Holding back the Mighty River

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By Nirupa Manoharan, Special Counsel

Introduction

In its recently published reasons in the case of Mighty River International Limited v Mineral Resources Limited [2018] HCA 38, the High Court has affirmed that deeds of company arrangement (DOCAs) afford practitioners a high degree of flexibility.  The High Court also stamped its approval for the use of “holding DOCAs” by administrators to, among other things, extend the moratorium provided by the Corporations Act 2001 (Cth) (Act) to provide administrators further time to conduct their investigations.

Background

Mesa Minerals, a listed mining company, was placed into voluntary administration on 13 July 2016.  In due course, the administrators issued their 439A report and in it recommended a “Recapitalisation DOCA”, to be presented at the forthcoming meeting of creditors. The objective of the Recapitalisation DOCA was to provide time for the administrators to conduct further investigations and to explore the possibility of a restructure or recapitalisation of Mesa Minerals.

At the second creditors’ meeting, the majority of creditors voted for the recapitalisation on the terms proposed by the administrators.  The Deed instrument included provisions that the administrators investigate proposals for the company’s reconstruction or sale and, importantly, also provided:

  1. for an extended moratorium during the period of the Deed in which creditors would be prevented from enforcing their claims; and
  2. that there would be “no property” of the company available for distribution to creditors under the Deed.

The Recapitalisation DOCA was the subject of challenge by Mighty River, a minority shareholder of Mesa Minerals.

Proceedings at first instance and on appeal

Mighty Rivers sought orders that the Deed was of no force and effect as:

  1. it was inconsistent with the object of Part 5.3A of the Act, specifically failing to comply with the mandatory requirement of section 444A(4) of the Act that mandated “some” property be available under a Deed for distribution to creditors; and
  2. the Deed circumvented the role of the Court to extend the convening period by using the Deed to bind creditors to an extended moratorium period.

Further, the Deed did not ‘sidestep’ the requirement for extensions of the convening period to only occur on order of the Court.  Although the Deed provided an extension of the moratorium period, this was nevertheless consistent with the object of Part 5.3A in trying to achieve a better return for creditors than they would obtain on any immediate winding of the company.Mighty River’s arguments were dismissed at first instance.  On appeal, each member of the Western Australian Court of Appeal also held the Deed valid.  The Court of Appeal stated that the Act only required specification of the extent to which the property of Mesa Minerals was to be made available for distribution to creditors under section 444A(4) of the Act and the Deed fulfilled this requirement by stating there would be “no property” available for distribution.

Appeal to High Court

Mighty River’s two key submissions to the High Court were that:

  1. the Deed was not a valid DOCA as it agreed an extension of the convening period that had not been ordered by the Court in accordance with the Act; or
  2. even if the Deed was a valid DOCA, then it should have been declared void at first instance as the Deed contravened the Act in (i) failing to specify “some” property be available for creditors and (ii) that the administrators failed to form or communicate to creditors an opinion of the requisite character required by section 438A of the Act – that is whether it was in creditors best interest for the company to execute a DOCA or the administration to end or for the Company to be wound up.

The majority judges noted that although an extension of the convening period can only be obtained by Court order, “an otherwise compliant instrument that becomes a deed of company arrangement can incidentally extend time for an administrator’s investigations pending a subsequent variation to it.”

Did the Deed enable an extension of the convening period in breach of the Act?

The Deed created and conferred genuine rights and duties and the quid pro quo for these duties upon the administrators was that the creditors had accepted a moratorium on their claims. A comparison was aptly drawn to schemes of arrangement, which could be devised with the central or sole purpose of securing a moratorium on claims.  Therefore “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.”

In addition, creditors choosing, in a DOCA, to extend a moratorium did not defeat the object of Part 5.3A, which Part emphasised appropriate protection of creditors’ interests. That might include creditors deciding it was in their own best interest that a DOCA be entered into which provides for an agreed moratorium on repayment of the company’s debt to them while further investigations are undertaken.

Should the Deed have been declared void for not specifying “some” property for distribution?

The majority judges supported the respondent’s construction that the Act only required the Deed to specify the property of the company to be available, it did not require it to specify “some” property be available.

There are numerous examples of DOCAs, their Honours noted, where no property of the company is available for distribution – for example, deeds that provided for debt for equity swaps, deeds where creditors’ claims are replaced with rights as beneficiaries of a Creditors’ Trust with the trust funded by a third party, deeds which provide for the transfer of shares in the company from members to creditors, or (in line with the present case) a deed of moratorium which allows the company to trade out its solvency difficulties.  All of these DOCAs were consistent with “the intended flexibility of the approach to deeds of company arrangement.”

Did the administrators fail to form or communicate to creditors an opinion of the requisite character required by section 438A of the Act?

This issue was only briefly addressed by Mighty River in oral submission.   The majority judges dismissed this argument noting, among other things, that the opinion expressed by the administrators on this issue in the 26 pages of their 439A report was self-evident, and the administrators’ expressed opinion was it was in creditors’ interest to execute the proposed Recapitalisation DOCA, which became the Deed.

Practitioners should draw comfort from the comments of Kiefel CJ and Edelman J that “there may be circumstances in which there is simply insufficient information for an administrator to express an opinion” and “opinions have no fixed voltage. They can be expressed with varying degrees of confidence.”

Take away points

Consistent with the objectives of the Harmer Report, the High Court has confirmed, by a majority, that a DOCA remains a streamlined process and flexible tool to effect an arrangement or reconstruction.  The term “arrangement” in the context of a DOCA encompasses many forms of compromise and “there is no compelling reason to confine the ambit of the terms and conditions of a compromise or arrangement upon which creditors may lawfully agree.

For further information, please do not hesitate to contact us.

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