Administrator independence and 'holding' DOCAs under the microscope

The recent Western Australian Supreme Court decision of Mighty River International Ltd v Hughes and Bredenkamp [2017] WASC 69 considered a challenge to both the independence of administrators of a company and their endorsement of a ‘holding’ deed of company arrangement.

The case involved a creditor’s application to Court for relief on the basis that, firstly, certain ‘pre-appointment contact’ between the administrators and the company’s board ‘gave rise to a perception of bias’ which justified their removal.  Secondly, the creditor asserted that a ‘holding DOCA’ which the company had entered was ‘at odds with’ the Corporations Act 2001 (‘the Act’) and therefore impermissible.  

The judgment of Master Sanderson is worth reading for its analysis of independence principles and their application to the position of insolvency practitioners who are involved in pre-appointment communications with a company’s board regarding the options and possible outcomes for a company when contemplating the appointment of the practitioners as administrators. 

The administrators had recommended that the company’s board obtain a valuation of the company’s assets, which would assist the assessment of the company’s financial position and the evaluation of the various options open to it under a Part 5.3A procedure (including a possible DOCA).

Ultimately, in the circumstances before the Court, the administrators were held to have maintained their independence.  Master Sanderson held that, ‘in arranging for … [the company] to obtain a valuation of its assets … [the administrator] took the first logical step to obtain an idea of … [the company’s] financial position.’  It was also held that the administrators had provided minimal advice to the board of the company and not individual board members.

Master Sanderson also endorsed the concept of a ‘holding DOCA’ as a ‘valid exercise of power’ under Part 5.3A of the Act.  The choice of either the use of (i) a holding DOCA or (ii) an application to Court for an extension of the convening period is a matter of commercial and professional judgment on the part of the administrators and there was no suggestion that the wrong judgment had been made.

Master Sanderson stated that Part 5.3A of the Act ‘clearly anticipates a limited role for the court’ and ‘allows creditors to make decisions as to how or whether the company should be restructured’ and concluded that a resolution of creditors that the company enter into a holding DOCA ‘is consistent with the intents and purposes of the Act.’