Young’s List barrister Matthew Harvey has published an edition of The Talk Around Chambers. In it he discusses deed of company arrangements. The edition is extracted below:
When appointed to a faltering company, administrators must answer three questions. Should the company go into liquidation? Should the administration end because the company is solvent? Or should the company enter into a deed of company arrangement (DOCA)?
A DOCA is an agreed administration of a company that either increases the chance that a company will trade out of its financial difficulties or provides a better return for the creditors than immediate liquidation. In practice, this may involve a repayment of debts by instalments. The varieties of DOCA are vast.
Last week, in Mighty River International Ltd v Hughes the High Court considered whether a holding DOCA is valid under the Corporation Act 2001.
In that case, the DOCA provided for a moratorium on creditors’ claims and obliged the administrators to investigate and report on possible variations to the deed within six months. In effect, it prolonged the administration of the company. The appellant objected saying that, among other things, the DOCA was contrary to the object of Part 5.3A of the Act.
By a 3:2 majority, the High Court held that the DOCA was valid. Kiefel CJ and Edelman J held that the DOCA was not contrary to Part 5.3A because (1) the administrators’ opinion that the winding-up of the company was not in the creditors’ interests fulfilled the object of the Part; (2) it was consistent with moratorium-only schemes of arrangement, which are the predecessors to DOCAs; and (3) the speed and efficiency of the administration procedure is not undermined by creditors entering into a DOCA that allows for a longer moratorium period.
Gageler J agreed. He pointed out that, while a holding DOCA has the potential to be contrary to the interests of minority creditors, an application can be made under Part 5.3A for relief.
Nettle and Gordon JJ gave a powerful and, in my view, persuasive dissent.
Where does this leave us? A majority of the High Court has ruled on the matter – holding DOCAs are not automatically in breach of the Corporations Act. This gives administrators far more flexibility than previously thought. But that flexibility must be tempered by the risk that disgruntled creditors can take steps to invalidate a DOCA.
For further information about briefing Young’s List, or to brief Matthew, please call Tammy Young on +61 3 9225 6777 or after hours on +61 (0)414 523 515.