Validity of holding DOCAs confirmed by High Court of Australia

In a previous article (which can be viewed here), we discussed the High Court’s grants of special leave to Mighty River International Ltd (Mighty River) to appeal the judgment of the WA Court of Appeal which found that holding DOCA’s are valid under the Corporations Act (the Act).

In June 2018, the High Court heard and dismissed Mighty River’s appeals and confirmed the validity of holding DOCAs.

On 12 September 2018, the High Court delivered its reasons for that judgment in Mighty River International Ltd v Hughes; Mighty River International Ltd v Mineral Resources Ltd [2018] HCA 38. This article considers the High Court’s reasons.

Characteristics of ‘holding DOCA’

As we explained in our previous article, Mighty River’s appeals concerned the validity of a DOCA with the following characteristics (commonly referred to as a ‘holding DOCA’):
  1. It provided for a moratorium on creditor’s claims;
  2. It required the administrators to conduct further investigations and report back to creditors concerning possible variations to the deed within a set period (in this case 6 months); and
  3. It provided that no property of the company in administration (Mesa Minerals Ltd) would be made available for distribution to creditors.

Grounds of appeal

Mighty River made the following submissions:
  1. the deed was invalid because it was contrary to the object of Pt 5.3A (to maximise the chance of the company continuing in existence, or if that is not possible, provide a better return to creditors than a winding up);
  2. the deed invalidly sought to circumvent or sidestep the requirement in s 439A(6) for an extension of time for convening a second creditors’ meeting to be obtained by a court order;
  3. the deed did not comply with an alleged requirement in s 444A(4)(b) that there be “some” property available to distribute to creditors under the deed; and
  4. the administrators had failed to form the opinions required by ss 438A(b) and/or 439A(4) (about whether it would be in the interests of the company’s creditors to execute a DOCA, end the administration or wind up the company).

Court’s findings

A narrow majority of the High Court disagreed with Mighty River’s arguments and held that the DOCA was valid.  The majority (Kiefel CJ, Edelman J and Gageler J, with Nettle and Gordon JJ dissenting) found that:
  1. The DOCA was not contrary to the object of Pt 5.3A because in the circumstances it aimed to fulfil that object.
    1. The administrators had expressed the opinion that it would not be in the interests of creditors for the company to be wound up. There was evidence before the court at first instance that it would be preferable for the company to sell all its assets to realise its debts rather than be wound up because there was value of between $400,000 and $900,000 in preserving the value in the company as an ASX listed shell.
    2. Kiefel CJ and Edelman J also said that the provision of only a short convening period before the second meeting is for the protection of creditors, and that this speed and efficiency is not compromised if creditors themselves choose to enter into a DOCA to extend that period.
  2. The DOCA did not involve an impermissible sidestepping of s 439A(6) as it only had the “incidental effect” of extending the time for the administrators' investigations. The main effect was for the DOCA to provide for a quid pro quo by which the administrators were required to investigate potential claims by the company in administration against third parties, seek proposals for the restructure of the company, and issue regular interim reports and a final report within 6 months, and in exchange the creditors agreed to a moratorium on their claims.
  3. Section 444A(4)(b) does not require the DOCA to specify “some” property to be available to pay creditors' claims. To specify that no property will be available (as was the case here) can satisfy section 444A(4)(b) (which requires that the DOCA specify “the property” available to pay creditors’ claims).
  4. The administrators had formed and expressed the opinions required by s 438A(b) and, at the relevant time, s 439A(4). The majority noted that the administrators’ report to creditors contained 26 pages of reasoning before it reached the conclusion that in their opinion it was in the interests of creditors to execute the DOCA.
In dissent, their Honours Nettle and Gordon JJ took the view that the deed was not a valid DOCA within the meaning of Pt 5.3A because it purported to continue the administration and indefinitely defer creditors deciding whether to enter a valid DOCA (thereby agreeing to a compromise or arrangement of their debts or claims), end the administration, or wind up the company.

Take aways

The High Court’s decision provides clear confirmation that administrators can continue to use holding DOCAs as a mechanism to gain further time to conduct investigations that may yield a better return to creditors.

That said, it is of course important to keep in mind that, even after a DOCA is formally constituted, the Court has broad powers to terminate a deed on application by a creditor or other interested person, including on the ground that the deed is prejudicial to the interests of a creditor or will cause injustice or undue delay.  Accordingly, it remains important to have regard to the interests of minority creditors and achieving a prompt resolution to administrations when considering and recommending the terms of a DOCA.

If you would like our assistance in advising on the terms or operation of a DOCA or any court applications regarding them, please don’t hesitate to contact us.

Contributors

Michele Izzo Lawyer