Hold on a second: WA Court of Appeal confirms “holding” DOCAs are valid

Back in April 2017, we reported on the decision of Master Sanderson of the Supreme Court of Western Australia in Mighty River International Ltd v Hughes & Bredenkamp¹ insofar as it approved the use of “holding” deeds of company arrangement (DOCA).  Click here to read that update.

The finding that the use of the particular holding DOCA was a valid exercise of the administrators’ power, was somewhat tempered by the Master’s comment that:

This is one of those situations where if holding DOCAs are found not to be consistent with the [Corporations Act 2001 (Cth) (Act)], then it is a matter which should be determined at least by an intermediate court of appeal.

Unsurprisingly therefore, the decision was appealed by Mighty River International Ltd (Mighty River) to the Western Australian Court of Appeal which delivered its unanimous judgment earlier this month, dismissing the appeal and confirming the validity of holding DOCAs under the Act.²

Questions determined by the Court of Appeal

Mighty River’s numerous grounds of appeal ultimately boiled down to the following questions:

• Will a DOCA be invalid if it does not specify, pursuant to section 444A(4)(b), some property of the company that is to be available to pay creditors’ claims?
• Will a DOCA be invalid if it creates a moratorium period in relation to creditors’ claims, provides that the deed administrator will carry out further investigations in relation to the company for a period exceeding the convening period specified in section 439A(5) of the Act and provides that the deed administrator may present a proposal for restructuring or otherwise resuscitating the company after those investigations are completed?

 No property? No worries!

Section 444A(4) of the Act sets out a number of matters that must be specified in a DOCA including, relevantly, the property of the company that is to be available to pay creditors’ claims (see section 444A(4)(b) of the Act).

Mighty River argued that section 444A(4)(b) of the Act requires that a DOCA specify at least some present or future property of the company that is to be available to pay creditors’ claims.³

The Court of Appeal rejected that argument, holding that the fact that the DOCA specified ‘no property’ to be available to pay creditors’ claims did not mean that the DOCA was invalid by virtue of section 444A(4)(b) of the Act.⁴

It was noted that section 444A(4)(b) is couched in terms that require the DOCA to specify the property that ‘is to be available’, not property that ‘is available’.

As Buss JA noted at [148]:

Section 444A(4)(b) merely requires that the deed particularise or address expressly and in detail the extent to which the company’s present or further property is to be available to pay creditors’ claims.  The provision does not require that the deed of the arrangement make property available for distribution to creditors.  Section 444A(4)(b) will be complied with if the deed specifies that no property of the company is to be available to pay creditors’ claims.

Buss JA also emphasised that the apparent purpose of section 444A is to ensure that creditors are fully informed as regards a proposed DOCA, but that not all of the matters listed in the section will be relevant to every DOCA.⁵

Holding DOCAs as a ‘gateway’ to extension of the convening period

Mighty River argued that:

• investigations into the company and its affairs must be carried out while the company is under voluntary administration (i.e. before the end of the convening period); and
• the only valid manner in which to extend the convening period under the Act was to apply to the Court under section 439A(6) and that use of a holding DOCA as a ‘gateway’ to extension was to usurp the Court’s power under section 439A(6).

Again, Mighty River’s argument was rejected by the Court of Appeal on numerous bases.

Central to the Court’s rejection of that argument was the notion that, provided that the contents and presentation of the holding DOCA meet the threshold requirements of Part 5.3, the decision as to whether it is in the creditors’ interests to execute a holding DOCA is a commercial matter for the creditors of the company to decide.

Usefully, the Court reasoned that:

• the validity of a holding DOCA is based on whether it complies with the provisions of Part 5.3A of the Act and not whether it achieves one or more of the statutorily expressed objectives of Part 5.3A;⁶
• the terms and conditions upon which the debts or claims against the Company should be compromised is for the majority of creditors to decide as a matter of commercial judgment;⁷
• a DOCA may originate as a holding DOCA and then subsequently be varied such that it becomes a fulsome DOCA, and the terms of the original holding DOCA do not limit the scope or contents of the varied DOCA;⁸
• the administrator may rely on his or her power under section 445F(1)(a) to convene a meeting of creditors to facilitate the conversion of the holding DOCA to a fulsome DOCA;⁹
• subject to the facts and circumstances of the particular case, the administrator’s opinion that it would be in the creditors’ interests for the company to execute a holding DOCA would be a valid opinion of the kind mandated by section 438A(b) and 439A(4)(b);¹⁰
• in forming the opinion that it is in the creditors’ interests to execute a holding DOCA, the administrator need not establish that execution of the holding DOCA will, without doubt, produce a further proposal in the form of a varied, more fulsome DOCA;¹¹
• a court ordered extension of the convening period under section 439A(6) is not the sole means (nor, necessarily, the preferable means) by which further investigations in relation to the a company may be undertaken after the end of the convening period and a holding DOCA does not ‘side-step or outflank the Court’ in relation to the function and power of the Court under section 439A(6); and
• a creditor who objects to the contents of a holding DOCA, or a variation of the DOCA to convert it into a fulsome DOCA, can apply to the Court to terminate the DOCA pursuant to section 445D or cancelling the variation pursuant to section 445B.

Lavan comment

This decision not only confirms that holding DOCAs are valid under the Act, but also recognises and supports their extensive use by insolvency practitioners in practice.

Importantly, the Court has accepted that, in certain administrations, the execution of a holding DOCA is in fact a more preferable manner in which to effectively extend the convening period than making a formal application to Court for orders under section 439A(6) of the Act.