The Situation: Frequently, the statutory moratorium period provided to voluntary administrators to restructure an insolvent company is too short to find a solution. Administrators often utilise "holding" deeds of company arrangement to extend the period of moratorium and "buy" time to investigate potential restructuring opportunities for the future of the company. A creditor recently challenged this industrywide practice by arguing that holding DOCAs are invalid.
The Question: Are holding DOCAs valid under the Corporations Act 2001 (Cth)?
Looking Ahead: Holding DOCAs are permissible, but validity will turn on the circumstances in each case.
In Mighty River International Ltd v Hughes  WASCA 152, the Western Australian Court of Appeal delivered a landmark decision approving the use of a "holding" deed of company arrangement ("DOCA").
On 13 July 2016, Mesa Minerals Ltd ("Mesa") was placed in voluntary administration. At the first meeting of creditors, the administrators indicated that as they had only just begun their investigations and were not in a position to make recommendations, it was likely that they would recommend a holding DOCA.
Mighty River International Ltd ("Mighty River"), a shareholder and creditor of Mesa, queried why a holding DOCA was preferable to liquidation. It also indicated that the administrators should seek Court orders to extend the convening period for the second meeting of creditors, rather than hold the second meeting of creditors and enter into a holding DOCA.
The administrators subsequently issued their report to creditors. The administrators were of the opinion that it was in the creditors' interest to vote in favour of executing the proposed DOCA as it "may deliver an improved outcome to creditors".
At the second meeting of creditors, the administrators recommended that the creditors approve the company entering into a holding DOCA. The objective of the proposed DOCA was:
to provide sufficient time for the administrators to conduct further investigations into [Mesa's] property and affairs, and to explore the possibility of a restructure or recapitalisation of [Mesa] to determine the likely outcomes to creditors and form an opinion as to whether a deed of company arrangement or liquidation is in the best interests of creditors of [Mesa].
The deed provided that no property of Mesa would be available for distribution to creditors. However, it also provided that the deed administrators would need to call a meeting of creditors, where the creditors would vote on Mesa's future.
The majority of creditors voted in favour of the holding DOCA, and it was subsequently executed ("Mesa Holding DOCA"). Mighty River commenced proceedings alleging that the holding DOCA was invalid.
Master Sanderson held that the Mesa Holding DOCA was valid as it is consistent with the purposes of the Act. The objects of pt 5.3 of the Corporations Act 2001 (Cth) ("Act"), as set out in s 435A, are to provide for the business, property and affairs of an insolvent company to be administered in a way that: (i) maximises 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 in existence, (ii) results in a better return for the company's creditors and members than would result from an immediate winding-up of the company.
The Master held that administrators have two options to extend the time limitations prescribed by pt 5.3A. They can either apply to the Court for an extension under s 439A(6) or recommend that the creditors vote in favour of a holding DOCA at their second meeting. The administrators' decision about which option to choose is "an exercise of professional judgement".
The Master noted that holding DOCAs are in widespread use by insolvency practitioners. Indeed, ASIC's Regulatory Guide 82 describes the use of holding DOCAs by administrators. However, it is important to note that there is no particular type of DOCA under the Act called a "holding" DOCA.
Mighty River challenged the Master's decision. The Court essentially dealt with the appeal by considering the following three grounds.
- Was the Mesa Holding DOCA invalid because it did not specify, pursuant to s 444A(4)(b), some property of the company that is to be available to pay creditors' claims?
- Was the Mesa Holding DOCA invalid because it sought, in effect, to circumvent s 439A(6) under which the administrators could apply for an extension of time to convene the second meeting of creditors from the Court?
- Was the Mesa Holding DOCA inconsistent with the objects of pt 5.3A, as set out in s 435A, in that it did not maximise the chance of the business continuing as a going concern and does not produce any return to creditors?
The Court of Appeal unanimously held that the Mesa Holding DOCA was valid. The Court considered whether the Mesa holding DOCA was valid by examining the terms of the deed in the context of the statutory scheme in pt 5.3A of the Act.
First Ground. The Court of Appeal examined what is necessary to comply with s 444A(4)(b). That section requires that a DOCA "specify … the property of the company (whether or not already owned by the company when it executes the deed) that is to be available to pay creditors' claims". The judgment noted that s 444A(4)(b) merely requires that a DOCA particularise or address expressly the extent to which the company's present or future property is to be available to pay creditors' claims. Ultimately, the Court held that because the Mesa Holding DOCA specified that no property will be available for distribution to the creditors, the deed complied with s 444A(4)(b).
Second Ground. The Court of Appeal considered the statutory context and noted the time constraints administrators face when conducting the administration process. The Court of Appeal held that it is open to the administrator to recommend a holding DOCA to creditors or to seek an extension of time to convene the second meeting of creditors under s 439(6). It was noted that an application to the Court to extend the convening period is not the sole means by which further investigations into the company or the enhancement of a significant asset of the company may be undertaken, after the convening period specified in s 439A(5). The Mesa Holding DOCA expressly provided for the deed administrator to undertake further investigations before making a recommendation to creditors as to the future of the company.
Third Ground. The Court of Appeal found that the Mesa Holding DOCA was not inconsistent with the objects of pt 5.3A and was a valid DOCA. The Court unanimously held that the Mesa DOCA was designed to at least provide the opportunity for a better return for creditors than would result from an immediate winding up. One judge stated that a DOCA which lays the foundation for, or facilitates in a realistic way, the prospect of a better return to creditors than would result in an immediate winding‑up—even if the returns would ultimately require a variation to the DOCA—is consistent with the objectives of the Act.
Two Key Takeaways
- Administrators can use "holding" DOCAs to gain more time to complete investigations and pursue possible options to secure the future of the company. However, the question of whether a particular DOCA is valid will turn on the circumstances in each case.
- It is valid for a holding DOCA to provide that, subject to a variation of the deed, no property will be available to creditors.