Australian High Court endorses the use of 'holding' deeds of company arrangement

​The High Court of Australia has recently confirmed that deeds of company arrangement (DOCAs) allowing administrators longer to investigate companies' affairs than the statutorily prescribed 20 working day period do not contravene the voluntary administration regime in the Corporations Act 2001 (AU), provided that the DOCAs otherwise confer rights and obligations on the parties that are subject to them.

The decision is relevant here because our voluntary administration regime is modelled on Australian law.

The context

Mesa Minerals Limited (Mesa) entered voluntary administration.  Prior to the watershed meeting (the meeting at which a company in administration has its fate determined), the administrators distributed a report to Mesa's creditors, recommending that they vote in favour of what the administrators termed a “Recapitalisation DOCA".  The terms of the Recapitalisation DOCA included that the administrators were afforded a period of time that extended beyond the date of the watershed meeting, in order to further investigate Mesa's property and affairs with a view of determining whether a restructure or recapitalisation of Mesa was possible.  During this prolonged period of investigation, no property was being distributed to Mesa's creditors.

First instance decision and appeal

Mighty River International Limited (Mighty River), a creditor and shareholder of Mesa, sought orders in the Western Australian Supreme Court that the Recapitalisation DOCA be terminated or set aside, and a declaration that it was of no force and effect.  It contended that the Recapitalisation DOCA was not consistent with the:

  • object of Part 5.3A of the Corporations Act (the legislation that New Zealand's voluntary administration regime is modelled on);
  • alleged requirement in section 444A(4)(b) of the Corporations Act which provides that a DOCA allow that some property be available for distribution to creditors (the equivalent of section 239ACN(2)(b) in the Companies Act 1993 (NZ)); and
  • legislative requirement that administrators must seek court approval in order to extend the 20 working day period (the convening period) within which the watershed meeting must be convened after the appointment of administrator(s). [1]

The Supreme Court rejected each of Mighty River's grounds of complaint.  It held that the Recapitalisation DOCA (including the terms that permitted an extension of time for the administrators to conduct their investigations) was consistent with Part 5.3A.  Further, the Court held that section 444A(4)(b) of the Corporations Act need only specify the extent to which property is to be made available to creditors, rather that property in fact be made available.

Mighty River's claims were rejected by the Court of Appeal division of the Supreme Court for materially the same reasons.

High Court decision

The High Court dismissed Mighty River's appeal after only five minutes of deliberation, and a few months later published its reasons for doing so. 

Recapitalisation DOCA inconsistent with the object of Part 5.3A of the Corporations Act – the Court opined that the Recapitalisation DOCA aimed to maximise the chances of Mesa's survival, or otherwise provide a better return to Mesa's creditors, and as such was consistent with Part 5.3A.  The Court also expressed doubt as to whether the object of Part 5.3A can be treated as a validity condition independent of the provisions of the Part.

Requirement that a DOCA specify some property be available to distribute to creditorsthe Court agreed with the Supreme Court that section 444A(4)(b) only requires that a DOCA specify the property (if any) available to pay creditor claims. [2]

Recapitalisation DOCA impermissibly sidestepped the requirement that court approval must be obtained to extend the convening period – the Court rejected this submission, noting that while an extension of time can only be obtained by a court order, an otherwise compliant instrument that becomes a deed of company arrangement can incidentally prolong the time for an administrator to conduct his or her investigations pending a subsequent variation to it.  In this case, the extension of time was incidental to the genuine rights and duties imposed on the parties to the Recapitalisation DOCA. [3]

Chapman Tripp comment

This decision is consistent with the courts’ general willingness to allow a high degree of flexibility when assessing the validity of DOCAs.  It also exemplifies the courts’ tendency to afford primacy to the purpose of voluntary administration, rather than the text of the provisions of the regime as set out in statute.  The decision is likely to be followed in New Zealand, given that Part 15A of the Companies Act 1993 (NZ) is modelled on Part 5.3A of the Australian Act.

A copy of the decision can be found here.

Our thanks to Cameron Laing for writing this Brief Counsel.

[1] This rule exists on both sides of the Tasman – see section 239AT(2) of the Companies Act 1993 (NZ).
[2] The Court also noted that other types of DOCAs, for example, those that involve debt for equity swaps, do not involve the distribution of property to creditors.
[3] Pursuant to the terms of the Recapitalisation DOCA, the administrators were required to investigate claims by Mesa against third parties, report to Mesa’s creditors, and to seek restructuring proposals. Mesa’s creditors were subject to a moratorium on their claims in order to allow the administrators to do so.

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Related topics: Restructuring & insolvency

 

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