Australia: High Court confirms the 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 Australia1 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'.

Footnotes

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Chambers Asia Pacific Awards 2016 Winner – Australia
Client Service Award
Employer of Choice for Gender Equality (WGEA)

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions