Following on from the High Court’s decision regarding the holding DOCA of Mesa Minerals Ltd (subject to deed of company arrangement) (Mesa Minerals) (our publication on that case can be found here), Mighty River International Ltd (Mighty River), a creditor of Mesa Minerals, again unsuccessfully challenged Mesa Minerals’ deed of company arrangement (DOCA), this time in the Supreme Court of Western Australia.1
Upon a recommendation by the deed administrators, the creditors voted to amend the DOCA to incorporate a sale and purchase agreement entered into with a related third party, Auvex Resources Limited (Auvex). Auvex’s parent company, Mineral Resources Ltd (Mineral Resources), is a creditor and shareholder of Mesa Minerals.
That sale and purchase agreement provided a cash contribution of over $2 million and (among other things) an assumption by Auvex of $6 million of debt, being the $6 million debt which was a portion of Mineral Resources’ proof of debt.
Mighty River asserted (among other things) that:
Mighty River also sought a declaration that the varied DOCA contemplated giving a financial benefit to a related party in contravention of chapter 2E of the Corporations Act.2
In addition to Mighty River’s application, the deed administrations sought directions from the Court to enter into the proposed sale and purchase agreement with Auvex.
In relation to Mighty River’s assertion that it would be unlawful and unreasonable for the deed administrators to enter into the proposed sale and purchase agreement, the Court determined that the deed administrators’ negotiation of and decision to enter into the transaction was made in good faith and for a propose purpose.3 Further, the Court noted that the deed administrators engaged a leading and independent firm to carry out the marketing campaign and provide valuations in relation to the mining assets.4
In relation to the poof of debt assertion, the Court considered that the deed administrators had reviewed Mineral Resources’ proof of debt and that the deed administrators had verified the proof of debt and found the amounts to be substantiated.5
In relation to the alleged breach of chapter 2E of the Act, the Court noted that chapter 2E does not apply to a company under a DOCA. Justice Le Miere said [at 64]:
The purpose of ch 2E is to protect members from the risk that the interests of a related party may influence the decision‑making of directors to the detriment of the interests of members of the company as a whole when the company is considering entering into a transaction with a related party, by requiring member approval for giving financial benefits that could endanger member's interests.
When a company is subject to a deed of company arrangement the decision to enter into a transaction is made by the deed administrators and the creditors, not by the directors whose decision‑making may be influenced by the interests of a related party.
The Court dismissed Mighty River’s application and granted the directions the deed administrators sought in relation to the sale and purchase agreement.
Importantly for practitioners, the Supreme Court made similar comments to the High Court and set out that it will not usually critique and question administrators’ recommendations in relation to a DOCA in circumstances where the administrators have acted in good faith and for a proper purpose. The Court noted that it was not the task of the Court to ‘consider the commercial desirability of the transaction as if it and not the administrators were deciding to enter into the transaction.6
[1] Mighty River International -v- Bryan Hughes And Daniel Bredenkamp s deed administrators Of Mesa Minerals Ltd (subject to deed of company arrangement) [No 2] [2018] WASC 368.
[2] 2001 (Cth)
[3] At 99.
[4] At 111.
[5] At 141.
[6] At 144.