BVI based creditor – Mighty River International Limited – challenged the validity of a “holding” deed of company arrangement (or a ‘holding DOCA’) approved by creditors of Australian miner Mesa Minerals Limited (Company).
The administration process in Australia is deliberately focused on rescuing a company – the objectives of the administration process are expressly stated in the Corporations Act 2001 (Cth) (Act) as being to maximize the chances of the company, or as much as possible of its business, continuing in existence or, if that is not possible, to result in a better return for the company’s creditors and members than would result from an immediate winding up of the company.
The administrator has a short time (20 business days, generally speaking) (Convening Period) to investigate the affairs of the company and make a recommendation to creditors as to whether the company should (1) be handed back to directors, (2) enter into a DOCA or (3) be placed into liquidation.
The Convening Period may be extended by order of the Court. The Court will only extend the Convening Period if it is satisfied that it is in the best interests of creditors to do so.
The holding DOCA is used in the industry to refer to a DOCA that provides for an extension of the moratorium on creditors’ rights (without obtaining a Court ordered extension) while the administrators continue to administer the company with a view to effecting a restructuring or finding some other solution that is better than liquidation.
The case before the High Court of Australia (High Court) concerned a challenge to a holding DOCA that, among other things:
- was proposed for the purposes of providing “sufficient time for the Administrators to conduct further investigations…and to explore the possibility of a restructure or recapitalization”; and
- provided that “there will be no property of the Company available for distribution to Creditors under [the holding DOCA].”
The holding DOCA was criticized for a number of reasons, including that:
- it was a means of “sidestepping” the Court’s supervisory role in considering whether extensions of the convening period should be granted; and
- it is a mandatory requirement under the Act that “some” property be available for distribution to creditors under s444A(4)(b).
The majority of the High Court held that the holding DOCA proposed by the administrators of the Company was consistent with the objectives of administration and therefore valid.
While the minority did not agree that the holding DOCA was a deed of company arrangement consistent with the Act, the High Court was in unanimous agreement that the statutory requirement for a DOCA to specify “the property of the company that is to be available to pay creditors” is not concerned to particularize the minimum assets available to meet creditors’ claims.
The decision of the High Court confirms that, under Australian law, holding DOCAs are an appropriate tool for administrators to effect a restructuring or recapitalization of a company.
This decision does not, however, relieve Administrators of their duties and obligations to obtain sufficient information in relation to the company so as to be in a position to recommend one of the three options available to creditors. If an administrator has insufficient information to make a recommendation to creditors, the only possibility is for the administrator to apply to court to extend the convening period.