The High Court will consider the validity of “holding” deed of company arrangements (commonly known as “holding DOCAs”) under the Part 5.3A of the Corporations Act (the Act).
Holding DOCAs have been a useful mechanism for administrators to gain further time to conduct investigations to yield a better return to creditors. That benefit is to be weighed against the interests of prompt resolution to administrations, and interests of minority creditors. The decision of the High Court on this matter will have far reaching consequences for the administration process.
On 16 February 2018, the High Court granted special leave to Mighty River International Ltd (“Mighty River”) to appeal the WA Court of Appeal decision of Mighty River International Ltd v Hughes  WASCA 152 which found that a holding DOCA is valid under the Act. The maximum period for administrators to convene a creditors’ meeting to determine the future of a company (i.e. whether to hand it back to the director, enter into a DOCA or place the company into liquidation) is generally 65 business days from the day the administration begins (with a further 5 business days allowed if the administration begins in December or within 25 business days of Good Friday): see s 439A of the Act and rule 75-140 of the Insolvency Practice Rules.
Administrators commonly utilise holding DOCAs to obtain further time past this maximum convening period to undertake investigations and consider restructure or recapitalisation proposals. Holding DOCAs are a useful tool for administrators to gain further time when they are not in a position to specify property that is or may become available for distribution to creditors.
If the High Court finds that holding DOCAs are not valid under the Act, administrators will need to resort to the following alternatives to gain further time past the maximum convening period:
- Court application under s 439A(6) of the Act to extend the convening period.
To obtain an extension under this section, the applicant needs to satisfy the Court that the extension would be in the best interests of creditors. An application under this provision can be made before or after the maximum convening period expires; however, if made after that period, the delay in making the application will be a relevant consideration in relation to an order about costs of the application.
- Court application under s 447A of the Act to seek an order that Part 5.3A of the Act applies differently to the administration (for instance because in the particular circumstances of the administration, the administrator ought to be given further time).
Arguments for consideration by the High Court
The High Court will likely consider the following arguments made in the WA Court of Appeal as to whether holding DOCAs are valid under the Act.
Mighty River (the appellant creditor) takes the following position:
- The holding DOCA in the case provides: “Subject to any variation of this deed, there will be no property of the Company [Mesa] available for distribution to Creditors” [emphasis added]. Mighty River contends that on the above terms the holding DOCA does not specify, as required by section 444A(4)(b) of the Act, “the property of the company… that is to be available to pay creditors’ claims”, because it specifically says “no property” is available.
- The holding DOCA was inconsistent with the objects of Part 5.3A of the Act as expressed in section 435A, because (by specifying that no property would be available for distribution) it did not:
- maximise the chances of Mesa (as the company in administration) continuing in existence; or
- result in a better return to creditors than would result from Mesa’s immediate winding up.
- The holding DOCA circumvents the operation of ss 439A(6) and 447A of the Act which (as noted above) provide for applications to the Court to extend the maximum convening period. Mighty River argues that holding DOCAs avoid the need to make a court application, which shifts the onus from administrators to minority creditors (who may object to the DOCA) to demonstrate that the holding DOCA is not in the interests of the creditors.
On the other hand, the administrators contend the following (consistent with the findings of the WA Court of Appeal):
- As a matter of statutory construction, s 444A(4)(b) of the Act will be satisfied provided that the DOCA specifies the property to be distributed to creditors, even where that property is nil.
- Holding DOCAs are not inconsistent with the objects of Part 5.3A of the Act because they at least provide “the opportunity” for a better return to creditors than would result from a winding up (even if that return is dependent on the administrators’ further investigations).
- There is no express or implicit prohibition in Part 5.3A of the Act on creditors agreeing to enter into a DOCA (outside of the court application process) which happens to contain terms the effect of which is that no commitment is made to distribute funds to creditors and the administrators are granted further time to investigate beyond the maximum convening period.
Holding DOCAs have been used to allow further time to the administrators to conduct investigations in circumstances where the anticipated return to creditors is nil (and where further investigations or time may yield a better return to creditors). Holding DOCAs facilitate the prospect of a better return to creditors. However, this will be weighed against the interests of prompt resolution to administrations, and interests of minority creditors that object to entry into a holding DOCA and are then forced to make an application to the court themselves to convince the court that it is not in the interests of creditors.
If the High Court finds that holding DOCAs are invalid under the Act, the decision will have a significant impact on the conduct of administrations. It will become necessary for administrators to apply to the court for further time and the onus will be on the administrator to satisfy the court that it is in the interests of creditors to enter the holding DOCA. If such an application is made after expiry of the maximum convening period, administrators will also need to be in a position to reasonably justify the time taken to undertake investigations.