This week’s TGIF considers the decision of Mighty River International Ltd v Hughes, in which the WA Court of Appeal held that a ‘Holding DOCA’ was valid. The decision provides comfort to insolvency practitioners who use ‘Holding DOCAs’.
What is a ‘Holding DOCA’?
The phrase ‘Holding DOCA’ is not used in the Corporations Act and has no defined legal meaning. It is a phrase used within the insolvency industry to describe a particular type of Deed of Company Arrangement. ASIC’s Regulatory Guide 82 gives the following description of a Holding DOCA:
“holding DOCAs are 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”
Because the phrase has no defined meaning, each ‘Holding DOCA’ will have different features and operate in different ways. Accordingly, the validity of every DOCA (with or without the descriptor ‘Holding’) must be determined by reference to its form and contents.
Why was this ‘Holding DOCA’ challenged?
In this case, one of the company’s creditors challenged the validity of the DOCA on the grounds that ‘Holding DOCAs’ (of this kind) are not permitted by the Corporations Act.
Specifically in this case, the creditor argued that the DOCA:
did not specify any property that would be available to creditors;
did not make provision for a return to creditors;
created a moratorium period (in relation to creditor’s claims against the company), during which the Deed Administrators would carry out further investigations. Once those investigations were completed, the Deed Administrators would present a restructuring proposal to creditors.
In relation to contentions 1 and 2, the creditor argued that section 444A of the Corporations Act requires that a DOCA specify at least some property of the company that is to be available to pay creditors' claims. Because the ‘Holding DOCA’ didn’t specify any property, the creditor submitted that it wasn’t a valid DOCA.
In relation to contention 3, the creditor argued that the “Holding DOCA’ extended the time available to the Administrators to complete their investigations, without the Administrators obtaining that extension of time from the Court. The creditor submitted that the only permissible means of doing this was by applying to the Court to extend the ‘convening period’ (the amount of time before the ‘second meeting’ of creditors). At first instance, the Administrator admitted that this (the avoidance of applying for Court approval) was the purpose of ‘Holding DOCAs’. The creditor submitted that the Corporations Act does not permit an Administrator to use a ‘Holding DOCA’ to side-step or outflank the Court.
Why the Court held that this ‘Holding DOCA’ was valid
In a unanimous decision, the Court of Appeal held that this ‘Holding DOCA’ was valid and complied with the requirements of Part 5.3A. Specifically the Court of Appeal held that:
a DOCA will comply with section 444A(4)(b) of the Corporations Act 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 to that effect. That is, the creditors are to be in a position to make a fully informed decision as to whether or not to vote in favour of the DOCA;
the focus should be on whether the relevant DOCA complies with the provisions of Corporations Act and not whether the DOCA achieves one or other of the objects set out in section 435A. In any event, this ‘Holding DOCA’ was consistent with the objectives of section 435A as it could maximise the chances of the company continuing in existence or provide the opportunity of creditors obtaining a better return than a winding up.
Ultimately, the creditors of a company will be in the best position to decide whether or not a ‘Holding DOCA’ is in their interests. Beech JA said that with some limited exceptions, the statutory provisions revealed an intention to permit “maximum flexibility for creditors and a company to determine what may be contained in a DOCA”.
The effect of the Court’s decision is that there may be situations where an administrator might have two means of proceeding: to apply to the court for an extension of time before holding the ‘second meeting’ of creditors’; or to propose to the creditors a ‘Holding DOCA’. Given the widespread use of ‘Holding DOCAs’, the decision provides a level of comfort for those administrators who have used, and intend to continue using, ‘Holding DOCAs’. However, as each DOCA will be assessed on its specific contents, a DOCA is not automatically valid simply because it is described as a ‘Holding DOCA’