'Holding' DOCAs in the balance?

The High Court of Australia has granted special leave to appeal in Mighty River International Limited v Hughes & Ors [2018] HCATrans 026, throwing some confusion as to the validity of a ‘holding’ Deed of Company Arrangement (DOCA).

The key facts

Mighty River was a minority shareholder of Mesa Mineral Limited (Mesa).  Mesa entered into voluntary administration on 13 July 2016. At the reconvened second meeting of creditors held on 20 October 2016, the creditors of Mesa resolved to enter into a DOCA pursuant to pt 5.3A of the Corporations Act 2001 (Cth) (Act).

There were two applications for special leave to appeal before the High Court in respect of the two proceedings considered below. The first proceeding was commenced by Mighty River who sought orders that the ‘holding’ DOCA was of no force and effect and should be terminated or set aside. The second proceeding was commenced by Mineral Resources Limited (a creditor and shareholder of Mesa), who sought an order pursuant to section 445G of the Act declaring that the ‘holding’ DOCA is not void or alternatively, that it should be validated under that provision.

At first instance, Master Sanderson of the Supreme Court of WA held that the DOCA, labelled as a ‘holding’ DOCA, was valid. Master Sanderson also made an order under section 445G(2) declaring that the DOCA was not void. Mighty River appealed to the Court of Appeal of Western Australia on the basis that:

• The ‘holding’ DOCA did not comply with the requirements of section 444A of the Act; and
• Master Sanderson should have given reasons for rejecting Mighty River’s argument that the ‘holding’ DOCA should be terminated under section 445D or declared void under section 445G(2).

Mighty River argued that the ‘holding’ DOCA did not specify at least some present or future property of the company that would be available to pay creditors’ claims. A requirement having its origin under section 444A(b). Rather, Mighty River claimed that the ‘holding’ DOCA merely intended to ‘preserve the status quo so that the Administrators could carry out further investigations and formulate some future proposal which may or may not improve the chances of Mesa continuing in existence or result in a better return to creditors’². This was said to be an attempt by the Deed Administrators to subvert the role of the Court, who has the power to allow or refuse an extension of the convening period for the second creditor’s meeting.

Before we get into the details of the Mighty River’s application for special leave to the High Court and the background to that application, it is useful to pause and first explain the phrase ‘holding’ DOCA.

There is no legal definition of ‘holding’ DOCA in the Act. However, ASIC, in its Regulatory Guide 82 (at [1.23]), has provided a helpful description of a ‘holding’ DOCA as one which is:

“typically used as a means of providing more time for a voluntary administrator (or the directors or third parties) to develop proposals for restructuring or otherwise resuscitating the company, thereby avoiding the need for the voluntary administrator to seek an extension from the court of the convening period for the second creditors’ meeting under s439A. Typically, holding [DOCAs] do not contain any concrete provisions on the future of the company or any immediate benefits for creditors.”

In this case, the DOCA was labelled a ‘holding’ DOCA because it:

• Did not specify any property that would be available for creditors or provide for a return to creditors; and
• Created a moratorium in relation to the creditors’ claims and provided that the Deed Administrators would carry out further investigations for six month and at that time they may present a proposal to a meeting of Mesa’s creditors for restructuring or otherwise resuscitating Mesa.

Frequently, a ‘holding’ DOCA allows administrators to continue investigations and negotiations for a restructure without the need to incur costs in seeking an extension of the convening period from the Court, which has found favour among insolvency practitioners.

Findings by the Court of Appeal

Mighty River’s grounds of appeal and submissions were distilled to the following key questions to be answered by the Court of Appeal:

• Will a DOCA be invalid if it does not specify, pursuant to section 444A(4)(b), some property of the company that is to be available to pay creditors’ claims; and
• Will a DOCA be invalid if it creates a moratorium period in relation to the creditors’ claims against the company, and provides that the deed administrator will carry out further investigations in relation to the company for a period in excess of the convening period specified in section 439A(5) and that, after the further investigations have been completed, the deed administrator may present a proposal to a meeting of the creditors for restructuring or otherwise resuscitating the company.

In a unanimous decision, the Court of Appeal held that the ‘holding’ DOCA was valid and complied with the requirements of pt 5.3A of the Act. After a detailed summary of the terms of the ‘holding’ DOCA and the legislative provisions contained in pt 5.3A, the Court of Appeal stated (among other things):

• A ‘holding’ DOCA will comply with section 444A(4)(b) if it specifies that no property of the company is to be available to pay creditors’ claims and the statement setting out the details of the proposed DOCA to creditors includes details of this;
• In determining whether a ‘holding’ DOCA is valid under pt 5.3A, the focus will be on whether the DOCA complies with the provisions set out in pt 5.3A and not whether, in the judgment of the Court, the ‘holding DOCA’ achieves one or other of the objects in section 435A;
• Subject to the facts and circumstances of the particular case, the purposes of a ‘holding’ DOCA will advance the objects in section 435A because those purposes are reasonably capable of³:
  • maximising the chances of the company, or as much as possible of its business, continuing in existence; or
  • if it is not possible for the company or its business to continue to exist, resulting in a better return for the company’s creditors and members than would result from an immediate winding up of the company; and
• A DOCA can start as a ‘holding’ DOCA and then subsequently be varied. The presentation to creditors for approval of another proposal, in addition to the moratorium, and the execution of a deed of variation does not make the ‘holding’ DOCA or its purposes inconsistent with the objects in section 435A⁴.

Application for special leave to appeal to the High Court

The issue at the heart of the application, and Mighty River’s first ground for special leave, was whether a ‘holding’ DOCA must specify some present or future property of the company that is to be available to pay creditors claims. The special leave application did not itself determine the issue. Rather the matter for consideration was whether it raises an important question of principle for consideration by the High Court.

Mighty River contended that:

• A ‘holding’ DOCA needs to comply with the mandatory requirements as set out in the Act and it must be consistent with the overall object of pt 5.3A; and
• If the administrators require more time to investigate the affairs of the company, they should either make an application under s447A for an order that a DOCA does not have to provide for any property to be distributed or to make an application under s439A for an extension of the convening period.

The Deed Administrators argued against the grant of special leave because the decision below was not attended by sufficient doubt. They submitted that on the proper construction, section 444A(4)(b) required that the DOCA specify the property of the company that is to be available. The DOCA, they submitted, conformed with the provisions set out in section 444A.

Her Honour Justice Gordon and Justice Nettle considered two key issues with the Deed Administrators’ argument:

• Where there is nil property, there is inconsistency of a ‘holding’ DOCA with the principal object of pt 5.3A; and
• The ‘holding’ DOCA removes the supervision of the Court to ensure that the interests of creditors are protected.

Addressing the issue of inconsistency, the Deed Administrators valiantly argued that where the affairs of the distressed company remain in the hands of the administrator, then they approach the court and get extensions of the convening period and other extensions of time. However, where the creditors have determined by majority that they wish the company to enter into a DOCA and take control of the affairs of the company in that way, then there is no inconsistency with the other provisions of pt 5.3A. It is simply a different vehicle for dealing with the future of the distressed company.

This did not sit well with Gordon J, who noted that section 444A(4)(b), when read with the balance of the sub-paragraphs, works on the assumption that there is to be some return to creditors otherwise the company should be wound up.

As to whether a ‘holding’ DOCA shifts the power of creditors and the Court, Mighty River contended that the argument that a ‘holding’ DOCA allows creditors to have control is limited. This is because the minority creditors’ voice in that situation is not heard. It is for this reason that Court supervision for extending the convening period was said to be important so as to allow the minority creditors’ position to be taken into account.

The second special leave ground related to s445G of the Act. Mighty River argued that the only gateway into the discretion to save a DOCA that would otherwise be void is section 445G(3), and in this case you would not get through that gateway because there has not been substantial compliance with pt 5.3A. It was argued for the Deed Administrators that section 445G is only an issue if Mighty River were to succeed on their first ground for special leave regarding section 444A(4)(b). All parties were in agreement that this issue should be remitted back because the discretion in section 445G(3) was not considered at first instance or by the Court of Appeal.

Special leave was granted to Mighty River on both issues. This paves the way for the High Court to consider whether a ‘holding’ DOCA is valid and complies with the requirements of section 444A of the Act. In particular, it will be interesting to see how the High Court balances the importance of allowing ‘holding’ DOCAs, which provide a cost effective mechanism to allow administrators time to resuscitate a company, with the need for Court’s to supervise these DOCAs to ensure that all creditors interests are protected.

This article was written by Jonathan Kramersh, Partner, and Vesa Prekaz, Associate.

 Publication Editor: Grant Whatley, Partner.

¹[2017] WASC 318
²[2017] WASCA 152, at [94]
³at [179]
⁴at [180]