Updated: Mar 2
2022 was a year in which we at de Jonge Read saw an increasing number of successful uses of Deeds of Company Arrangement (DOCAs) - In this month’s case study, we will look at how one of a DOCA’s many uses were applied to bring finality to a challenging legal dispute with a Council.
We were contacted by a client who had researched our firm and approached us directly for assistance.
The client operated a limestone quarry in New South Wales. The company leased the site from the local Council. The lease agreement provided that the Council would lease certain plant and equipment to the company, and demolish the existing storage shed and construct a new storage shed.
In order to properly operate the quarry, it was necessary for the company to purchase plant and equipment in excess of $1m in addition to the plant leased from the Council.
THE PROBLEMATIC RELATIONSHIP
After the terms of the lease agreement were agreed upon and formalised, there were significant delays in gaining access to the site.
Once our client was eventually granted access, it was quickly established that the site was not safe for workers to enter. The leased plant and equipment were not operational or fit for purpose. Our client was then forced to spend a further circa $1m to make the plant and equipment operational and the site safe and workable.
A few months later, it was discovered that the new storage shed constructed by the Council was not watertight and as a result, $130k worth of lime stored in the shed was damaged by water ingress.
All this gave rise to several ongoing disputes with the Council. Ultimately, the Council terminated the lease and refused our client access to the quarry.
At the time of termination, approximately $480K worth of limestone belonging to our client was stockpiled on site which it could not retrieve and sell to its major customer.
This resulted in expenses going unpaid and significant cash flow pressures arose.
Needless to say, our client commenced legal proceedings against the Council for damages and to recoup the substantial amount of funds that were outlaid to make the leased plant and equipment safe for workers to operate.
Our client had briefed a Queen's Counsel whose opinion was that its prospects of success against the Council were very favourable.
However, with the court process being notoriously slow, the prospects of success gave our client cold comfort when time was of the essence due to pressing creditor demands.
But for the actions of the Council, the core business of the company would be very profitable. The directors’ opinion (with which we agreed) was that it would be a pity to liquidate the company when a successful action against the Council was so strong. It was almost inevitable that the company would obtain a court order in its favour or negotiate a satisfactory settlement. Accordingly, the directors wanted to know from de Jonge Read what options and strategies were available to save the business.
After initial investigations, we recognised that we could provide significant assistance by implementing and project-managing a DOCA procedure with the support of an insolvency practitioner.
The DOCA procedure can be very adaptable and can be utilised to achieve a variety of outcomes. In this case, by putting the company’s business on hold pending the outcome of litigation we at de Jonge Read assisted our client in proposing the DOCA.
We were able to provide a proposal that compared the return to creditors in liquidation as opposed to the potential return under a DOCA. We also worked with the Insolvency Practitioner to ensure the proposal was something they would recommend.
As it was generally accepted that our client’s prospects of success against the council were good, the majority of our client’s creditors were in favour of the DOCA. The DOCA was executed.
A few months later our client and the Council agreed to mediate. Our client achieved a settlement on very favourable terms. The DOCA process provided for a much greater return to creditors than would otherwise have been the case in a liquidation scenario. Indeed, creditors received 80% of the settlement sum.
As it did for some of our clients during the Covid shutdown, the DOCA provided our client the critical time needed to increase the chances of the company’s survival during a challenging period.
------------------------------------------------------------------------------------------------------------------------------- Should you have clients or associates that you know are struggling with financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies.
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