The Mighty River International Ltd v Hughes & Bredenkamp1 raised two important issues for insolvency practitioners. For the purposes of this paper we will focus on the issue of “holding” deeds of company arrangement (DOCA) only.
On 8 August 2016, Mighty River International Ltd (Mighty River) instructed its solicitor to write to Mr Bryan Hughes and Mr Daniel Bredenkamp, the administrators of Mesa Minerals Ltd (Administrators) in relation to Mighty River’s objection to the proposed holding DOCA:
In our view, the Administrators should immediately apply to the Supreme Court of Western Australia for an extension of time to convene a second meeting of creditors. Our client would support any such application.2
On 15 August 2016, the solicitor for Mighty River again wrote to the Administrators raising concerns in relation to the proposed holding DOCA and restating that an application to extend the convening period should have been made to the Supreme Court of Western Australia.3
The Administrators’ section 439A report was tabled at the second meeting of creditors held on 17 August 2016.4
That section 439A report contained, relevantly, the following recommendations:
The Administrators’ opinion on each of the options available to creditors for the future of the company is that:
For reasons unrelated to the holding DOCA, the second meeting of creditors convened on 17 August 2016 was adjourned to 20 October 2016. At that meeting on 20 October 2016, the holding DOCA was proposed and adopted.6
Mighty River then commenced proceedings against, amongst others, the Administrators, in relation to, amongst other things, whether the use of a holding DOCA is permitted under part 5.3A of the Corporations Act 2001 (Cth) (Act).
Mighty River’s position as set out by Master Sanderson at [99] was as follows:
Mighty River then says the reason the purported Holding DOCA is inconsistent with the purposes identified in s 435A and elsewhere within the part is that it does not maximise the chances of the company continuing in existence nor does it result in a better return to creditors than would result from immediate winding up. Rather, the Holding DOCA was intended to do nothing more than preserve the status quo so that the administrator could carry out further investigations and formulate some future proposal which may or may not improve the prospects of the company’s business surviving or a better return to creditors. Everything that can be done under a Holding DOCA could equally be done in an extended convening period.
Furthermore, Mighty River argued that as the DOCA did not include mandatory items pursuant to sections 444A4(b) and (c) of the Act, the DOCA should be set aside.7
Clause 8 of the DOCA stated:
Subject to any variation of this deed there will be no property of the Company available for distribution to Creditors under the deed.
However, clause 9 of the DOCA set out the purpose of the DOCA, being that the deed administrators would sell all of part of the company’s assets to meet outstanding creditors and attempt to return funds to shareholders.
Mighty River argued that as there was no property of the company available, the requirement in section 444A(4)(b) of the Act to specify the property of the company in any DOCA, had not been complied with.
The Administrators argued that, despite the fact that the property is nil, that property, or lack thereof, who specified pursuant to the section.
Furthermore, the Administrators argued that when read as a whole, the DOCA’s intention was to realise any assets and distribute funds.
The Administrators’ position was set out by Master Sanderson at [101]:
[T]here are two gateways. The first gateway is the use of the court approved extension to the convening period. The second is the use of a Holding DOCA. The decision of the Administrators as to which gateway to access is a commercial decision for them which is always subject to review by the court and the setting aside of the Holding DOCA.
The fact that the holding DOCA was implemented for the purpose of avoiding the need for an application to the Court to extend the convening period was acknowledged by Mr Hughes during cross-examination.8
At paragraph 4 of his reasons for decision, Master Sanderson notes that the “Act itself does not refer to a Holding DOCA.”
The Master then refers to the Australian Securities and Investment Commission regulatory guide 82, at clause 1.23:
These holding DCAs are typically used as a means of providing more time for a voluntary administrator (or the directors or third parties) to develop proposals for restructuring or otherwise resuscitating the company, thereby avoiding the need for the voluntary administrator to seek an extension from the court of the convening period for the second creditors’ meeting under s439A. Typically, holding DCAs do not contain any concrete provisions on the future of the company or any immediate benefits for creditors.
Master Sanderson noted that following his review of the case law, he had formed the view that “[a]ll judges who were involved in the various cases were prepared to proceed on the basis that the Holding DOCA was valid."9
Furthermore, at [113], Master Sanderson stated that he was satisfied the use of the holding DOCA was a valid exercise of power.
At [114]-[115], the Master stated:
[114] There seems to be nothing inherently wrong with the creditors meeting as a whole resolving to enter into a Holding DOCA. It is consistent with the intents and purposes of the Act.
[115] Further, it is clear from Mr Hughes’ evidence Holding DOCAs are in widespread use. If that is so (and there is no reason to doubt what Mr Hughes says), it would be a bold step to rule that such Holding DOCAs are impermissible. It would have a profound effect on insolvency practice.
If national insolvency practice sanctions Holding DOCAs and their use is widespread, then the uncertainty created by a first instance decision ruling against their validity could create significant problems.
Finally, the Master noted at [116] that:
Having said all of that if I was of the view Holding DOCAs were not sanctioned by the Act, then I would not have reached the conclusion that the challenge to this Holding DOCA ought be dismissed.
This case illustrates that, at least at first instance in the Supreme Court of Western Australia, the use of holding DOCAs for the purpose of providing administrators with more time to canvas and prepare proposals for the future of the company is deemed to not contravene the purpose of the Act.
This case further demonstrates that proceeding with a holding DOCA is a reasonable alternative to making an application to the Court to extend the convening period.
[1] [2017] WASC 69.
[2] Ibid, [74].
[3] Ibid, [76].
[4] Ibid, [77].
[5] Ibid, [78].
[6] Ibid, [79].
[7] Ibid, [103].
[8] Ibid, [5].
[9] Ibid, [5].
