What you need to know
The High Court yesterday affirmed the flexibility of the purposes for Deeds of Company Arrangement (DOCA). In its reasoning, the Court placed very few limits on the use of what are commonly called "holding" DOCAs. It confirmed that a holding DOCA can be validly accepted by creditors to allow more time for an administrator to investigate the future options for an insolvent company.
The decision is to be welcomed by practitioners and creditors as it emphasises the breadth of the purposes for which a DOCA can be used and the primacy of the decision of creditors in determining the future of an insolvent company.
This alert summarises the background of how this issue came to be considered by the High Court, and the key aspects of the Court's reasoning in reaching this conclusion.
How we got here
“Holding DOCA” is a term commonly used to describe a DOCA which has the function of deferring the decision of creditors on the future of a company whilst taking advantage of the moratoria a DOCA can provide. Such DOCAs may allow more time for an administrator to investigate options for the future of the company, where those options may not be readily apparent by the time of the second meeting of creditors. Typically they do not provide for an immediate distribution to creditors. However, they avoid the need for an application to the Court to extend the time frames under Part 5.3A of the Corporations Act 2001 (Cth) (Corporations Act).
Mesa Minerals Limited (Subject to Deed of Company Arrangement) (Mesa), an ASX listed company, entered into a holding DOCA on 3 November 2016 which allowed time for the deed administrators to investigate the property and affairs of Mesa and to recommend either a deed proposal or liquidation of the company. It made no provision for distribution to creditors. The DOCA was to conclude with a further meeting of creditors.
At the time Mesa entered administration, it had been in protracted litigation with Mighty River International Ltd (Mighty River), a creditor and shareholder of Mesa. Mighty River considered the directors of Mesa had breached their duties by allowing a related company to use Mesa’s assets, and that Mesa may have claims arising out of those breaches. Mighty River was concerned that those claims had been insufficiently investigated by the administrators. Mighty River challenged the holding DOCA on the basis that:
- it improperly avoided seeking Court orders to extend the time frames under Part 5.3A;
- it did not specify property of the company which was to be made available to meet creditors’ claims. Section 444A(4)(b) of the Corporations Act requires a DOCA to identify the property of the company that is to be available for those purposes; and
- the holding DOCA was contrary to the purposes of Part 5.3A.
In March 20171., Master Sanderson of the Western Australia Supreme Court upheld the validity of the Mesa holding DOCA. The Western Australia Court of Appeal also unanimously accepted the holding DOCA was valid2..
After a full day hearing on 19 June 2018 and a short adjournment, “at least a majority” of the judges of the High Court dismissed the appeal indicating that they would deliver their reasons later. Those reasons were published yesterday. The Court decided these issues by a majority consisting of Kiefel CJ and Edelman and Gaegler JJ.
A DOCA which has the incidental effect of extending time before a final decision as to the future of the company is made is valid. That effect will be considered incidental where the DOCA creates genuine rights and duties. In the case of the Mesa DOCA, the obligations of the deed administrators under the Mesa DOCA included:
- to investigate claims and seek proposals for the restructuring of the company; and
- to provide specified reports to creditors during that process.
The Mesa DOCA was consistent with the purposes of Part 5.3A in that:
- It recognised that some form of restructuring of the company would provide a better return to creditors than a liquzidation, in that the ASX listing had value which might be realised.
- A DOCA which allows more time to investigate the company's options is consistent with the purposes of Part 5.3A. A DOCA predominantly or solely for the purpose of putting a moratorium in place on enforcement is permissible.
- It is open to the creditors to agree to a DOCA which allows that additional time. The short time frames for voluntary administration are for the protection of creditors, and the creditors can agree to allow a longer time for a final decision to be made by them on the future of the company through a holding DOCA.
A holding DOCA need not identify any property of the company for distribution to the creditors for it to be valid.
1. Mighty River International Ltd -v- Hughes & Bredenkamp  WASC 69 (16 March 2017)
2. Mighty River International Ltd -v- Hughes  WASCA 152 (11 August 2017)