In Mighty River International Ltd v Hughes [2018] HCA 38, the High Court confirmed the validity of a deed of company arrangement (“deed”) binding a company and its creditors to an extension of the period of a voluntary administration while the administrators undertook further investigations. The decision provides certainty as to the use of so-called “holding deeds” that are entered into in order to provide more time for a voluntary administrator to develop proposals for restructuring the company.
Voluntary Administration
Mesa Minerals Ltd (“Mesa”) was a mining company that was placed into voluntary administration. The voluntary administration procedure, introduced into what is now Part 5.3A of the Corporations Act 2001 (Cth) in 1992, is intended to provide an efficient and flexible approach for dealing with companies with solvency issues.
Its purpose, as stated in s 435A, is to allow an insolvent company to be administered in a way that either maximises the chances of the company continuing in existence or, if that is not possible, ensures a better return to creditors and members than would result from an immediate winding up.
When a voluntary administrator is appointed, s 438A requires that the administrator must investigate the company’s affairs as soon as practicable and form an opinion as to which of three courses of action should be pursued; namely, entering into a deed, ending the administration, or winding up the company.
Part 5.3A requires that an administrator must convene two creditors’ meetings, the first within eight business days, and the second within 20 business days. Prior to the second creditors’ meeting, s 439A(4) requires the administrator to prepare a report for creditors on the company’s affairs and a statement setting out the administrator’s recommendation as to which of the three courses of action would be in the creditors’ interests. If an administrator requires further time to investigate and report, they can apply for an extension of the convening period by an application to the court under s 439A(6).
Deed of Company Arrangement
A deed is a binding arrangement between a company and its creditors governing how the company’s affairs will be managed. Section 444A(4) sets out a list of matters that are to be specified in the terms of a proposed deed. These include, among other things, the administrator of the deed, the property of the company that is to be available to pay creditors’ claims, and the nature and duration of any moratorium on the enforcement of rights against the company.
In Mesa’s case, the administrators proposed a deed that had the stated objective of providing time to conduct further investigations and to explore the possibility of a restructure or recapitalisation. The investigations would include considering potential claims the company may have against third parties. During this time there would be a moratorium on proceedings by creditors against the company. The deed provided that there would be no property available for distribution to the creditors. The majority of Mesa’s creditors voted to accept the deed.
High Court Challenge
Mighty River International Ltd (“Mighty River”) was a creditor that wished to place Mesa in liquidation. It commenced proceedings challenging the validity of the deed in the Supreme Court of Western Australia. The validity of the deed was upheld at first instance and on appeal. Mighty River then applied for and obtained special leave to appeal to the High Court.
The High Court appeal challenged the validity of the deed on the ground that it did not conform to the requirements set out in Part 5.3A. Specifically, Mighty River argued that the deed:
Decision of the High Court
The validity of the deed was upheld by a 3:2 majority. Chief Justice Kiefel and Edelman J wrote the lead judgment, with Gageler J agreeing in a short separate judgment. Justices Nettle and Gordon wrote a joint dissenting judgment.
Chief Justice Kiefel and Edelman J found that the deed did not involve an impermissible sidestepping of s 439A(6) by extending the administration period without a court order. They held that “an otherwise compliant instrument that becomes a deed of company arrangement can incidentally extend time for an administrator’s investigations” and the Mesa deed “had that incidental effect”. It was not a deed that simply purported to extend the administration period but conferred “genuine rights and duties” upon the administrators and creditors (at [34]).
Further, the deed was not contrary to the object of Part 5.3A. Having regard to the most significant undertaking of the creditors, which was a moratorium on their claims, the deed operated to maximise the chances of Mesa’s survival or otherwise provide a better return to creditors (at [35]). It was a valid purpose for a deed to provide a moratorium on claims while the company’s position is further assessed. That has been the position with respect to schemes of arrangement, and “[i]f a moratorium-only scheme was, and is, permissible, then a fortiori, a deed which is intended to be a more flexible device for managing the company’s affairs, may provide predominantly, or solely, for a moratorium” (at [36]).
As to the allegation that the deed had contravened the requirement of s 444A(4)(b) by failing to specify that some property be distributed to creditors, Kiefel CJ and Edelman J held that the purpose of that provision was to “direct attention to a subject that must be addressed in the instrument” and not to “prescribe some minimum obligation upon the administrator to distribute some property, however little, to creditors” (at [43]).
Finally, the administrators had reported on the company’s affairs and expressed their opinion that it was in the interests of the creditors that the company execute the deed. Therefore, Mighty River’s contention of non-compliance with ss 438A and 439A would require the conclusion that those expressed opinions were not validly held (at [50]). However, “[t]he opinions expressed by the Administrators were no less genuine because they were based only upon the ‘information available’. The requirement in s 438A(b) that an administrator must form the relevant opinions as soon as practicable after the administration begins necessarily requires that the opinions might be formed without the administrator having fully investigated and assessed all relevant matters” (at [53]).
Significance
This decision affirms the validity of a deed that extends the duration of the administration period, at least where the extension is the incidental effect of a deed that confers genuine rights and duties upon the administrators and creditors. The decision rejects an unduly technical approach to the operation of Part 5.3A and emphasises that a deed is a flexible device for achieving a better outcome than an immediate winding up, including, where necessary, by allowing deed administrators to conduct further investigations and explore options for restructuring.
