The recent decision of the Supreme Court of Western Australia in Mighty River International Ltd v Hughes & Bredenkamp  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’).
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:
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.
A Holding DOCA can be a useful tool during an administration for a number of reasons, including but not limited to:
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.
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).
Master Sanderson rejected Mighty River’s arguments and held:
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.
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.
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.
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