Insolvency Practitioners have a Win on Fees and Holding DOCAs, for now

Liquidators and voluntary administrators around the country would have breathed a sigh of relief earlier this month when the New South Wales Court of Appeal, and the Western Australian Supreme Court each handed down decisions that profoundly affect day-to-day insolvency practice.

Liquidator’s remuneration

In early March, the New South Wales Court of Appeal delivered its decision in Sanderson as Liquidator of Sakr Nominees (in liquidation) v Sakr [2017] NSWCA 38.  The liquidator of a small family company applied to the New South Wales Supreme Court for approval of his remuneration.  He claimed $63,577.80, calculated on the basis of time spent on the job; he got $20,000.00. The Court at first instance found that it was more appropriate to determine remuneration as a percentage of the realisations and distributions in the winding up, rather than on a time costing basis.

The case had enormous implications for insolvency practitioners, and had the potential to make it uncommercial for most insolvency practitioners to run small liquidations. Fortunately for liquidators in NSW and elsewhere, the Court of Appeal found that, while proportionality was an important factor in assessing the reasonableness of a liquidator’s remuneration, the work done must be proportionate to the difficulty and importance of the task, not just the size of the job. Charging on an hourly basis was therefore not inappropriate if the time was needed to do the work, whether or not it led to a greater return to creditors.

The matter was of such importance to the insolvency profession that our ADVOC colleagues in NSW, Colin Biggers & Paisley, ran the appeal pro bono on behalf of the liquidator.  Click here for their full report of the case.

Holding DOCAs hold on

Insolvency practitioners would have been almost as pleased with another decision handed down in the Supreme Court of Western Australia a few days later, in the case of Mighty River International Limited v Hughes and Bredenkamp [2017] WASC 69.

What is a Holding DOCA?

The case involved a “Holding DOCA”; a commonly used and very important device in corporate restructuring. When a voluntary administrator is appointed to a company they face strict and very short time limits to convene the meetings of creditors where the fate of the company is decided. They are also personally exposed to debts and liabilities incurred by the company while they control it.  If creditors accept a proposal to restructure the company and avoid liquidation, this is implemented in a Deed of Company Arrangement (DOCA) which brings the voluntary administration, and the personal liability, to an end.

The times prescribed under the Corporations Act for these meetings is often insufficient to pull a restructuring proposal together. These convening periods can be extended by court order, but an alternative way to extend time is to have creditors pass a DOCA that does not determine the company’s fate, but allows further steps to be taken before a final DOCA is presented.  This is known as a Holding DOCA. It gets a company out of voluntary administration relatively quickly while allowing for an orderly reconstruction.

The dispute In Mighty River International

The dispute in the Mighty River International case arose from the voluntary administration of Mesa Minerals Limited (Mesa), which owned various mining assets including tenements and access rights.  Mighty River International Limited, a minority shareholder of Mesa, suspected that Mesa might have claims against its own directors, some of whom were also directors of the majority shareholder, Mineral Resources. In early 2016 Mighty River had commenced proceedings against Mesa for access to its books and records in order to investigate these claims.

Mesa’s directors appointed voluntary administrators in July 2016, who recommended that Mesa enter into a Holding DOCA which allowed the administrators time to sell Mesa’s assets. The Holding DOCA was approved by creditors on 20 October and signed on 3 November.

Mighty River was mightily displeased by this. It alleged that the voluntary administrators had done little or nothing to identify or assess the potential claims against the directors of Mesa, and that the Holding DOCA would affect claims against the directors of Mesa and against Mineral Resources.  Furthermore, they alleged that the pre-appointment advice given by the voluntary administrators to Mesa was effectively given to Mineral Resources, partly because of the overlapping directorships, and that the voluntary administrators therefore lacked the necessary independence to do their job.

After carefully reviewing the evidence, which included a detailed cross-examination of the administrator, Master Sanderson dismissed the allegations of apprehended bias, saying that the administrator’s conduct ín this regard was “exemplary”.

The argument against Holding DOCAs

But the Master had to deal with a more fundamental issue, because Mighty River also alleged that Holding DOCAs in themselves were invalid, and the one entered into by Mesa should therefore be set aside.

Mighty River’s argument was that the whole point of a DOCA is either to maximise the chances of a company continuing in existence, or to provide a better return to creditors than would result from immediate winding up. Because it is by its nature an interim measure, a Holding DOCA does neither of these things.  Furthermore, the Corporations Act requires DOCAs to address certain matters, such as identifying the property which is available for distribution.   Mighty River pointed out that because a Holding DOCA does not provide for the distribution of property, it does not meet these mandatory requirements.

As the Master noted, this issue is of considerable practical importance, as Holding DOCAs have been in widespread use for over two decades.

Holding DOCAs hold on, for the moment

The Master found that Holding DOCAs were consistent with the intention of the Corporations Act and noted that, because of their widespread use, to rule them impermissible “would have a profound effect on insolvency practice”.

Despite this outcome, the decision still has the potential to send a frisson of alarm through the insolvency profession because the Master did find that “the arguments are finely balanced and Mighty River’s case was not without its merits”. The Master found that it was not for a Court at first instance to create uncertainty across the country about a device that is part of national insolvency practice,   and said that “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.”

Insolvency practitioners and others involved in corporate reconstructions should note that this is a long way short of a categorical endorsement of the Holding DOCA, and it may not be the last time we see this argument raised against them.

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.