Last Thursday's decision in the WA Supreme Court to allow a sale to insiders of a company subject to a deed of company arrangement will make the restructuring process smoother for administrators, who can now negotiate with a wider pool of potential purchasers, as Chapter 2E of the Corporations Act 2001 (Cth), which deals with related party transactions, will not apply (Mighty River International v Bryan Hughes and Daniel Bredenkamp as Deed Administrators of Mesa Minerals Ltd (Subject to Deed of Company Arrangement) [No 2]  WASC 368; Clayton Utz acted for the deed administrators of Mesa Minerals Limited).
The ongoing saga of the Mesa Minerals administration and restructure
This decision follows a decision of the High Court of Australia which found that the first iteration of the deed of company arrangement (loosely termed a "holding DOCA") was valid and permissible under the Corporations Act.
This case involved yet another challenge by creditor, Mighty River, in relation to the Mesa Minerals Limited (Subject to Deed of Company Arrangement) deed of company arrangement (DOCA) after it had been amended to incorporate a sale and purchase agreement proposed by a third party, Auvex Resources Limited (a wholly owned subsidiary of creditor and shareholder, Mineral Resources Limited), which provided as consideration:
- a cash injection of $2,027,500; and
- an assumption of $6 million of the Mineral Resources Limited proof of debt.
The proposed sale was approved by creditors at a meeting of creditors, and the deed of company arrangement was varied to incorporate the proposed sale.
The Deed Administrators sought directions under section 90-15 of the Insolvency Practice Schedule from the Court to enter into the proposed sale.
Mighty River concurrently sought:
- a declaration that the DOCA and the proposed sale was a related party transaction to which the provisions of Chapter 2E of the Corporations Act applied;
- an injunction under section 1324 of the Corporations Act preventing the Deed Administrators from performing or giving effect to the DOCA and that the DOCA be terminated; and
- an order that Mesa be wound up.
Mineral Resources Limited and the Deed Administrators opposed Mighty River's application. Mighty River opposed the Deed Administrators' application for directions, arguing that it would be unlawful and unreasonable for the Deed Administrators to enter into the proposed transaction, as it involved the giving of a financial benefit by a public company (Mesa) to a related related party (Auvex) (which Mighty River alleged would contravene section 208 of the Corporations Act). Mighty River otherwise alleged, amongst other things, that the proposed sale was at an undervalue and was not fair and reasonable in the circumstances.
The Court agreed with the Deed Administrators and Mineral Resources Limited:
- Chapter 2E of the Corporations Act does not apply to companies which are not under the control of the directors and shareholders, and accordingly does not apply to companies the subject of deed administration.
- Regardless, in this case the Deed Administrators could rely on the exception to section 208 – section 210 of the Corporations Act, which provides that a public company may give a financial benefit to a related party if the financial benefit is given on arm's length terms. The Deed Administrators had achieved the best commercial result they were able to achieve in negotiations.
- After considering the evidence of the Deed Administrators as to investigations and alternatives to the sale proposal, the Court found the Deed Administrators negotiated the proposed sale in good faith and for a proper purpose with no material personal interest in the transaction.
- The consideration under the proposed sale was reasonable, and the Deed Administrators were justified and were acting reasonably and properly in participating in negotiations in relation to the various agreements in relation to the proposed sale. It was further noted that it is not, of course, the task of the Court to consider the commercial desirability of the transaction as if the Court and not the Deed Administrators were deciding to enter into the transaction.
As a result, the Court granted directions sought by the Deed Administrators to enter into the proposed sale. The Court found that given the directions application was successful, Mighty River's claims must necessarily fail.
Key takeaways of the Mesa Minerals decision for administrators
The decision means that the rules on related party transactions found in chapter 2E of the Corporations Act do not apply to deed administrators dealing with a company under a deed of company arrangement.
For administrators currently evaluating their options, this decision will open up a larger pool of potential buyers and transactions generally. In the longer term we would expect this to give restructuring a boost as there will be a wider range of commercial opportunities available to administrators.
More generally, it confirms that courts will take a sensible approach when assessing administrators' actions and, notwithstanding the traditional judicial hesitancy in granting directions in relation to commercial matters (such as value and consideration), directions may still be granted. The result could be a smoother, more streamlined process for administrators – again, this could be a win for restructuring generally in Australia.