‘Stench’ of potential tax fraud insufficient to set aside DOCA

By Paul Apathy and Lisa Ban

In the recent decision of Commissioner of State Revenue v McCabe (No 2) [2024] FCA 662, Justice Derrington declined to terminate the Deed of Company Arrangement (DOCA) after finding that it was not in the public interest to liquidate the Comlek companies (Companies).

• The Queensland Office of State Revenue (Commissioner) challenged the DOCA proposed by Comlek’s administrators, arguing that the restructure was against public interest and commercial morality. The Companies were put into administration in December 2022 after they received payroll tax assessment notices totalling approximately $10m in September 2022.

• The court found that although there was ‘an obvious stench to deliberate tax fraud and evasion’ and a ‘real possibility’ that the Companies were insolvent much earlier, the evidence adduced was not conclusive. In the absence of strong prima facie evidence of directors’ substantial wrongdoing, the court saw little purpose in terminating the DOCA and allowing a liquidator to pursue investigations.

• The Commissioner also argued that the DOCA was unfairly prejudicial as the estimated returns differed between the Commissioner and the other admitted creditors. However, the court noted, in line with previous cases such as Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32, that where the purpose of the DOCA is to keep the company in business, there may be reasons to depart from general distribution principles. The legislation does not assume that all creditors will be treated equally, especially in cases where equal treatment could thwart the attempt to revive the company.

• Noting that the Companies were now trading profitably and solvently with over 80 employees, the court held that it would be against public interest and legislative intent to wind up a solvent company and make their employees redundant.

• There was insufficient evidence to establish that any creditor would be worse off under the DOCA than in liquidation. As such, where the return under the DOCA is not insubstantial and the public interest issues are unlikely to translate into a cause of action worth pursuing, courts will generally prefer to retain the DOCA.

• Courts are unlikely to terminate a DOCA that is in the interests of the creditors as a whole on the basis that a majority creditor, like the Commissioner on these facts, wants to further explore speculative claims unsupported by evidence.

• Link to decision: Commissioner of State Revenue v McCabe (No 2) [2024] FCA 662

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