A Deed of Company Arrangement (“DOCA”) can be the perfect instrument to facilitate a commercial settlement between parties where there are no other viable options available, as demonstrated by the recent matter of Brightwater Engineering Solutions Pty Limited (“the Company”).
The directors of the Company appointed BRI Ferrier as Voluntary Administrator in June 2016, owing to the fluctuations of the NZ Groups venture into the Australian market and a contract that generated losses.
The Administration of the Company included cross-border tax arrangements and a limited partnership structure; these complexities had to be traversed in order to effect the DOCA.
The return for creditors
Under the DOCA, priority employee creditors received a dividend of 100 cents in the dollar while participating unsecured creditors received a dividend of 34 cents in the dollar. This is in stark contrast to an estimated return in a Liquidation scenario of nil to 100 cents to priority employee creditors and nil to 3 cents in the dollar for unsecured creditors.
The Company was a wholly owned subsidiary of Brightwater Engineering Limited. From a taxation and legal perspective, the business operated through the Brightwater Engineering Limited Partnership (“the Partnership”), for which the Company was the General Partner and therefore responsible for the trading and liable for all debts incurred. The nature of business was an industrial engineering solutions provider to Australasia’s Resources, Industrial Energy, Quarry & Minerals and Wood & Forestry sectors.
The Company had entered into a construction contract with an ASX listed company (“the Customer”) in August 2015, to design and construct an upgraded quarry at Maddington, WA (“the Contract”). The Contract proved to be extraordinarily unprofitable with the Company incurring trading losses totalling around $16M caused by cost over-runs in almost all segments of the project. These losses were largely funded directly or indirectly by secured creditors (related parties), located in Bermuda and the Company’s parent in NZ.
The funding support was withdrawn around March 2017, and the Company could not continue to perform under the Contract. Consequently, trading ceased, staff were terminated, the Customer took control of the construction site and the Company was placed into Voluntary Administration shortly after.
The asset position
On appointment, the Company held a substantial amount of inventory materials (“Materials”) purpose built for the Contract, which had not been delivered or installed on the construction site. The Materials predominantly comprised of steel infrastructure and related componentry with cost value of around $2.5M. The Materials were held at the Company’s leased premises and with logistics operators (who were owed substantial debts). Their remaining assets included cash at bank (of around $100K), trade debtors (mainly impaired) and minimal plant and equipment.
The Materials were a major focus of the Administration as the Company’s primary asset. However, the Materials were subject to a competing ownership claim by the Customer, priority security interest claims by the Secured creditors and by the priority employee claims. Additionally, substantial costs were incurred with the logistics operators who physically held the Materials and asserted a warehousemen’s lien.
With the competing claims for the Materials, the matter displayed all the hallmarks of uncertain and protracted litigation to be prosecuted by the various parties and inevitably resulting in the Liquidation of the Company. In a Liquidation scenario, it was estimated that the return to unsecured creditors would be negligible, if any, in circumstances where there was an estimated deficiency in shareholder funds of $50m. This scenario was obviously not ideal.
Having conducted enquiries and taken advice in respect of the Materials, the Administrators determined that a commercial deal with the Customer represented the best possible outcome for all stakeholders, including employees, trade suppliers and creditors generally.
The Administrators engaged in complex negotiations with the Customer, the secured creditors and the broader Brightwater Group to seek an agreement that would see value extracted for the Materials and result in a return to creditors. The Customer would then be free to continue with the construction of the quarry upgrade, being a desirable outcome for them also.
An agreement was reached in the form of a DOCA co-proposed and funded by the Customer and Brightwater Engineering Limited, with the support of the secured creditors and the Brightwater Group. Critically the DOCA achieved the following:
- mitigated the credit risk for creditors by requiring the cash contributions be paid upfront;
- provided the necessary releases between the parties;
- meaningfully improved the certainty and quantum of a return to the creditors; and
- returned the Company and Partnership to solvency.
As noted above, the upshot of the DOCA was priority employee creditors receiving a dividend of 100 cents in the dollar, while ordinary unsecured creditors received a dividend of 34 cents in the dollar.
This was a substantially improved and timely return when compared to Liquidation.
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