The High Court has published its reasons for dismissing two appeals against a decision of the Court of Appeal of the Supreme Court of Western Australia on deeds of company arrangement. Part 5.3A of the Corporations Act 2001 (Cth), which deals with the administration of companies with solvency issues, provides for companies and their creditors to enter into a deed of company arrangement to either prevent the company from becoming insolvent, or, at least, to provide creditors with a better return than would result from a winding up.

The appellant Mighty River and Mineral Resources Ltd (the first respondent in the second appeal) were both creditors of Mesa Minerals Ltd, which was placed into voluntary administration and had administrators appointed (the respondents Hughes and Bredenkamp). Mesa’s creditors voted in favour of the Administrators’ proposal to draw up a deed of company arrangement that placed a moratorium on creditors’ claims, required the administrators to conduct further investigations and then report on varying the deed within six months. Mighty River’s efforts to have the deed declared void were unsuccessful at first instance and before the WASCA.

After a hearing before the Full Court on 19 June, the High Court dismissed the appeals, with Kiefel CJ stating that the Court, ‘at least by a majority’, was of the view that the appeals be dismissed. On 12 September the Court published those reasons, with Kiefel CJ and Edelman J, Gageler J agreeing, holding that the deed was valid. Nettle and Gordon J dissented.

After reviewing the details of pt 5.3A (at [4]ff), the administrative meetings and conclusion of the deed (at [15]ff), and the decisions below (at [24]ff),  Kiefel CJ and Edelman J held that the deed was valid under pt 5.3A. Their Honours first rejected Mighty River’s contention that the deed contravened the object of pt 5.3A. Part 5.3A lays out a set of formal procedures for creating the deed, as well as a set of additional rules to deal with contraventions of these requirements, and to terminate the deed in a range of circumstances (at [32]–[33]). Mighty River’s argument that the deed sidestepped the requirement in s 439A that extensions of time for reporting can only be made by court order was rejected because, as Mighty River accepted during argument, a deed can incidentally extend investigation time to allow for later variations to it: ‘The Deed had that incidental effect. Although the s 439A report that was provided to creditors loosely characterised the proposed Deed as “essentially an extension of the Administration Period”, that was only its incidental effect. The Deed created and conferred genuine rights and duties.’ (at [34]).

Their Honours then rejected Mighty River’s submission that the deed went against the objects of pt 5.3A, especially in its moratorium on creditors’ claims clause, for three reasons. First, the deed fulfils the objects of pt 5.3A because it aims to ensure Mesa Minerals’ survival or, alternatively, a better return to creditors than would result from a winding up, and this was backed by the Administrators investigations (at [35]). Second, a moratorium on creditors’ claims pending a clearer assessment is a valid purpose for a deed, as had been found in a range of earlier cases (at [36]). Third, that the second creditors meeting was held sooner than the normal statutory stay period was for the protection of creditors, and that speed and efficiency is not undermined by the creditors deciding to enter into a longer moratorium than they otherwise might have (at [37]).

Kiefel CJ and Edelman J then turned to Mighty River’s submissions that the deed contravened two other formal requirements, holding that it did not. Firstly, it did not contravene the s 444A(4)(b) requirement that the deed clearly state the property available to pay creditors claims (at [39]ff). Section 444A requirements direct attention to important matters that must be addressed in the instrument; they do not require that administrators do indeed distribute some property to creditors (at [43], [44]), and many deeds do not involve company property being made available for creditor distribution (at [45]). Secondly, it did not contravene ss 438A, on the opinions an administrator must form on creditors’ interests, or 439A(4) on the timing of the second meeting following these opinion formations (at [48]). The report did clearly state the Administrators’ opinions on those matters, backed by investigations and analysis of Mesa Minerals’ financial position and its relation to creditors’ interests (at [49]ff).

Kiefel CJ and Edelman J concluded that the respondents’ case that the deed was valid and did not contravene pt 5.3A had been made out, and dismissed the appeal.

Gageler J joined in the orders dismissing the appeal, with his reasons for doing so ‘substantially reflected’ in the reasoning of Kiefel CJ and Edelman J. His Honour made additional points on why, ‘at the level of principle’, the appellant’s argument that the deed was non-compliant with pt 5.3A’s procedural requirement should be rejected. For Gageler J, Mighty River’s arguments on the procedural requirements were without merit because the scheme of pt 5.3A aims to allow creditors themselves to decide on what course of action is in their best interests (at [61]), and shows no reason why they could not enter into an arrangement of agreeing on a moratorium on repayment pending further investigations, as occurred here (at [63]). While this arrangement could go against the interests of smaller creditors, pt 5.3A has a range of provisions to protect their interests (at [64]–[65]). The only point offered in response during oral argument — that those remedial provisions place the onus on minority creditors to convince the court to intervene — simply reflects the operation of the provisions in the statutory scheme (at [66]ff).

Nettle and Gordon JJ, dissenting, would have allowed the appeal. Their Honours held that pt 5.3A conceives of the administration of a company and the arrangements that may be made subject of a deed of company arrangement as ‘mutually exclusive’, and that, substantively, the deed ‘did no more than purport to extend the administration of the Company’ (at [70]).

After laying out the main statutory provisions (at [71]ff), Nettle and Gordon JJ noted that the s 439A meeting convening provisions intentionally fix a brief period, which can be extended by courts in complex cases (at [72]–[73]). There is, however, no provision to allow creditors to extend the length of the convening period (at [74]), and Nettle and Gordon JJ emphasised that an ‘equal balance’ of power and information between company and creditors ‘cannot be assumed’, which is one reason why courts are entrusted to supervise extensions (at [75]). Nettle and Gordon JJ then noted that Pt 5.3A gave effect to longstanding principles in in bankruptcy, and that deed of company arrangements are more streamlined versions of older arrangements and reconstructions, and which involves various forms of compromises: ‘there is no compelling reason to confine the ambit of the terms and conditions of a compromise or arrangement on which creditors may lawfully agree’ (at [76]–[77]). While those arrangements are for the creditors to agree on, the essence of these deeds remains to provide for an alternative to liquidation or, ‘more generally’ to wholly or partially resolve creditors’ debts and claims ‘by alteration of rights on one side or the other’ (at [77]).

Turning to the deed in this matter, Nettle and Gordon JJ noted that at the first meeting the Administrators concluded they had not been able to gather enough information within the period fixed by s 439A, and instead of applying to the court to extend that period, they issued a report recommending the creditors agree to a second meeting to execute the deed and extend the administration of the company (at [78]ff). After reiterating the deed’s essential terms (at [81]ff), Nettle and Gordon JJ held that it was not a deed of company arrangement within the meaning of pt 5.3A (at [83]):

The Deed did not provide for an arrangement alternative to liquidation for the whole or partial payment or satisfaction of creditors’ debts or claims against the Company or the whole or partial resolution of creditors’ debts or claims against the Company by alteration of rights on one side or the other. In effect, it purported to provide for no more than the continuation of the administration of the Company and thereby the deferral to a later date of a decision whether the Company should execute a deed of company arrangement or be wound up or that the administration should end.

It also ran counter to the policy of pt 5.3A that extensions of the convening period should only be granted by courts (at [83]).

Nettle and Gordon JJ rejected the respondents’ argument that this deed was essentially no different from an ordinary moratorium on debts, holding instead that pt 5.3A specifically means moratoria on debts alternative to liquidation, that is, calculated to allow a company to trade out of financial difficulty or in exchange for full or partial releases of particular debts or claims (at [85]). Here, the moratorium on debts was not an alternative to liquidation or to resolve debts or claims, but instead was aimed at enabling the company to be kept in administration to allow the administrators more time to seek proposals that might become an alternative to liquidation (at [85], and see [86]–[87], rejecting the respondents’ analogy with an earlier case). Further, the opinions formed by the Administrators were not in accordance with the statutory requirements of those opinions: that an option would allow the Administrators more time to sort out a proposal is not one that allows the creditors to make a choice between executing a deed, winding the company up, or the administration ending (at [88]–[91]).

Nettle and Gordon JJ then rejected the respondents’ argument that s 444B(6) means an instrument prepared under s 444A and executed by the company and administrator becomes a deed on execution: s 444B(6) does not deem otherwise defective deeds, but rather lays out the timing requirements for execution, and because of the deed’s deficiencies, s 444A does not apply (at [92]–[94]). After noting that a deed of company arrangement need not distribute property to creditors (at [95]–[97]), Nettle and Gordon JJ stated that they would have allowed the appeal, declared the deed as not falling within pt 5.3A, and remitted the matter to the primary judge.