A Mighty Relief for Insolvency Practitioners: Holding DOCAs upheld by WA Court of Appeal

Insolvency practitioners, bracing for the next wave of insolvency law reforms to take effect on 1 September 2017, have one less thing to worry about after the Western Australian Court of Appeal rejected an attempt to argue that Holding DOCAs were not consistent with the Corporations Act and were therefore invalid.

In our March article, Insolvency Practitioners have a Win on Fees and Holding DOCAs, for now, we reported on the first instance decision of Master Sanderson in the matter of Mighty River International Ltd v Hughes & Bredenkamp [2017] WASC 69.

To recap – Mesa Minerals Ltd went into voluntary administration in July 2016 and on 20 October the company’s creditors approved a Holding DOCA; in essence, a deed of company arrangement that brought the voluntary administration to an end, but did not put up a final proposal to restructure the company and avoid liquidation.

Mighty River International Pty Ltd, a minority shareholder in Mesa, did not think this was appropriate at all. Mighty River did not just argue that this particular DOCA should be set aside; they argued that Holding DOCAs generally were not consistent with the wording and intention of the Corporations Act, and were invalid per se.

As we reported earlier, Holding DOCAs are used very commonly by external administrators, as an alternative to applying for the permission of the court to extend the voluntary administration period. However “Holding DOCA” is a term of art used by insolvency professionals; you will search in vain for the term in the Corporations Act. Hence the argument.

The decision

Master Sanderson’s decision at first instance was not a particularly solid endorsement of the Holding DOCA’s consistency with the Corporations Act, notwithstanding that the Master recognised their importance to the practice of insolvency and reconstruction across the country.  The Master said in his judgment that “if Holding DOCAs are found not to be consistent with the Act, then this is a matter which should be determined at least by an intermediate court of appeal”.

On 11 August 2017 the Western Australian Court of Appeal did exactly that, in its judgement in Mighty River International Pty Ltd V Hughes [2017] WASCA 152, with detailed and closely reasoned judgments being delivered by each of the three Court of Appeal Judges.  In two of those judgments it was emphasised that DOCAs under the Corporations Act are intended to give creditors a flexible device for maximising the return to creditors, and there was nothing in the Act to justify the narrow reading of certain sections of the Act urged on the court by Mighty River.

So the validity of Holding DOCAs has been authoritatively upheld. For now.

The information published in this paper is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.