“Two issues of importance in insolvency practice” – holding DOCAs upheld; pre-appointment conflict claim rejected

What the WA Supreme Court described as the two issues of importance in insolvency practice were whether holding DOCAs (deeds of company arrangement) were a legitimate process in the restructuring of an insolvent company under Part 5.3A of the Corporations Act; and the extent permitted of pre-appointment meetings of administrators with the board of the company without compromising their independence in then taking appointments as administrator.

The Court in Mighty River v Hughes found in favour of the concept of a holding DOCA, and upheld the conduct of the administrator as being “exemplary” in not compromising his independence. 

Conflict

As to the conflict claim the Court said that

“given the law requires the company to decide to appoint an administrator, that must of necessity mean that the board has to get advice from potential administrators as to the proper procedure to be followed and the consequences of administration. The potential for a conflict of interest must arise in almost every case. After all, the administrators once appointed are obliged to investigate the conduct of the directors in relation to the affairs of the company. They may well decide the company has an action against the directors”.

“administrators have to tread a fine line”

The Court went on to say that said that

“administrators have to tread a fine line. On the one hand, they have to advise a board – and not individual board members – as to the consequences of administration. On the other hand, they have to bring to the attention of the board the requirements of the law and their obligations to investigate the conduct of the directors”.

In this case, the administrator

“did everything possible to ensure independence. The advice he gave the board was minimal and could not be in any way construed as benefiting Mineral Resources (which held an interest in Mesa)or the directors. His conduct was exemplary. In arranging for the board to obtain a valuation of its assets he took the first logical step to obtain an idea of Mesa’s financial position. He did not at any time advise individual board members of Mesa – he directed his advice to Mesa. He did not advise Mineral Resources and whatever was passed on by the board of Mesa to Mineral Resources was entirely beyond his control”.

“Holding DOCAs”

The second issue arose because the administrator allowed the company to enter a holding DOCA, being

“a DOCA entered into by the administrator and the company whose purpose is typically to provide more time for a voluntary administrator (or the directors or third parties) to develop proposals for restructuring or otherwise resuscitating the company. It thereby avoids the need for the voluntary administrator to seek an extension from the court of the convening period for the second creditors’ meeting under s 439A. Typically, holding DCAs do not contain any concrete provisions on the future of the company or any immediate benefits for creditors”.

That analysis is taken from ASIC’s RG 82 titled ‘External Administration: Deeds of company arrangement involving a creditors’ Trust’, at [1.23].

The concept of a holding DOCA is not referred to in the Corporations Act, but the use of various provisions in the Act allow these deeds to be used. In that respect, the Court rejected a challenge to the use of holding DOCAs as being

“used to avoid the proper process for seeking court approval for an extension of the convening period, thereby subverting the role of the court and the intent of the legislature”.

The evidence was that holding DOCAs are widely used by insolvency practitioners particularly in large administrations, and in particular to avoid the need for a court application to extend the convening period for the second creditors meeting.

“Holding” terms of the DOCA

They are “holding” in the sense that there is no action required under them, the one in this case saying that “subject to any variation of the deed, there will be no property of the Company available for distribution to Creditors under the deed”.  The purpose of the holding DOCA was expressed to be to put in place a mechanism for the orderly sale of the company’s assets, with complete flexibility as to outcome retained.  At an appropriate time, when the sale process was complete or when plans for reorganisation had reached fruition there would be a meeting of the creditors which would vary the holding DOCA to allow for the realisation of the assets in the most expeditious fashion.  The Corporations Act does allow for the variation of a DOCA, under s 445A and the holding DOCA contemplated that. 

[ILRA 2016 Note that, in light of changes introduced by the ILRA 2016, s 445A will read “a deed of company arrangement may be varied by a resolution passed at a meeting of the company’s creditors convened under s 445F, but only if the variation is not materially different from a proposed variation set out in the notice of the meeting”.  Section 445F which deals with a meeting of creditors to consider a proposed variation or termination of a DOCA is being repealed its requirements are replicated in the Insolvency Practice Rules].

Two gateways

The Court saw an administrator as having two choices, or “gateways”, one to apply to the court for an extension of time, the other to use a holding DOCA. It will always be a question of professional judgment on the part of the administrator as to which of the two gateways are accessed.

Reluctance to disturb accepted insolvency practice

Importantly, the court took into account was appeared to be accepted insolvency practice, saying that given that the evidence was that holding DOCAs are in widespread use 

“it would be a bold step to rule that such Holding DOCAs are impermissible. It would have a profound effect on insolvency practice. … If national insolvency practice sanctions Holding DOCAs and their use is widespread, then the uncertainty created by a first instance decision ruling against their validity could create significant problems. This is one of those situations where if Holding DOCAs are found not to be consistent with the Act, then it is a matter which should be determined at least by an intermediate court of appeal”.

Mighty River International Ltd v Hughes & Bredenkamp [2017] WASC 69.

Comment

The decision is indeed significant in:

  • emphasising the reality of the process of appointment of an administrator, and the necessity for pre-appointment meetings, particularly in large and complex administrations; and
  • in upholding the profession’s development of flexibility through the use of holding DOCAs, in particular in avoiding the cost and time of court applications.

Sakr Nominees

The Court also made an important point that relates to the remuneration issue recently decided in Sakr Nominees. In effect, the NSW Court of Appeal decision in Sakr merely restored the law to a position that always applied, but for the decisions of one judge, despite the High Court saying that state and federal courts interpreting the national corporations law should be consistent – the Marlborough Gold decision. 

The same point was made in this case, the WA Supreme Court applying that approach in endorsing what is a national approach in relation to the use of holding DOCAs.

 

 

 

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