the interests of creditors.
Why Should a Creditors’ Trust be Used?
As one would expect, there are advantages and disadvantages to using a creditors’ trust.
Advantages
- The company’s external administration promptly comes to an end.
- Upon the DOCA being effectuated, the company is no longer required to use the notification ‘Subject to Deed of Company Arrangement’ on its public documents, which it would otherwise be required to do pursuant to s 450E(2) of the Corporations Act 2001 (Cth).
- It may facilitate the prompt listing or re-listing of the company on a financial market such as the Australian Stock Exchange.
- It may allow the company to continue trading with less administrative burden or oversight, thereby resulting in a better return to creditors, particularly if the fund used to pay creditors derives, at least in part, from the trade on profits of the business of the company following the effectuation of the DOCA.
- The costs of a trustee may be less than the costs of a deed administrator, who has certain reporting obligations.
Disadvantages
- Once the DOCA has been effectuated, creditors no longer have the benefit of the protections contained in Part 5.3A of the Corporations Act 2001 (Cth).
- Creditors may have fewer rights if the DOCA and / or creditors’ trust is not fully complied with.
- Creditor claims against the company are often extinguished before the amount available for distribution to creditors has been received and, in some cases,ascertained.
- Professional trustees and liquidators are regulated differently and have different duties and obligations. On the one hand, professional trustees are predominately regulated in New South Wales by the Trustee Act 1925 (NSW) and equity. Conversely, liquidators are regulated by ASIC pursuant to, predominately, the Corporations Act 2001 (Cth), the Insolvency Practice Schedule (Corporations), the Insolvency Practice Rules (Corporations) and Australian Securities and Investments Commission Regulatory Guide 258.
- It may be more difficult for creditors to monitor and enforce rights under the Creditors’ Trust Deed. Under the, Corporations Act 2001 (Cth) and the Insolvency Practice Schedule (Corporations), the court has broad supervisory powers to make such orders as it thinks fit in relation to the external administration of a company. Such orders include orders in connection with an appeal to the court brought by a creditor from a decision made by a deed administrator rejecting a proof of debt. A beneficiary may not have analogous rights under a Creditors’ Trust Deed.
Key Considerations in Preparing a Creditors’ Trust
An administrator who is faced with a DOCA proposal which contains a creditors’ trust should properly consider, and explain to creditors in their report in advance of the second meeting of creditors, at least the following matters, in addition to the usual matters which an administrator would ordinarily explain to creditors in advance of a second meeting of creditors:
1. The reasons (including the commercial and / or legal reasons) why the DOCA proposal involves a creditors’ trust.
2. The anticipated sequence of key events if the DOCA proposal is approved and the consequence(s) for any party’s failure to comply with any of the key events on time.
3. Whether the company and relevant third parties are likely to comply with their obligations to the trustee. It would also be prudent for the administrator to explain the reasons why he / she considers the company and relevant third parties are likely to comply with their obligations to the trustee.
4. The likely consequences of approving the DOCA proposal. In explaining the likely consequences of approving the DOCA proposal, the administrator should also comparatively explain the protections and rights of creditors under the Corporations Act 2001 (Cth) and of beneficiaries under the proposed creditors’ trust, including pursuant to the relevant trust legislation in the State or Territory by which the Creditors’ Trust Deed is governed.
5. The anticipated return to creditors / beneficiaries under the DOCA proposal with a creditors’ trust, compared to a DOCA proposal without the proposed creditors’ trust (if any) or a liquidation.
6. Details about the proposed trustee (who is, ordinarily, the administrator). The administrator should also consider and explain whether the proposed trustee has civil liability insurance (including professional indemnity) that will cover conduct by them in their capacity as trustee of the proposed trust, and the nature and aggregate value of any such insurance.
7. Details of any indemnity for the trustee’s fees and liabilities.
8. The proposed remuneration and expenses of the DOCA administrator and trustee.
9. Whether and, if so, when creditors’ claims against the company will be released.
10. Whether and, if so, when an interim dividend may be declared and paid.
11. The time within which creditors must lodge a proof of debt following execution of the Creditors’ Trust Deed.
12. How creditors’ claims will be dealt with under the Creditors’ Trust Deed and in what priority.
13. Creditors’ rights of appeal, including the timing of any appeal, from any decision made by the trustee under the Creditors’ Trust Deed.
14. Creditors’ rights to be informed about the progress the obligations created by the Creditors’ Trust Deed and to require the trustee to call a meeting of beneficiaries to put a resolution to vary or terminate the Creditors’ Trust Deed.
15. Whether the trustee can pay final dividends pending the determination of any appeal from any decision made by the trustee.
16. Whether the company disavows any interest in the creditors’ trust fund.
17. Consequences of the funder’s failure to pay some or all of the creditors’ trust fund.
18. Whether beneficiaries of the trust have any rights to appoint a replacement trustee.
19. The process of appointing a new trustee if the original trustee retires or is unable to fulfil their role by reason of legal incapacity.
20. The process of approving a variation to the Creditors’ Trust Deed, including whether the funder’s approval is required.
21. The effect, if any, on employee entitlements under the Fair Entitlement Guarantee Scheme.
22. Whether the company will be solvent at the date the DOCA is effectuated. If the administrator anticipates that the company will be solvent, the reasons why the administrator anticipates that the company will be solvent should also be explained to creditors.
23. Whether there will be potential differences in taxation implications for the company or creditors / beneficiaries.
24. What ought to happen to the creditors’ trust fund if, prior to a final dividend being paid and the Creditors’ Trust Deed terminating, the company is placed into liquidation, a subsequent voluntary administration (other than by the company's director), the Creditors' Trust Deed is terminated by a court order, or the admitted beneficiaries pass a resolution terminating the Trust.
The above list is not intended to be exhaustive; however, it contains several important considerations to which administrators should have regard upon their receipt of a DOCA proposal that contains a creditors’ trust.
How We Can Help
We have vast experience acting for administrators, liquidators, receivers, receivers and managers, controllers, directors, other company officers and employees, creditors and other parties interested in the administration process. With that vast experience, we can provide comprehensive and tailored advice and legal representation about the administration process, including by:
1. preparing DOCA proposals which include a creditors’ trust;
2. negotiating with administrators, liquidators, receivers, receivers and managers, controllers, directors, other company officers and employees, creditors and other parties interested in the administration process about DOCA proposals;
3. attending creditors’ meetings on behalf of administrators, liquidators, receivers, receivers and managers, controllers, directors, other company officers and employees, creditors and other parties interested in the administration process; and
4. acting and advising throughout the administration process, including by applying to the court for relief in connection with the administration / DOCA process.
If you require advice or legal representation in connection with any part of the administration process, please do not hesitate to contact our office.
Disclaimer
The above is general commentary only and is not legal advice. It is also not an exhaustive statement of the law, nor is it specific to your circumstances. If you are considering proposing a creditors’ trust or suggesting that one be accepted by the creditors of a company, you should seek proper and tailored legal advice about whether to use or suggest a creditors’ trust before doing so.
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