Holding DOCA Floodgates Resist Mighty River
In a wide-reaching judgment concerning an appeal by Mighty River International in the administration of Mesa Minerals, the Western Australian Court of Appeal has recognised that a "holding" Deed of Company Arrangement (DOCA) is permissible under Part 5.3A of the Corporations Act.
The key points - Holding DOCAs as a flexible framework
The key points for insolvency and turnaround professionals to take from Mighty River International v. Hughes are:
- A holding DOCA is a DOCA that does not itself provide for distribution of a fund of property to pay dividends to creditors bound by the DOCA. Rather, the holding DOCA provides a framework for ongoing investigations and negotiations for a restructuring, typically through an amendment to the holding DOCA (by further vote of affected creditors).
- The WA Court of Appeal has determined that a holding DOCA is consistent with the objectives of the voluntary administration procedure.
- In broad terms, this determination involved acceptance of the two key propositions that (a) a DOCA need not provide for property to be available to pay creditors bound by the DOCA, and (b) a DOCA may create a moratorium on creditors bound by the DOCA while the Administrator carries out further investigations either beyond the standard timetable for doing so or in the absence of an order extending the "convening period" for the critical second meeting of creditors.
- At this stage, it is not known if an application to the High Court of Australia for special leave to appeal will be filed by the aggrieved creditor.
This much-anticipated decision affirms current industry practice of using holding DOCAs in appropriate circumstances - a decision otherwise would require drastic revision to that practice. Holding DOCAs continue to be a valuable tool for insolvency professionals - they facilitate reduced costs and complexity in an administration, and avoid constraints on Administrators in carrying out investigations and negotiations that go to the essence of the voluntary administration procedure: resuscitation of the business with optimal prospects of success or, otherwise, to maximise the return to creditors, bettering that which they would receive in an immediate winding up.
For those interested, further detail on the decision follows.
Mesa Minerals Ltd (company) was placed into a holding DOCA in November 2016, with Mr Hughes and Mr Bredenkamp of Pitcher Partners appointed as DOCA Administrators. Mighty River International Ltd, the appellant, argued that the holding DOCA was invalid because the DOCA did not fulfil the statutory purpose and requirements of a DOCA - the company's DOCA did not make property available to creditors.
At trial, the Supreme Court of Western Australia found that “on balance” holding DOCAs are a permissible gateway for administrators to obtain more time, however, and importantly, it also stated that the appellant’s argument was not without merit but ruling in its favour could create significant problems. Given the widespread use of holding DOCAs in insolvency practice, the Court strongly signalled for the matter to be decided “at least” at intermediate appellant level. It dismissed the appellant’s claim against the Administrators and the company and declared the DOCA was not void.
Unsurprisingly, the appellant appealed, arguing the Court should have found that the company's holding DOCA was invalid.
On appeal, the Court of Appeal answered three questions:
- Whether a DOCA under Part 5.3A of the Corporations Act is invalid if it does not specify, pursuant to s 444A(4)(b), some property that is to be available to pay creditors' claims?
- Whether a DOCA under Part 5.3A is invalid if it creates a moratorium period over creditors' claims against the company, and provides that the Administrators will carry out further investigations in relation to the company for longer than the period in s 439A(5) following which the Administrator presents his proposal to creditors?
- Whether the holding DOCA in this case was invalid?
Each question was answered "No", and the appeal was dismissed. An outline of the Court of Appeal's reasoning - which went into considerable detail in a well-reasoned decision - follows.
No property is needed – legislative scheme
The Court determined that the reference in section 444A(4) of the Corporations Act to "property" of the company that is to be available for distribution to creditors bound by a DOCA - a matter required to be included in a valid DOCA - should be construed very broadly. In reaching that conclusion, the Court had regard to the object and legislative purpose of Part 5.3A of the Corporations Act - it found that the central purpose is to provide companies with the opportunity to have their affairs administered with a view to their continuing in existence, or in the alternative, with a view to creditors receiving the best return possible. The Court also had regard to the explanatory memorandum for the bill that introduced the voluntary administration procedure, stating that Part 5.3A does not seek to limit the nature or the content of the arrangement between the company and its creditors that is expressed in a DOCA.
In considering the scheme and substance of Part 5.3A, the Court gave numerous reasons for its rejection of the appellant’s contention that a valid DOCA must provide property for distribution to creditors.
The Court determined that it would be extraordinary if some present or contingent property (indicating the law’s recognition that some property may not be available) had to be available for a DOCA to be valid - if that were so, the Court reasoned, even one dollar of present or future property could make the difference between it being valid or invalid.
Further, the Court explained, the Corporations Act provides for other ways to make property available under DOCAs, like third parties paying creditors to exchange rights against the company for rights against trustees, and transfers of shares to satisfy creditor claims.
Part 5.3A is not to be confined or read narrowly
In relation to the second question, the Court determined that a holding DOCA’s achievement of the objects of Part 5.3A is only one aspect of its compliance –it should not be the sole focus of consideration. As to those objects, the purpose of a holding DOCA is to enable further investigations to be done and for another proposal for a restructuring to be presented in due course - the Court determined that this itself is reasonably capable of maximising the chance of a company continuing or providing a better return to creditors. This wide reading is consistent with earlier authority from the High Court in Lehman Brothers (also a decision concerning validity of a DOCA) on the wide reading to be given to Part 5.3A.
The Court also pointed to other legislative indications that a valid DOCA may simply contain a moratorium on creditors and administrator obligations (without property for distribution). In forming that view, the Court noted that a holding DOCA may be varied under section 445F (by creditors or the Court), with no conditions on that variation other than procedural requirements - this variation power allows a holding DOCA to initially omit property, and then upon variation specify that some property is available to creditors.
Finally, the Court concluded that there is no implied prohibition on creditors voting to enter a DOCA that administers a company in the same way the administrator would do with curial supervision under an extension of the convening period for the second meeting of creditors, granted pursuant to section 439A.
The company's holding DOCA
Following its resolution of the above two questions of principle, the Court quickly dispensed with the third question (regarding the validity of the company's specific holding DOCA). The Court held that the company's DOCA created a moratorium, keeping its assets safe, and imposed obligations on the Administrators (not leaving the company to drift). Aside from being satisfied as to the evidence of the DOCA’s advantage over immediate liquidation (in this instance, preservation of the value of the company’s ASX listing), the Court noted that its purview does not extend to making commercial judgments as to proceed with the DOCA or proceed directly into a creditor's voluntary liquidation, that decision being a matter for determination by creditors.