Recently, the creditors of Virgin Australia resolved to approve the Bain Capital proposal for a deed of company arrangement (DoCA) involving a creditors’ trust. A creditors’ trust – you may have heard of one but what are they?
A creditors’ trust is a mechanism used to accelerate a company’s exit from external administration. Under a DoCA, the creditors’ claims are usually dealt with under the terms of the deed. However, with a creditors’ trust, the creditors become beneficiaries of that trust, which means that the DoCA can be ‘wholly effectuated’ (finalised) and the company that was formerly in administration no longer has to use the terms “Subject to Deed of Company Arrangement” after the company’s name.
Why is this beneficial?
Even though it is common for the control and stewardship of a company to revert to the directors under a DoCA (but not always), there is sometimes a reluctance by stakeholders such as customers, suppliers and creditors to engage with a company that has the terms “Subject to Deed of Company Arrangement” after its name. It creates uncertainty. In addition, the incorporation of a creditors’ trust on any proposal for a DoCA may prove useful should there be a need to restructure and recapitalise a company in order for it to be (re)listed on the Australian Securities Exchange (ASX)
What are the risks to creditors?
Under a DoCA, the rights of creditors to apply for the termination of a DoCA or to appeal against a proof of debt lodged by a creditor is governed by provisions set out in the Corporations Act 2001 (Cth). Under a DoCA, the rights of creditors will be dependant on the terms of the trust and relevant trust legislation, such as the Trustee Act 1925 (NSW).
Any proposal of a DoCA involving a creditors’ trust requires additional disclosures by the administrator in a report to creditors. These disclosures include, amongst other things, key events, returns to creditors under the creditors’ trust, indemnities and powers of the Trustee (who is usually the former deed administrator), protections and rights of creditors (under a deed company arrangement as opposed to a creditors’ trust), tax issues and other material aspects.
Creditors may find that the cost of a proposed DoCA involving a creditors’ trust may be greater than one without, when these additional required disclosures by the administrator are taken into account, along with the additional legal costs necessary for the preparation and review of the creditors’ trust deed. As always, these issues are a matter of balancing the interests of the parties to the DoCA. Often those interests are not aligned.
Creditors should make enquiries with the relevant administrator or seek external advice if they are unsure of their rights and alternatives when considering a proposal for a DoCA a creditors’ trust.
At Vincents we are proud to be well-positioned across all touchpoints for insolvency and reconstruction reform, as one of Australia’s few, fully integrated mid-tier professional services firms. We have a clear mission to work with our clients to give them greater clarity and direction – and right now this couldn’t be more pivotal.
If you’re a stakeholder involved in any part of this process and struggling to understand your options – reach out to us.