Deeds of Company Arrangement: are the so-called “holding DOCAs” valid - the Mighty River High Court appeal.

Background

On 19 June 2018, the High Court heard two appeals from the Western Australian Supreme Court,[1] involving a contested deed of company arrangement (“DOCA”) entered into between Mesa Minerals Ltd (subject to deed of company arrangement) (“Mesa”) and its creditors. In both cases, the appellant, Mighty River International Pty Ltd (“Mighty River”) contended that the relevant DOCA was void (and should set aside) on three principal grounds, viz:

(a) The DOCA did not specify any property which would be available to satisfy the claims of Mesa’s creditors and did not otherwise make provision for any return to creditors[2] (“ground 1”);

(b) The DOCA created a moratorium on creditors’ claims and allowed the deed administrators up to 6 months to attempt to sell assets and carry out further investigations, and if appropriate to put some proposal to creditors (“ground 2”); and

(c) The DOCA was not consistent with the objects of Part 5.3A of the Corporations Act 2001 (Cth) (“ground 3”).

The DOCA really did nothing substantive other than impose a continuing moratorium and provide the deed administrators an extended “breathing space” to attempt to sell assets and conduct further investigations and ascertain what may be in the best interests of the creditors. This type of DOCA is colloquially known as a “holding DOCA”.

The Court of Appeal (Buss P, Murphy J and Beech JA) unanimously upheld the holding DOCA. Although their Honours’ reasoning varied slightly (and at the risk of over-simplification), their Honours held:

(a) Ground 1: s 444A(4)(b) which provides that a DOCA must specify “the property of the company…that is available to pay creditors’ claims” was satisfied as the section does not mandate that any particular property be made available; the provision merely requires that any property which is in fact available to pay creditors’ claims at the date of execution of the DOCA be specified;

(b) Ground 2: the argument here centred around s 439A(6) pursuant to which the Court may extend the convening period for the second meeting of creditors: the point being made by Mighty River was that the DOCA in this case circumvented the control a Court has over the administration process, in that if the holding DOCA was valid then of course no Court application would be necessary. In that case, the Court would have no supervisory role in controlling the length of the extension, or assessing the merits of it. The administrators argued that a holding DOCA was an alternate mechanism to a Court application for an extension of the convening period and it was a commercial decision for the administrators (and voting creditors) to make. The Court of Appeal accepted this with the result that a costly Court application could be avoided.

(c) Ground 3. The Court of Appeal considered that the objectives of Part 5.3A as set out in s 435A were met by the DOCA before them as it provided an opportunity for a better return to creditors than an immediate liquidation.

The High Court?

Mighty River appealed the decision of the Court of Appeal to the High Court. As noted above the High Court heard the appeals on 19 June 2018. The High Court dismissed both appeals. The High Court is yet to hand down its reasons, however one might confidently speculate that “holding DOCAs” are a legitimate exercise of the process under Part 5.3A and that they may be used as an alternative to expensive applications for extensions of the convening period under s 439A(6). It may well be however that the High Court will put some caveats around the carte blanche use of these holding DOCAS. For example, the High Court may warn that a holding DOCA may well be set aside if it appears that the administrators were not acting diligently in conducting their investigations within the statutory timeframe allowed.[3]

[1] Mighty River International v Hughes [2017] WASC 152.

[2] The Deed provided that “Subject to any variation of this deed there will be no property of [Mesa] available for distribution to Creditors under the deed.”

[3] In the Mighty Rivers case, the Court of Appeal noted that the administrators had acted promptly and diligently with their investigations but simply needed more time.