Still holding on: the validity of ‘holding’ deeds of company arrangement

The recent appeal judgment in Mighty River International Ltd v Hughes [2017] WASCA 152 has confirmed the validity of ‘holding’ deeds of company arrangement, or ‘Holding DOCAs’ under the Corporations Act 2001 (Cth) (the Act).

Key takeaways

A number of recent administrations have shown that in light of complex business structures or external factors (for example environmental or counterparty issues) further time in excess of the period prescribed in the Act may be beneficial to formulating proposals which may see the company survive or, in the alternative, provide a better return to creditors. Therefore, Holding DOCAs remain useful tools to provide this extra time and in many circumstances allow the aims of Part 5.3A to be successfully achieved.

Background

In the first instance decision of Mighty River International Ltd v Hughes & Berdenkamp [2017] WASC 69, Master Sanderson held that the Holding DOCA proposed by the administrators of Mesa Minerals Pty Ltd was valid, because:

• Holding DOCAs are not inconsistent with the aims of Part 5.3A of the Act;
• 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; and
• Holding DOCAs are in “widespread” use and ruling them invalid “would have a profound effect on insolvency practice”.

(Click here to see our earlier article for more commentary).

Appeal

Mighty River, a creditor of and minority shareholder in Mesa Minerals Pty Ltd, appealed the decision. The appeal was based on three central contentions, namely:  

1. Will a DOCA, purportedly executed under Part 5.3A of the Act, be invalid if the DOCA does not specify, pursuant to s444A(4)(b), some property of the company that is to be available to pay creditors’ claims¹?
2. Does the DOCA invalidly seek to circumvent the requirement for an order under s439A(6) of the Act extending the convening period²?
3. Is the DOCA consistent with the objects of Part 5.3A as set out in s435A of the Act³?

Outcome

In rejecting the appeal by Mighty River, President Buss, with Justices of Appeal Murphy and Beech reiterating, set out reasons why the Holding DOCA was not invalid:

1. s444A(4)(b) requires that a DOCA spell out which property of the company is to be made available for distribution to creditors. It does not mean that a DOCA is required to make property available for distribution to creditors. The DOCA complies with s444A(4)(b) because it specifies that no property of the company will be available for distribution to creditors⁴.

2. A Holding DOCA does not “side-step or outflank the court” in relation to the function and power of the court under s439A(6) to extend the convening period⁵.  The DOCA in this case did not defeat the objects of s439A(6), which are to ensure that creditors are fully informed about the company’s position as early as possible and have an opportunity to vote on its future as soon as possible. The execution of the DOCA in this case does not defeat, but rather meets, that objective⁶.

3. Subject to the facts and circumstances of the particular case, the purposes of a Holding DOCA will advance the objects in s435A because those purposes are reasonably capable of maximising the chances of the company continuing in existence or, if that is not possible, resulting in a  better return for the company’s creditors and members than would result from an immediate winding up⁷.

4. The focus in determining whether a Holding DOCA complies with and is a valid DOCA under Part 5.3A is whether a Holding DOCA complies with the provisions of Part 5.3A with respect to DOCAs and not whether a Holding DOCA achieves one or another of the objects in s435A⁸.

5. The nature and content of the arrangement between the company and its creditors expressed in a DOCA, is not one prescribed by Part 5.3A. It is for the majority of the creditors of the company to decide as a matter of commercial judgement, the terms and conditions upon which debts or claims against the company should be compromised.

Conclusions

The appeal decision makes it clear that Holding DOCAs are a valid means to provide further time for administrators to conduct investigations and consider restructure or recapitalisation proposals for distressed businesses. Further, the use of a Holding DOCA can avoid the need for a court application to extend the convening period which may be preferable depending on the circumstances.

As noted in our earlier article, 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.

A number of recent administrations have shown that in light of complex business structures or external factors (for example environmental or counterparty issues) further time in excess of the period prescribed in the Act may be beneficial to formulating proposals which may see the company survive or, in the alternative, provide a better return to creditors. Therefore, Holding DOCAs remain useful tools to provide this extra time and in many circumstances allow the aims of Part 5.3A to be successfully achieved.

¹Mighty River International Ltd v Hughes [2017] WASCA 152 at [110]
²Ibid at [370]
³Ibid at [387] 
⁴Ibid at [369]
⁵Ibid at [194]
⁶Ibid at [380]
⁷Ibid at [179]
⁸Ibid at [176]