Holding DOCAs get three thumbs up

The High Court, in Mighty River International Limited v Hughes [2018] HCA 38, by a majority of 3 v 2 has finally put to bed the issue of whether practitioners can use a holding deed of company arrangement (DOCA) in an external administration.

The Answer: You can.

Links to our previous publications on the Mighty River decisions are here and here. A link to the High Court’s reasons for decision can be found here.

The majority’s reasons for decision were delivered by Kiefel CJ and Edelman J, with whom Gageler substantially agreed.  Nettle and Gordon JJ dissented.

Key findings

The majority of the High Court found that the holding DOCA in question was:

a DOCA that complied with the Corporations Act¹, and was more than simply a deed of extension of time, as it conferred certain obligations on the administrators, such that the administrators were required to (among other things) conduct further investigations and deliver further reports.

not contrary to the objects of Part 5.3A of the Act as:

• The s439A report prepared by the administrators indicated that the administrators considered that it was not in the interests of creditors for the company to be wound up, and as such, the holding DOCA maximised the chance of the company’s survival or otherwise provided a better return for creditors, which was consistent with Part 5.3A of the Act.
• A DOCA that does no more than provide a moratorium on creditors’ claims is permissible.
• The objects of Part 5.3A of the Act are not compromised if creditors choose a DOCA that extends the moratorium beyond what they would have otherwise have had outside an administration.

Not invalid as a result of the fact that the DOCA did not make any property available for distribution to creditors.

Lavan comment

This decision provides some much needed clarity to practitioners about their ability to use holding DOCAs in external administrations.

While this decision effectively resolves this issue for the time being, practitioners should still be mindful of entering into DOCAs that do not impose any further obligations. 

At a minimum, we recommend that practitioners ensure that any proposed holding DOCA imposes obligations on the administrator to conduct further investigations and to report to creditors on their findings, that is in addition to providing a moratorium on creditors’ claim.