Court approves a creditors' trust

The NSW Supreme Court has recently considered whether administrators would be justified in recommending that creditors approve a Deed of Company Arrangement (DOCA) and associated creditors' trust in the case of Re Bevillesta Pty Ltd (in voluntary administration) [2011] NSWSC 417.

The company, Bevillesta Pty Ltd, was the registered proprietor of the land where the Top Ryde Shopping Centre is located. The administrators sought directions from the court in relation to the DOCA and creditors' trust, which proposed to pay out unsecured creditors at or close to 100 cents in the dollar in satisfaction of their claims.

The court held that, despite the proposal of the DOCA and creditors' trust being risky for the creditors (as the creditors would relinquish all rights against the company), and despite ASIC's published objections to the use of such mechanisms by administrators, the fact that the creditors were fully informed by the administrators of the risks involved, and the fact that the creditors stood to receive a substantial return if the proposal was implemented meant that there were sound reasons for presenting the proposal to a meeting of creditors.

This decision highlights that administrators are able to present unusual and potentially risky proposals to creditors, including proposals which provide for a creditors' trust, if the creditors are fully informed of the risks involved in the proposal and the situation is one where the creditors stand little to no chance of otherwise receiving any return in the event of liquidation.

The creditors subsequently voted in favour of the DOCA and creditors' trust at the second creditors' meeting which was held on 8 July. For further information see our Focuson this case.