Shrimp Happens – Project Sea Dragon Pty Ltd (Subject to Deed of Company Arrangement) and Canstruct Pty Ltd

19th June, 2024

In February 2024, the Federal Court of Australia made orders:

  • setting aside a deed of company arrangement entered by Project Sea Dragon Pty Ltd (PSD); and
  • winding up PSD in insolvency,

finding that the voluntary administration of PSD and a subsequent deed of company arrangement (DOCA) was an abuse of the provisions of Part 5.3A of the Corporations Act 2001 (Cth).

The DOCA provided that all unrelated creditors would receive 100 cents in the dollar, except for Canstruct Pty Ltd (Canstruct) who would only receive approximately 10 to 11 cents in the dollar.  Relevantly, PSD owed Canstruct some $14million under an adjudication determination made against PSD under the Construction Contracts (Security of Payments) Act 2004 (NT).  Canstruct Pty Ltd asserted that if PSD was found not to have been insolvent and its entry into the DOCA was not abuse of process, PSD and its parent company, Seafarms Group Limited (Seafarms), would have developed a “business model to allow insolvent trading to occur”.

Derrington J found that there was no serious doubt that the predominant purpose of the voluntary administration and DOCA process was to allow PSD to avoid paying the liability to Canstuct under the adjudicator’s determination.  Derrington J’s reasons can be found here.

The orders were stayed until the period for the filing of an appeal had expired.

Predictably, PSD and Seafarms appealed and, in doing so, they sought interlocutory relief for an extension of the stay of Derrington J’s orders until their appeal was determined and, further, the orders which:

  • set aside the DOCA;
  • ended the administration;
  • wound up PSD in insolvency,

be suspended or stayed pursuant to s 29 of the Federal Court of Australia Act 1976 (Cth).

Canstruct argued, among other things, that orders staying the execution of the order that PSD be wound up in insolvency would not be effective because the provisions of the Corporations Act 2001 (Cth) would be engaged upon the winding up order being made and liquidators being appointed.

On 9 May 2024, Collier J granted an extension of the stay of Derrington J’s orders subject to certain conditions which included:

  • PSD only incur debts and liabilities in the ordinary course of its business;
  • Seafarms provide a formal undertaking, by way of guarantee or undertaking to the Court, to pay the debts and liabilities of PSD as and when those debts were incurred by PSD; and
  • Seafarms provide security for Canstruct’s costs in the appeal in the sum of $185,000.00.

Collier J’ reasons, which can be found here, included:

  • the Federal Court of Australia, as part of its inherent jurisdiction, has power to stay its own orders;
  • the weight of authority was that the Court was vested with the power to stay, suspend or postpone the coming into effect of the winding up order (such as those made by Derrington J); and
  • the balance of convenience favoured the continuation of the stay, with the conditions imposed, as the winding up order involved consequences of a serious and adverse kind, there was evidence that PSD was an active corporate vehicle, employees in regional areas would likely become unemployed, the Deed Fund (under the DOCA) may not be available to the liquidator and there was evidence, albeit weak, that there were funds available to PSD to pay its debts and when they fell due.

Successfully negotiating, drafting, and navigating the path of DOCA implementation can be a tightrope walk. Appropriate advice is crucial in order to mitigate against the risk of legal action frustrating the effectuation of a DOCA.  MPH Lawyers can provide assistance to guide you through the process. Please contact Dan Butler or Mark Williams by email to dbutler@mphlawyers.com.au or mwilliams@mphlawyers.com.au or on (08) 9221 0033.

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