Lessor's make-good claim fails in Supreme Court challenge to DOCA

This week's TGIF considers the recent Supreme Court decision to dismiss an application to terminate a deed of company arrangement (DOCA) by the lessor of a former restaurant (Tetsuya's in Sydney).

Key takeaways

• Landlord creditors should take care to ensure that their claims can be proved against the debtor company in a voluntary administration, including for any 'make-good' costs contingent on pre-appointment steps under the lease.
  
• Even where a DOCA is opposed by some key creditors, generally it will not be set aside unless it is clearly oppressive, unfairly prejudicial, or contrary to the interests of the creditors as a whole, where it offers a benefit to creditors when compared with the outcome in a liquidation.
  
• The involvement of related parties in supporting a DOCA need not cause it to be invalid, particularly where independent creditors also vote in favour.

Background

T Pty Ltd (Company) operated the well-known Sydney restaurant 'Tetsuya's' from premises owned by 529 Kent Pty Ltd (the Plaintiff). After ceasing operations in July 2024, the Company entered voluntary administration in December 2024. A DOCA was executed in April 2025, with the administrator using their casting vote at the second meeting of creditors.

The DOCA was to be funded by a $300,000 contribution from the director, Mr Tetsuya Wakuda, and other assets. The DOCA aimed to provide a better and faster return to creditors compared to liquidation.

The dispute arose from the Plaintiff's claim for over $1 million in 'make-good' costs under the lease, which it argued were triggered when the company vacated the premises. The lease required 'make-good' works "to the extent required by the lessor." However, the terms of the lease required those works to be specified within the contractual timeframe.

The application

The Plaintiff sought orders under section 445D(1)(f) of the Corporations Act 2001 (Cth) (Act) to terminate the DOCA, arguing the agreement was contrary to creditors' interests and that a liquidation would yield a better return.

In the alternative, the Plaintiff relied on sections 445D(1)(g) and 447A of the Act and claimed:

• the DOCA frustrated investigations into the alleged breach of duties by the directors of the Company under sections 180 to 182 of the Act; and
  
• the DOCA was beneficial to Mr Wakuda, as opposed to the Company's creditors, by enabling the transfer of certain property (including artworks in the premises) to Mr Wakuda personally.

The Plaintiff's case relied on its claim including 'make-good' costs under the lease, which constituted most of its proof of debt and underpinned its allegations of breaches of directors' duties.

The decision

The Court dismissed the application with costs.

In relation to the 'make-good' costs, the Court held that, on the proper construction of the lease, the Company was only obliged to perform works "to the extent required by the Lessor". However, the Plaintiff never communicated its requirements within the relevant contractual timeframe. As a result, no enforceable obligation arose and the Plaintiff's claim for 'make-good' costs was not proved.

The Court determined any failure to pay disputed amounts or perform works did not amount to breaches of directors' duties under sections 180 to 182 of the Act nor were the payments made to trade creditors considered 'asset stripping'.

The supplementary report to creditors had concluded that the DOCA provided a comparable or superior return to creditors relative to a liquidation scenario, with estimated returns of:

• 1.7 to 16.6 cents in the dollar, in a liquidation scenario; and
  
• 16.8 cents in the dollar, under the DOCA.

That being so, the Court concluded that there was no abuse of Part 3.5A of the Act, the DOCA maximised returns to creditors and the collateral benefits to Mr Wakuda were outweighed by his $300,000 contribution to the DOCA fund.

Comment

This judgment reinforces the principle that a DOCA will not be set aside lightly and must be shown to operate oppressively or contrary to creditors' interests. A mere speculative claim of higher liquidation returns is insufficient. The Court emphasised the creditors' collective interests and certainty of return is a paramount consideration as opposed to individual creditor dissatisfaction.

There are also some interesting points of comparison between this case and the approach in Lam Soon, particularly whether the outcome here was more restrictive for the lessor in having to establish its contingent claims under the lease.

In Lam Soon, a lessor sought (ultimately unsuccessfully) to terminate a DOCA where its entitlement to future post-appointment rent under the lease fell within the debts covered by the DOCA. In this case, the Plaintiff's claim for 'make-good' costs was scrutinised by reference to whether the requirements under the lease had been met. The Court ultimately found the DOCA was not oppressive and concluded it provided a better or equivalent return than liquidation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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