Mighty River flows with the tide

by Dentons
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Yesterday, in "Mighty River"1 the High Court of Australia gave reasons for its decision that a DOCA which contemplated a potential restructure of a company and allowed further time for investigations into its affairs (without providing for the distribution of any property to creditors in the interim) was a valid invocation of the administration procedure in the Corporations Act 2001 (Cth) ('Act').

In doing so, the High Court serendipitously captured the zeitgeist of Australia’s modern insolvency regime which encourages flexibility (Safe harbour) and the primary goal of value retention (ipso facto). In this brief summary, partners Scott Guthrie and Hector West discuss the principal findings and some important pointers for external administrators.

Administrators were appointed to Mesa Minerals Limited (‘Company’). Mighty River was a shareholder of the Company. Prior to the second meeting of creditors to decide the Company’s fate, the administrators issued a report in compliance with their obligations under the the Act. In that report the administrators expressed a view that it would not be in the interests of the creditors for the Company to be wound up; and that instead, the creditors should vote in favour of what they called a “Recapitalisation DOCA”. 
The report itself was a detailed document and the result of extensive investigations by the administrators. The “Recapitalisation DOCA” would allow the administrators more time to conduct investigations, explore a possible restructure or recapitalisation and to determine whether the DOCA ought thereafter be varied or the company placed into liquidation. In the interim there would be no distribution of any property to creditors. (These terms earned the DOCA the colloquial descriptor of a “holding DOCA”, a title which the High Court said ought to be avoided as it “directs attention away from the terms of the deed and purports to create an ill-defined sub-class of deed of company arrangement”).

Mighty River contended that the DOCA was invalid for a number of reasons: that it sought to circumvent the legislative requirement for an administrator to seek an extension of time in order to complete his or her investigations; that to the extent that it did not provide for the distribution of property to creditors it otherwise contravened the provisions of the Act; and the administrators had not complied with their obligations to form an opinion as to whether the company should enter a deed or be placed into liquidation. Each of these arguments failed.

A summary of the High Court’s findings

The High Court determined that the DOCA was valid. In our view, the judgment reveals 5 key reasons why that was so:

  1. The object of Part 5.3A of the Act is to permit the administration of company in a way that maximises the chance of corporate recovery, or if that is not possible, provides a better return for creditors than the immediate appointment of a liquidator (i.e. by execution of a DOCA). The content, context and architecture of Part 5.3A was highly relevant in determining the issues at hand;
  2. The DOCA did not circumvent the requirement for an administrator to seek an extension of time to hold a second meeting of creditors if more time was needed to consider the best available outcome. As the Court noted, a DOCA “can incidentally extend time for an administrator’s investigations pending a subsequent variation to it” provided that it otherwise confers rights and obligations (i.e. it is not otherwise static). The DOCA here did so because it required the administrators to investigate potential claims and a potential restructure of the Company. Regular reports were to be provided to creditors; and a final report was to be delivered in 6 months’ time. In the interim, creditors’ claims were subject to a moratorium;
  3.  As to this last condition, Mighty River contended that a complete moratorium on claims was contrary to the Act, thereby invalidating the DOCA. However, the Court noted that moratoriums on creditor claims has historically been a feature of Australia’s insolvency laws, particularly in the use of schemes of arrangement.  The Court observed that if “a moratorium-only scheme was, and is, permissible, then a fortiori a deed, which is intended to be a more flexible device for managing a company’s affairs, may provide predominantly, or solely, for a moratorium”;
  4. The Act does not require that a DOCA specify some property be available to pay creditor’s claims. Although section 444A(4) requires a deed to specify “the property of the company that is available to pay creditors’ claims”, that expression did not compel the distribution of property if none was available. As the Court noted, there “are numerous examples of deeds of company arrangement that involve no property of the company being made available for distribution”. Examples given by the Court included arrangements providing for a debt for equity swap, the use of creditor’s trusts and the transfer of shares from members to creditors. As the Court noted, the intended flexibility of Part 5.3A “would be undermined if [a DOCA] were required to provide for the distribution of some property of the company”; and
  5. The administrators had clearly expressed a view that a DOCA would be in the best interests of the creditors. That the DOCA might later be varied or the company be wound up did not detract from the fact that the administrators had complied with their obligations under the Act. As the Court noted:  “the Administrators’ confidence that the proposed Recapitalisation DOCA was preferable to winding up [the Company] was based upon the effect of (i) the terms of the proposed deed, and (ii) the possibility of varying it. The effect was assessed in light of their substantial research and investigations”.

Take-outs for external administrators

It seems to us that there are three key take-outs for external administrators.

First, a DOCA can defer the distribution of (any) property to creditors (as well as a final decision as to a company’s fate) and place a moratorium on claims provided that its execution is based upon a genuine assessment that it is a better outcome for the creditors than the company’s immediate liquidation.

Secondly, such a DOCA should be “active” and compel an external administrator to continue timely investigations into the management of the company and a potential restructuring or some other legally acceptable outcome. Such a DOCA should also mandate regular updates to creditors and a finite time within which to provide a final report to creditors.

Thirdly, such a DOCA does not circumvent the need to obtain an extension of time for the holding of the second meeting of creditors, provided that the recommendation which leads to its execution is the subject of substantial investigations. As the Court noted, where there is insufficient information available to an administrator to express an opinion “the only possibility is for the administrator to apply to the Court to extend the convening period under” the Act.

Finally, we would observe that in giving precedence to the intent of Australia’s insolvency regime (corporate rescue) and its underlying focus on the rights and interests of creditors, the Court has provided a tantalising glimpse of how it is likely to interpret recently enacted provisions of the Act providing Safe harbour for directors and ipso facto protection for insolvent companies. 


1. Mighty River International Limited v Hughes [2018] HCA 38

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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