High Court Decision Confirms Validity of Holding DOCAs
On 24 April 2018 we informed you that the High Court had granted special leave to Mighty River International Ltd (Mighty River) to appeal a decision of the Western Australian Court of Appeal.
The High Court dismissed that appeal by a majority judgment and has recently published its reasons.1
This case concerned the validity of a deed of company arrangement (DOCA) that specified among other things, that there would be no property of the company available for distribution to creditors. The DOCA also established a moratorium on creditors’ claims and required the administrators to carry out further investigations for up to six months.
The majority of the High Court held that the DOCA (which is often described as a holding DOCA) was consistent with the object of Part 5.3A of the Corporations Act 2001 (Cth) (Act) and was not invalid. The argument presented by both parties before the High Court and the High Court’s findings are set out in more detail below.
Mighty River’s Arguments
Mighty River’s main arguments were that:
- The DOCA was invalid because it did not comply with section 444A(4)(b) of the Act that provides that a DOCA must specify the property of the company that is to be available to pay creditors’ claims. Clause 8 of the DOCA stated, ‘Subject to any variation of this deed, there will be no property available for distribution to Creditors under this deed’. A DOCA that fails to specify any property for distribution is invalid; and
- The DOCA ‘side-stepped’ the requirement in section 439A(6) of the Act for an administrator to seek Court approval for an extension of time to hold the second meeting of creditors.
The Respondents’ Arguments
The respondents’ main arguments were that:
- Section 444A(4)(b) of the Act was not drafted with the intention for administrators to make property available to creditors. Rather, its purpose is to inform creditors of the property available to be distributed; and
- There is no reason to assume a DOCA satisfies the intention of the legislation simply by stating that $1 of property is available for distribution compared with no property.
High Court’s Findings
The High Court determined that the DOCA was valid for the following reasons:
- The DOCA did not circumvent the requirement for an administrator to seek an extension of time to hold a second meeting of creditors. The effect of extending the time for investigations by the administrators was incidental to the purpose of the DOCA. In this case the DOCA required the administrators to investigate potential claims and a potential restructure of the company. It also required regular reports to be provided to creditors and a final report to be delivered in 6 months’ time;
- The Act does not require that a DOCA specify property of a company available to pay creditor’s claims if none is available. The High Court provided examples of DOCAs that involve no property of the company being made available for distribution such as a debt for equity swap, creditor’s trusts and the transfer of shares to creditors; and
- The administrators had expressed a view that a DOCA would be in the best interests of the creditors and had complied with their obligations under the Act.
Take away points
This case is a significant decision for insolvency practitioners because it gives comfort to administrators and creditors that holding DOCAs can continued to be utilised. A DOCA can defer the distribution of property to creditors and place a moratorium on claims provided that it is based upon a genuine assessment by the administrators that it is a better outcome for the creditors than the company’s immediate liquidation.
However, as each DOCA will be assessed on its specific contents, it is important to note that a DOCA will not automatically be valid simply because it is described as a ‘Holding DOCA’.
This article was written by Daniele Solomon, Special Counsel.
Publication Editor: Grant Whatley, Partner.
1Mighty River International Limited v Hughes  HCA 38