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Holding DOCAs upheld by the High Court

David Jackson - Monday, October 01, 2018

 

Overview

The High Court of Australia has, by majority decision in the recent case of Mighty River International Limited v Hughes & Ors[1] (Mighty River), held that a ‘holding DOCA’ whose main object is to extend the time for the administrators to conduct further investigations before presenting a proposal to the creditors, is valid under the Corporations Act 2001 (Cth) (Act).

Both the majority and minority founded their reasoning on the purpose of Part 5.3A of the Act, which is titled “Administration of a company’s affairs with a view to executing a deed of company arrangement”, but they reached different conclusions. Kiefel CJ and Edelman J (with Gageler J agreeing) emphasised the “intended flexibility … a wide variety of different possible deeds of company arrangement” and favoured a construction of the Act that empowered creditors to choose outcomes including extensions of time,[2] whereas Nettle and Gordon JJ (dissenting) placed weight on the ‘creditor protection’ aspect of the Part and conceived a non-displaceable role for the courts in such decisions being made.[3]

The result, while not as definitive as it might have been, gives comfort to administrators that they may validly propose a range of processes and outcomes to creditors, including holding DOCAs. The result reinforces existing commercial practice, whereas a contrary outcome could have been very disruptive.

However, the validity of any proposal by administrators will depend on its being supported by sufficient investigations and reasoning. Even on the majority’s reasoning, a holding DOCA will likely be invalid if it extends the time without specific justification. An administrator in those circumstances should instead apply under s 439A(6) for more time to investigate.

Voluntary administration

A DOCA is the presumptive end-point of a voluntary administration, the form of external administration provided for in Part 5.3A of the Act, the aim of which is to facilitate the rescue and revival of a company that is or might be insolvent.[4]

A DOCA is the result of the creditors of a company accepting a proposal put forward by a director or third party to pay all or part of the company’s debts and then be free from those debts. Proposals are typically assessed according to whether they are likely to deliver a better outcome for creditors than would a winding up.

That creditors’ interests and choices are paramount in a voluntary administration and the entry into a DOCA underpins the High Court’s reasoning in Mighty River.

Holding DOCAs

Section 444A(4) of the Act lists 9 types of information that a DOCA must specify, including:

(b)  the property of the company … that is to be available to pay creditors’ claims;

The DOCA the subject of the Mighty River case (the Deed) did address that requirement, but only in the negative – clause 8 stated:

"there will be no property of the Company available for distribution to Creditors under this deed"

DOCAs like that, whose primary objective is extending the time available to the administrators to investigate the company’s affairs (the ‘convening period’), are known as ‘holding DOCAs’. They have been used and tacitly approved of for many years,[5] despite the Act conferring only on courts the power to extend the ‘investigation phase’ of a voluntary administration.[6]

Mighty River asserted that the Deed (which it described as a ‘holding DOCA’) was invalid and should be declared to be void. The High Court disagreed.

The majority’s reasoning

Kiefel CJ and Edelman J began their analysis with the 1988 report of the Australian Law Reform Commission that ultimately led to the passing of the Act (the Harmer Report), identifying therein a recommendation that a new ‘voluntary administration’ procedure be enacted that would “have the benefit of speed and flexibility for creditors” and not require court approval of any particular step within that procedure, while preserving for the courts “a general supervisory power”.[7]

Applied to one of Mighty’s River’s main submissions, namely that the DOCA the subject of the appeal (the Deed) contravened s 444A(4)(b) of the Act,[8] their Honours’ reasoning led to conclusions that:

  • Part 5.3A intends a “flexibility of approach” to DOCAs;[9] and
  • accordingly, the “context and purpose” favours construing s 444A(4)(b) to permit a DOCA not to specify any property to be available to pay creditors’ claims.[10]

Mighty’s River’s other main submission was that the Deed was not a valid DOCA because it circumvented the extension of time mechanism in s 439A(6) and hence was contrary to the object of Part 5.3A.

While preferring not to use the terminology ‘holding DOCA’,[11] Kiefel CJ and Edelman J approved of the concept, holding that:

the operation of the Deed aims to fulfil the object of [Part 5.3A] by maximising the chance of Mesa Minerals' survival or otherwise providing a better return to creditors than would result from its immediate winding up.[12]

Critical in that regard were their Honours’ findings that:

  • the administrators had ‘genuinely’ formed the view, based on “substantial research and investigations”[13] and “substantial reasoning”,[14] that extending the time was justified, in part because winding up the company was not in the interests of creditors;[15] and
  • in that context, the creditors had chosen to extend the moratorium period on their claims beyond the ‘convening period’ fixed by sub-section 439A(5).[16]

Only in circumstances where there isn’t enough information for an administrator to form an opinion about what course of action would be in creditors’ best interests is it mandatory for the administrator to apply to extend the convening period.[17]

Their Honours noted that Part 5.3A already contains a “carefully drafted regime” to deal with DOCAs and the process leading to their execution.[18] Although as part of that regime an extension of the convening period under s 439A(6) can be obtained only by a court order, a DOCA can (incidentally) extend that time provided it also “created and conferred genuine rights and duties”.[19]

Gageler J elaborated on that issue as follows in a short judgment agreeing “completely” with the joint judgment of Kiefel CJ and Edelman J:[20]

[Mighty River submitted that] the opinion required to be formed and communicated to creditors in order for the second meeting of creditors to proceed … needed to amount to a firm conclusion as to what course was ultimately in the best interests of the creditors.The scheme of Pt 5.3A was said to require such an opinion one way or the other within the convening period set by s 439A(5) or such an extension of the convening period as the Court was satisfied was in the interests of creditors to allow… My view was, and remains, that the argument was without merit… The purpose of the strict time limits on the convening of a meeting of creditors after a company is placed in administration is to allow creditors to make their own decision as to what course is in their own best interests as soon as is practicable.

Dissenting judgment

After analysing the mechanism and processes provided in Pt 5.3A, Nettle and Gordon JJ held that:[21]

The evident purpose of Pt 5.3A is thus to confine administrations to the strict time limits laid down by Pt 5.3A subject only to such extensions as the courts may be satisfied are appropriate to be granted in exercise of the specific power of extension conferred by s 439A(6) or the general power of varied application conferred by s 447A(1).

According to their Honours, Part 5.3A of the Act conceives of the administration process on the one hand and the variety of arrangements that may be made the subject of a DOCA on the other hand as “mutually exclusive”:[1] the latter is flexible, but the former is strict. It was significant for their Honours that “there is no provision for creditors to extend the length of the convening period” and adjournments under s 439B(2) are capped at 45 days.

Their Honours reasoned that that legislative regime is there to protect creditors “while the administrator's investigations are ongoing [and] creditors do not know the full picture”.[2]

Their Honours’ further held that:

  • “the essence” of a DOCA is that it provide for the whole or partial payment of creditors’ claims;[3]
  • the Deed lacked that essence and instead “purported to effect essentially the same result as a court-ordered extension of the convening period under s 439A(6)”;[4] and
  • as such, the Deed was not a DOCA “within the meaning of Part 5.3A”.[5]

Their Honours buttressed that conclusion by their finding that the administrators had failed to form the opinions required within the convening period by s 439A, despite their the substantial investigations and reasoning.

 
 

This case note was written by Emilly Gunawan and David Jackson of Shiff & Company. For more information, please contact djackson@shiffco.com.au.


[1][70].

[2][75].

[3][77]: Despite their Honours expressly accepting there is “no compelling reason to confine the ambit of the terms and conditions of a compromise or arrangement upon which creditors may lawfully agree”.

[4][82].

[5][83].



[1][75].

[2][77]: Despite their Honours expressly accepting there is “no compelling reason to confine the ambit of the terms and conditions of a compromise or arrangement upon which creditors may lawfully agree”.

[3][82].

[4][83].

 

 



[1][2018] HCA 18.

[2]At [7].

[3]At [75].

[4]The other forms are receiverships (where secured creditors appoint someone to sell the company’s assets) and winding up (which usually ends in liquidation and deregistration of the company).

[5]ASIC’s regulatory guide, which addresses the topic, was released in May 2005 (RG 82).

[6]Section 439A(6).

[7] [5].

[8] Which provides that a DOCA specify the property of the company that is to be available to pay creditors’ claims.

[9][45]...

[10][42], citing the Harmer Report.

[11][28].

[12][31].

[13][55].

[14][51-53].

[15] [35].

[16][35].

[17][54].

[18] [33], citing sections 444B(2) and 445D(1).

[19][34].

[20]Per Gageler J, at [60-61].

[21][74].

[22][70].

[23][74].

[24][75].

[25][77]: Despite their Honours expressly accepting there is “no compelling reason to confine the ambit of the terms and conditions of a compromise or arrangement upon which creditors may lawfully agree”.

[26][82].

[27][83].