“Dodgy DOCAs”: avoiding court challenges to restructuring proposals

The Federal Court has provided a timely reminder that Deeds of Company Arrangement (DOCAs) are not beyond scrutiny.

In Horton Asset Pty Ltd v HMSY Group Pty Ltd [2025] FCA 1051, [1] Justice Burley terminated a DOCA that provided insiders a free pass while leaving unrelated creditors worse off. The Court described its effect as “oppressive, prejudicial and contrary to creditor interests.”

This case is a warning for Deed Proponents and administrators: DOCAs that favour related parties, cut off recovery avenues, or ignore administrator warnings are at high risk of being set aside.

Background

HMSY Group Pty Ltd (Company) was established to develop property in Padstow, NSW. Horton Asset Pty Ltd (Horton) lent the Company more than $2 million in 2016. When the project collapsed, Horton sued and in December 2024 obtained judgment for $2,016,642.47 plus costs.

In around June 2024, the Company owed more than $6 million. About $442,000 from a land sale was the only valuable asset owned by the Company left. After a winding-up application was filed in a separate proceeding, a new director was appointed, and on 27 December 2024 a voluntary administrator was appointed.

On 5 February 2025 the creditors resolved to enter into a DOCA notwithstanding the administrator’s contrary recommendation. The resolution carried only because of related-party votes:

• Ten related entities lodged claims totalling $2,279,193.75; and
• Two unrelated creditors (Horton and Lilygao Pty Ltd (Lilygao)) together were $2,044,176.83.

Red flags in the Administrator’s report

In his 28 January 2025 report, the voluntary administrator raised serious concerns:

• The new director had no knowledge of the Company’s financial records;
• The Company’s solicitors claimed a lien of $96,000 over the trust funds;
• Related-party debts required investigation as potential unfair loans or insolvent trading; and
• There was no viable plan for the Company’s business to continue.

The voluntary administrator recommended liquidation, estimating that unsecured creditors might receive about 5.4 cents in the dollar under the DOCA versus 0.3 to 19.7 cents in the dollar liquidation. But it was also emphasised that in liquidation, creditors could have benefitted from:

• Two potential unfair preference claims against Lilygao;
• Potential unfair loan claims exceeding $2,000,000; and
• Insolvent trading claims against directors with property assets.

Despite these warnings, creditors (driven by related-party votes) approved the DOCA.

Horton’s application under s445D - What it is and what it does

Horton applied to terminate the DOCA under s 445D(1)(f) of the Corporations Act 2001 (Cth), which enables a deed to be set aside if it is oppressive, unfairly prejudicial, unfairly discriminatory, or contrary to the interests of creditors as a whole.

A DOCA may be set aside where:

• It is not to maximise the chance of the company or its business continuing, or if that is not possible, deliver a better return for creditors; and where
• It is not within the interests of creditors, the comparative outcomes in liquidation versus under the deed, and the overall effect of the deed (including collateral benefits).

Per the two-stage inquiry established in s 445D, where it is shown to be a “not unrealistic prospect” that creditors may do better in a winding up than under the deed. The Court must decide whether to terminate the deed.

Why the DOCA was set aside

Justice Burley identified several fatal flaws in the present case:

1. The deed divided creditors into two categories. Horton and Lilygao, as participating creditors, could share in the limited trust funds but only if they gave up their claims in full. By contrast, related-party creditors received no distribution but were able to preserve their debts and avoid the scrutiny of a liquidator. Justice Burley commented that this structure had the effect of “insulating…entities from the closer scrutiny of a liquidator and depriving the Participating Creditors of an opportunity to benefit from that scrutiny.”
2. The deed only passed because of related-party votes, and those parties were the main beneficiaries of its structure.
3. The Company had no realistic restructuring path. Even if trading resumed, unrelated creditors would not benefit under the DOCA.

Against these factors, the Court therefore terminated the DOCA and ordered the Company be wound up, finding it “oppressive, prejudicial and contrary to creditor interests.”

What does this mean for administrators and deed proponents?

HMSY Group confirms that DOCAs which privilege insiders, strip outsiders of recovery pathways, and lack a credible restructuring rationale will not survive Court scrutiny. Well-designed deeds treat creditors fairly, preserve (or replicate) liquidation recoveries, and align with Part 5.3A’s objectives.

If you require advice on structuring DOCAs to withstand challenge or assessing the fairness of proposed arrangements, please contact our insolvency team here or Aaron McDonald on +61 (0) 8 6188 3341 or aaron@pragma.law.

[1] Horton Asset Pty Ltd v HMSY Group Pty Ltd, in the matter of HMSY Group Pty Ltd [2025] FCA 1051 (‘HMSY Group’)

Image: Murray Harris, Supreme Court of NSW