To Have and to Hold

Key takeaway

The recent decision of the Supreme Court of Western Australia in Mighty River International Ltd v Hughes & Bredenkamp [2017] WASC 69 (Mighty River v Hughes) has confirmed the legality and the utility of ‘holding’ deeds of company arrangement (colloquially referred to as ‘Holding DOCAs’).

Hold what?

Part 5.3A administrations are often complex and require more than the prescribed time limits under the Corporations Act 2001 (Cth) (the Act) to investigate the affairs of the company properly, convene creditors’ meetings and (if possible) formulate a restructuring proposal. In such scenarios administrators have two options, namely, to:

• apply to the Courts under section s 439A(6) of the Act for an extension to the convening period; or
• extend the effective time of the administration by recommending that creditors at the second meeting vote in favour of a Holding DOCA that does not determine the fate of the company at that point in time per se but allows for additional time or further steps to be undertaken before the administrators propose a final DOCA whilst also maintaining relevant moratoriums.

Therefore, a Holding DOCA effectively holds the status quo and avoids the need for court intervention. The administrators (now deed administrators) can maintain control of the company and can continue to undertake actions with the aim of obtaining the best result for creditors against the backdrop of certain protections.

Rationale for using a Holding DOCA

A Holding DOCA can be a useful tool during an administration for a number of reasons, including but not limited to:

• allowing more time for a restructuring proposal to be formulated and agreed;
• allowing a deed administrator (or indeed previous management if the power is delegated back to them) to run a trading business or half-complete project in order to achieve a greater return to creditors on realisation; 
• avoiding unnecessary court costs (especially in scenarios where there is uncertainty and there may be the need for multiple extensions);
• potentially providing for a better opportunity for the company to be brought out of voluntary administration;
• maintaining the benefit of a moratorium on creditors bound by the DOCA including preventing winding up actions and legal proceedings against the company but avoiding any stigma associated with voluntary administration; and
• allowing control to flow back to the company directors in circumstances where their actions were not the underlying cause of the financial distress or trigger event.

Mighty River v Hughes - background

Administrators were appointed to Mesa Minerals Pty Ltd (Mesa) under section 436A of the Act in July 2016.  At the second creditors’ meeting the administrators recommended that Mesa enter into a Holding DOCA in order to allow more time for the administrators to sell Mesa’s assets (which included a number of mining assets, including tenements and a joint venture in two manganese projects). The creditors resolved in favour of the Holding DOCA.

Issues before the Court

Mighty River International Pty Ltd (Mighty River), in its capacity as  creditor of and minority shareholder in Mesa, claimed that little had been done in the way of examining potential breaches by the directors of Mesa and that the entry into the Holding DOCA would be detrimental to any potential recovery claims available as result of the alleged breaches.

Mighty River also submitted the Holding DOCA was invalid for two reasons.

First, the Holding DOCA was inconsistent with the objectives of Part 5.3A of the Act set out in section 435A of the Act, which are to maximise the chances of the company continuing in existence or, if that is not possible, to result in better returns to creditors than an immediate winding up. Mighty River submitted that because a Holding DOCA is an interim measure “which simply subverts the role of the court and extends the convening period by other means (than those prescribed by the Act) must necessarily fail because it does not comply with the terms of the Act.”

Secondly, the Holding DOCA did not fulfill the mandatory requirements for a DOCA under section 444A of the Act. Specifically, that the Holding DOCA did not specify the property of the company that is to be available to pay creditors’ claims under section 444A(4)(b).

Ruling

Master Sanderson rejected Mighty River’s arguments and held:

• an administrator can use his or her professional judgement in determining whether he or she can apply to the Court for an extension of convening period or bypass the Court by way of creditors approving a Holding DOCA;
• a Holding DOCA is not inconsistent with the aim of Part 5.3A of the Act, to maximise returns for all parties related to the insolvent company; and
• Holding DOCAs are in “widespread” use and ruling them invalid “would have a profound effect on insolvency practice” and the question of their validity should be determined by at least an intermediate Court of Appeal.

However, it should be noted that the Court found that “the arguments are finely balanced and Mighty River’s case was not without its merits.” As such, further challenges to Holding DOCAs on the grounds submitted by Mighty River may well be forthcoming.

Conclusions

It is clear that Holding DOCAs are useful tools in an administrator’s armoury as they can be used to effectively extend the administration and avoid the need for court intervention. A Holding DOCA provides flexibility and time whilst also maintaining the benefit of moratoriums and other protections in circumstances where there may be a number of uncertainties or unfinished projects impeding a satisfactory resolution of the administration.  

Contrary to the arguments put forward by Mighty River, a Holding DOCA will, if used correctly, further the aims contained in section 435A of the Act by providing more time to realise or run a project, which in turn may provide a better return to creditors or allow the company to emerge clean following a restructure or recapitalisation.

We recommend seeking 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.

Appeal

As at the date of this publication an appeal lodged by Mighty River has been heard by the Western Australian Court of Appeal and we are awaiting the decision.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).