The High Court recently handed down its much anticipated judgment in Mighty River International Limited v Hughes, confirming that deeds of company arrangement which have the effect of extending the administration period can be valid under the Corporations Act 2001 (Cth) (the Act).
Insolvency practitioners and stakeholders now have a degree of certainty that ‘holding’ deeds of company arrangement (holding DOCAs) are capable of being a legally valid way to give administrators more time to achieve better returns for creditors, provided that the administrators have sufficient information about the company to form the opinions required under section 438A(b) of the Act. Before proposing the holding DOCA, administrators will therefore need to be in an informed position and form opinions as to:
(i) whether it would be in the interests of the company’s creditors for the company to execute a deed of company arrangement;
(ii) whether it would be in the creditors’ interests for the administration to end;
(iii) whether it would be in the creditors’ interests for the company to be wound up.
However, a holding DOCA put forward merely to circumvent the need to apply for an extension of the convening period will almost certainly fall afoul of the High Court’s ruling. A holding DOCA should therefore not be used as an excuse for an administrator to delay assessing available information.
To recap on our previous articles, Mighty River concerned Mesa Minerals Ltd (Mesa), a mining company that entered voluntary administration in 2016. In order to allow more time for the administrators to conduct further investigations and explore the possibility of a restructure or recapitalisation, a majority of Mesa’s creditors voted in favour of a DOCA that essentially maintained the status quo and temporarily prevented Mesa’s property being made available for distribution (the Recapitalisation DOCA). This allowed the administrators to avoid seeking a formal court order extending the time limit on convening a final meeting of the creditors.
Mighty River International Pty Ltd (Mighty River), one of Mesa’s creditors, challenged the validity of the Recapitalisation DOCA in the Supreme Court of Western Australia, where Master Sanderson held that it was valid (click here for our article) prompting Mighty River to appeal to the Court of Appeal. This appeal was unanimously dismissed (click here for our article), and Mighty River appealed to the High Court.
The High Court Appeal
The arguments in the High Court traversed familiar ground. Mighty River made essentially two submissions:
- the Recapitalisation DOCA was not a valid DOCA because it was actually an agreed extension of time that had not been ordered by the court and was contrary to the object of Pt 5.3A of the Act; and/or
- if the Recapitalisation DOCA was a valid DOCA, it should have been declared void because it contravened sections 438A(b) and 439A(4), and/or s 444A(4)(b), of the Act.
The High Court held by a 3-2 majority that the Recapitalisation DOCA was valid and effective.
Chief Justice Kiefel and Justice Edelman, writing the leading judgment, discouraged the use of the term “holding DOCA”, to describe a sub-class of deeds which do not specify the property available to satisfy creditors, and which have the express purpose of creating a moratorium period to allow further investigations. If in reality a deed is simply an extension of time agreed by creditors and nothing more, it would be invalid as a DOCA under the Act. However, a deed which is otherwise consistent with the objects of Pt 5.3A and is properly constituted, will not be invalid just because it has the incidental effect of extending the administration period.
Their Honours found that, in this instance, ‘[t]he Deed created and conferred genuine rights and duties’, such as obligations on the administrators to investigate potential claims against third parties, develop restructure proposals and provide reports to the creditors. Their Honours found that ‘the operation of the Deed aims to fulfil the object of the [Act] by maximising the chance of Mesa Minerals' survival or otherwise providing a better return to creditors than would result from its immediate winding up’. They saw no issue with the fact that a DOCA ‘may provide predominantly, or solely, for a moratorium’, particularly where the creditors themselves have agreed on the course of action.
Chief Justice Kiefel and Justice Edelman held that there was no contravention of the Act. While the Recapitalisation DOCA did not provide for the distribution of any property, their Honours held that it was enough for the DOCA to simply address the subject matter of ‘the property, if any, that will be available to pay creditors' claims’. Finally, while it is true that the Act requires an administrator to form and express certain opinions, the administrators had satisfied these requirements – even if their opinions were based only on the information then available and could not yet be expressed quantitatively.
However, Chief Justice Kiefel and Justice Edelman did indicate at least one scenario where a holding DOCA will not be an option. That is ‘where there is simply insufficient information for an administrator to express an opinion [as required under the Act]’, in which case ‘the only possibility is for the administrator to apply to the Court to extend the convening period’.
As the dust settles on Mighty River, it appears that administrators need not shy away from proposing a DOCA which has the incidental effect of extending the administration period, if they are of the informed opinion that a further moratorium will allow them to further assess the company’s position and potentially provide a better outcome for creditors. This increased flexibility and autonomy will undoubtedly prove useful.
However, the appeal was only dismissed by a bare majority and, as with all cases, was dependent on its facts. It is clear that there are situations where a holding DOCA will not be an option (for instance where an administrator has too little information to form the opinions required under the Act) and it is too early to rule out further movement in this area as the lower courts grapple with the complexities of the decision.
In our view, it would be prudent for insolvency practitioners to seek legal advice in circumstances where an administrator is considering the merits of applying to extend the convening period on one hand or a holding DOCA proposal on the other.