High Court of Australia rules that ‘Holding DOCAs’ are permissible in certain circumstances
Background
Mesa Minerals Limited (Mesa) is a listed mining company which owned a 50% joint venture interest in two manganese projects. It was placed into Voluntary Administration on 13 July 2016.
Voluntary Administrations are governed by Part 5.3A of the Corporations Act 2001 (CA). The object of Part 5.3A is set out in section 435A: being to administer the business, property and affairs of an insolvent company in a way that maximises the chances of the company, or as much as possible of its business, continuing in existence or if that is not possible, results in a better return to creditors and members than an immediate winding up.
The regime provided in Part 5.3A is that the administrator is to investigate the circumstances of the company, form an opinion in respect of certain matters and call a meeting of creditors within 5 days before or after the end of the ‘convening period’, in most cases being 20 business days after the beginning of the administration. The Court may extend the convening period upon application and at the time of the events in question, the convening period could not be extended for more than 45 business days. At the meeting, the creditors may decide either that the company execute a Deed of Company Arrangement (DOCA), that the administration should end or that the company be wound up.
During the period of Voluntary Administration under Part 5.3A, a statutory moratorium is also applied to the claims of creditors against the company in administration.
At the adjourned second meeting of creditors of Mesa on 20 October 2016, the creditors voted in favour of entry into a DOCA, which was executed on 3 November 2016. The DOCA provided that the Administrators were to continue to investigate the property and affairs of the Company to explore the possibility of a restructure or recapitalisation of the Company and report within 6 months with the results of their investigations.
The Deed, in effect, is what is known colloquially as a ‘holding DOCA’.
Proceedings at first instance and below
Mighty River International Limited (Mighty River) owned 13.5% of Mesa and commenced proceedings in the Supreme Court of Western Australia seeking orders, relevantly, declaring that the DOCA was of no force and effect and terminating or setting aside the DOCA. Another shareholder of Mesa, Mineral Resources Limited (Mineral Resources) cross-applied for orders to the effect that the DOCA was not void or alternatively, that it was valid.
Master Sanderson dismissed Mighty River’s application at first instance.
On appeal to the Court of Appeal of the Supreme Court of Western Australia, Mighty River argued that the DOCA was invalid on two basis of note, namely that:
- Section 444A(4)(b) of the CA required that a DOCA specify some property of a company available to pay creditors, which the present DOCA did not do; and
- the DOCA had the effect of impermissibly extending the moratorium upon creditors’ claims and the time for investigation and reporting upon a restructuring proposal beyond the convening period without obtaining an order of the Court to do so. The essential argument was that such an extension was not consistent with the object of Part 5.3A as expressed in section 435A of the CA because it provided for “essentially an extension of the Administration Period”.
The Court of Appeal of Western Australia held the DOCA valid in separate judgments and dismissed the appeal.
The decision in the High Court
By a 3:2 majority, the High Court also held that the DOCA was valid and dismissed the appeal.
The plurality (comprising Kiefel CJ and Edelman J, with whom Gaegler J agreed in a separate judgment) held that:
- the DOCA did not contravene the object of Part 5.3A or impermissibly extend the time for investigation and reporting without an order of the Court pursuant to s439A(6) of the CA because:
- “the operation of the Deed aims to fulfil the object of the Part by maximising the chance of Mesa Minerals' survival or otherwise providing a better return to creditors than would result from its immediate winding up”. Reliance was placed upon evidence that the value of the listed shell of Mesa was between $400,000 and $900,000 and that as a result, sale of the assets of Mesa would be a better outcome for creditors than winding up if the administrators’ investigations determined that the business could not be successfully restructured and continue to operate; and
- the object of Part 5.3A was “not compromised if creditors choose, in a deed of company arrangement, to extend a moratorium beyond the period that they would otherwise have had outside an administration”; and
- in light of its context and purpose, section 444A(4)(b) of the CA did not require that a DOCA must specify some property of a company available to pay creditors’ claims; rather, it required that a DOCA specify any property of a company available to pay creditors’ claims. As a result, the DOCA in question did not contravene section 444A(4)(b).
Gageler J, whilst agreeing with the reasons of Kiefel CJ and Edelman J, delivered a separate judgment further explaining his Honour’s rejection of the argument that the DOCA did not comply with the procedural requirements of Part 5.3A of the CA.
Conclusion
The decision is of significance because it confirms that a ‘holding DOCA’ (although note the questioning of the use of that term on the basis that it has no legislative recognition) is not invalid merely because it has the effect of extending the moratorium upon claims of creditors beyond the convening period in Part 5.3A without leave of the Court. Instead, a DOCA extending the moratorium beyond the end of the convening period will not be invalidated for that reason alone so long as the purpose of the extension is consistent with the object of Part 5.3A; namely, to achieve a better outcome for creditors and/or members than an immediate winding up of the company if the moratorium were not extended.
Further, the decision is also of practical assistance because it confirms that a DOCA need only identify property available to pay creditors’ claims where there is in fact such property available to do so.
