High Court confirms validity of Holding DOCAs

This week’s TGIF considers the case of Mighty River International Ltd v Hughes, where the High Court upheld the validity of Holding DOCAs.

Case history

This case concerned the validity of a deed of company arrangement (DOCA) between Mesa Minerals Ltd (Mesa) and its creditors.

Mighty River International Ltd (Mighty River) was a creditor of Mesa and wished to place Mesa in liquidation. It had previously sought to have the DOCA declared invalid in the Supreme Court of Western Australia[1] and on appeal before the Western Australian Court of Appeal,[2] but was not successful in either case. You can read about DOCAs and the Court of Appeal’s decision in our TGIF article from last year: Holding DOCAs Hold Firm.

Mighty River was granted special leave to appeal that decision to the High Court. Last week, the High Court dismissed that appeal, but is yet to publish its reasons.

In this week’s TGIF, we examine the arguments raised before the High Court.

Mighty River’s arguments in the High Court

Mighty River’s primary contention on appeal was that Mesa’s Holding DOCA was invalid because it did not comply with s 444A(4)(b) of the Corporations Act 2001 (Cth) (Corporations Act). That section states that when an administrator prepares a DOCA, it must specify “the property of the company (whether or not already owned by the company when it executes the deed) that is to be available to pay creditors’ claims”.

In this case, clause 8 of the Holding DOCA stated, “Subject to any variation of this deed, there will be no property available for distribution to Creditors under this deed”.

Mighty River contended that by stating that no property was available, the administrators had failed to specify the property available to pay creditors, thereby contravening s 444A(4)(b).

The main bases of Mighty River’s contention were:

1. The plain words of the section indicate that there must be property of the company available to be distributed to creditors. The section requires that the DOCA state the property “available to pay creditors’ claims”. A person cannot distribute “no property” and a creditor cannot be paid from “no property”. A DOCA that fails to specify any property for distribution is therefore invalid.
2. Subsection (4)(b) does not include the words “if any” in relation to the word property, indicating that some property must be available for distribution. Given that the words “if any” are used in subsections (4)(c), (e) and (f), their absence in subsection (4)(b) must have been deliberate and this indicates that there is a presumption that some property will be available to be distributed to creditors, even if it amounts to only $1.
3. The power granted to the Court to extend the convening period for the meetings of creditors suggests that Parliament did not intend for administrators to have the right to extend that period by use of a Holding DOCA. It would be “beyond strange” for the legislature to intend to allow administrators to avoid “the safeguard of judicial supervision” by instead making a “commercial decision” to adopt a Holding DOCA.
4. The hypotheticals relied upon by the Court of Appeal and the respondents (discussed below) to demonstrate the validity of Holding DOCAs were irrelevant to this case.

The respondents’ arguments in the High Court

The respondents (the administrators and a major creditor of Mesa) argued that the Court of Appeal did not err in concluding that a Holding DOCA specifying that no property was available for distribution was valid.

The respondents’ main arguments were:

1. Section 444A(4)(b) was not drafted with the intention for administrators to make property available to creditors. Rather, its purpose is to inform creditors of the property available to be distributed. There may in fact be no property to distribute. Nevertheless, creditors ought be made aware of this.
2. A number of hypothetical situations demonstrate the use of DOCAs where there is “no property of the company” to distribute. For example, a company may have no property to distribute. Instead, it may offer a debt for equity swap, whereby creditors forfeit their rights to enforce the debts owed to them in exchange for being granted shares in the company. Shares in the company are not “property of the company” because a company cannot own shares in itself. As such, a DOCA specifying no property to be distributed may be a useful tool.
3. There is no reason to assume a DOCA satisfies the intention of the legislation simply by stating that $1 of property is available for distribution compared with no property. The appellant’s submissions are a triumph of form over substance.
4. As was identified in the High Court’s decision in Lehman Bros Holdings v Swan CC,[3] the legislature made a deliberate decision not to introduce greater judicial supervision of companies in administration.

The High Court’s Decision

Helpfully, the High Court has allayed any fears that Holding DOCAs as a concept might be invalid, by announcing its conclusion immediately after oral submissions. After the Justices left the Court for five minutes to deliberate, they reappeared for Kiefel CJ to then state that the High Court had dismissed the appeals with costs “by at least a majority”.[4]

However, reasons for the decision will be published at a later date.

Until the Court does so, practitioners do not have total and clear guidance on when a Holding DOCA will and will not be valid. Even though the High Court dismissed the appeals in this case, that does not necessarily mean they agreed with the Court of Appeal’s reasoning. Therefore, the limits on the validity of Holding DOCAs remain subject to change from the Court of Appeal’s position.

Practice Point

The High Court has upheld the validity of Holding DOCAs, meaning administrators ought to be able to continue using Holding DOCAs in their practice. However, as we explained in our earlier article, each DOCA will be assessed on its merits and the circumstances in which it is created. A DOCA is not automatically valid simply because it is described as a ‘Holding DOCA’.

^{[1] Mighty River International Ltd v Hughes [2017] WASC 69.}

^{[2] Mighty River International Ltd v Hughes [2017] WASCA 152.}

^{[3] (2010) 240 CLR 509 at 521 [32].}

^{[4] Transcript of Proceedings, Mighty River International Ltd v Hughes [2018] HCATrans 120 (19 June 2018) at 3554-3555.}