High Court decision validates Holding Deeds of Company Arrangement

In Australia of Mighty River International Limited v Hughes, Mighty River International Limited v Mineral Resources Limited [2018] HCA 38, the High Court considered whether a Deed of Company Arrangement (DOCA) contravened Part 5.3A of the Corporations Act 2001 (Cth) (the Act). In particular, the High Court considered whether what is commonly described as a ‘holding’ DOCA was invalid and void.

The facts

Mesa Minerals was a mining company that was placed into voluntary administration on 13 July 2016 and the administrators were appointed.

A majority of creditors of Mesa Minerals voted in favour of entering into a DOCA at the second meeting of creditors.

Subsequently, a Deed of Company Arrangement – Recapitalisation (the Deed) was executed. The terms of the Deed included:

• a moratorium on creditors’ claims;
• a requirement for the Administrators to conduct further investigations and report to creditors concerning possible variations to the Deed within six months; and
• that no property of Mesa Minerals was available for distribution to creditors.

This arguably constituted what is commonly referred to as a ‘holding’ DOCA.

A creditor of Mesa Minerals, Mighty River, wished to place the company into liquidation and brought proceedings claiming that the Deed was void. Its claim was heard together with a claim brought by another creditor of Mesa Minerals, Mineral Resources, which conversely claimed that the Deed was not void.

Mighty River was unsuccessful in its claim and ultimately the decision was appealed through to the High Court.

What the High Court considered on Appeal

Mighty River claimed that:

1. The Deed was not a valid DOCA as it was an agreed extension of time that had not been ordered by a Court and therefore was contrary to Part 5.3A of the Act; and
2. The Deed should have been declared void for contravening sections 438A(b) and 439A(4) of the Act, or section 444A(4)(b) of the Act, or both.

These somewhat technical objections were rejected by the High Court.

Was the Deed a DOCA consistent with the object of Part 5.3A?

The object of Part 5.3A of the Act is to maximise the chance of an insolvent company/business to continue or if that is not possible, to result in a better return to the company’s creditors/members than would result from winding up that company.

Mighty River argued that the Deed was not a valid DOCA because, in essence, it was an agreed extension of time that had not been ordered by the Court and was contrary to the purpose of Part 5.3A.

Mighty River also alleged that the Deed involved an impermissible sidestepping of section 439A(6) of the Act and was essentially a ‘holding’ DOCA, being a deed that:

• did not specify company property available to creditors; and
• was predominantly focused on creating a moratorium period to allow the Administrators further time to investigate the company’s options.

Although an extension of time under the Act can only be obtained by an order of the Court, a compliant instrument that becomes a DOCA can incidentally extend the time period for an administrator’s investigations.

Here, it was confirmed that the Deed created rights and duties and only extended the administration period incidentally.  Chief Justice Kiefel and Justice Edelman found three reasons why the Deed was not contrary to Part 5.3A and therefore was not invalid, being:

1. The Deed aimed to fulfil the object of Part 5.3A by maximising the probability of Mesa Minerals’ continuing existence or, if that was not possible, increasing the potential return to creditors above what they would have received as a result of the company winding up;
2. The history of schemes of arrangement indicates that providing a moratorium on claims for the purpose of reassessing the company’s position was a valid purpose of the Deed; and
3. The short convening period before the second meeting of creditors is predominantly for the protection of creditors.

As was recognised in the decision of Lehman Bros Holdings Inc v City of Swan, Justice Gageler noted that it is fundamental to the scheme of Part 5.3A to allow creditors to decide what course of action is in their own best interest.

Consequently, the Deed was not contrary to the object of Part 5.3A of the Act.

Should the Deed have been declared void?

Mighty River claimed that if the Deed was found to be a valid DOCA, it should be declared void under section 445G(2) for contravening sections 438A(b) and 439A(4) or section 444A(4)(b).

Mighty River’s primary argument was that the Deed contravened section 444A(4)(b) as it provided that “there will be no property of the Company available for distribution to Creditors under this deed”.

A majority of the Court agreed that this section did not prescribe a minimum obligation upon the Administrators to distribute some property to creditors and did not require the Administrators to make available any assets of the company. Rather, the purpose of section 444A is to direct the creditors to important matters that should be addressed within the deed. Chief Justice Kiefel and Justice Edelman also noted that there have been numerous DOCAs that have no company property available for distribution to creditors.

Additionally, the Court found that the Administrators had adequately formed and vocalised their options in relation to section 438A(b) and, at the relevant time, section 439A(4).

As such, the Deed was not declared void.

Key takeaway

This decision provides welcome comfort to insolvency practitioners and creditors alike that a ‘holding’ DOCA represents a flexible approach that can be applied under Part 5.3A. Although each DOCA must be considered on a case by case basis, administrators and creditors may enter into a ‘holding’ DOCA as an effective alternative to applying to the Court for an extension of time under the Act.

Authored by:
Susan Forrest, Partner
Jasmia Bavaresco, Solicitor