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Brief Counsel

Court of Appeal backs High Court decision on casting votes

06 September 2011

The Court of Appeal has affirmed the High Court’s ruling that a voluntary administrator may only use a casting vote where the number of creditors voting for and against the resolution is equal. 

The second limb of the test, that the 50% represent at least 75% in value, cannot be the subject of the casting vote.  Nor can the casting vote be used to choose between the number and the value.

The Court also confirmed that, where a voluntary administration is a substitute for liquidation, a Deed of Company Arrangement (DOCA) should provide for preferential creditors to be treated as in a liquidation. 

We understand that the Court of Appeal decision may be appealed to the Supreme Court.

Casting votes in voluntary administration

Section 239AK of the Companies Act 1993 provides that a resolution of creditors is adopted if it is supported by a numeric majority representing at least 75% in value of those voting.  The Act provides for the administrator to exercise a casting vote but does not specify the circumstances in which this power may be used.

The Australian regime by contrast:

  • has a single 50% threshold applying to both number and value, and 
  • provides explicitly that the casting vote can be used to resolve situations where the majority in number reach a different conclusion to the majority in value.

The administrators claimed that in New Zealand the casting vote should be allowed in circumstances where the 50% in number had been reached, but the 75% in value had not.  They argued that this was consistent with the position applying in the Australian voluntary administration model on which the New Zealand law is based.

However, the Court of Appeal held that the New Zealand provisions were deliberately narrow and that the use of the words “casting vote” in the New Zealand legislation was not sufficient to import into the New Zealand scheme the deadlock breaking mechanism implied in the Australian law.

“The chair may use a casting vote only where, following the first round of voting, the votes for and against the resolution are equal in number (Condition 1).  But before the casting vote may be used, the votes in favour of the resolution must also represent at least 75% of the value of the debt (Condition 2). 
“In other words, a casting vote can only be used to break a numerical deadlock so as to comply with Condition 1.  It cannot be used to make up any shortfall in relation to value under Condition 2.”

Key to this conclusion was that the “super majority” adopted by the New Zealand legislature could not be “meaningfully protected” if the administrator’s casting vote could be used to force through resolutions which did not comply with the 75% by value threshold.

Oppressive or unfairly prejudicial DOCA

Relevant to the court’s judgment about whether a DOCA is oppressive or unfairly prejudicial to particular creditors will be:

  • how those creditors would have fared in a liquidation, as voluntary administration is an alternative to liquidation, and 
  • what the purpose of the DOCA is.

The DOCA in this case provided that all creditors would be paid out pari passu.  This affected the IRD’s position as the IRD was owed about $350,000, over 83% of which would have been classified as preferential in a liquidation.  The Court of Appeal affirmed, as did the High Court before it, that this provision was unfair to the IRD.

Both courts were absolutely right on this point.  In most cases, a DOCA should reflect preferential debts - particularly where the DOCA envisages the realisation and distribution to shareholders of the company’s assets. 

But the Court of Appeal went on to clarify that there may be circumstances in which a DOCA can override the preferential status of debtors without being found to be oppressive.  If the intention behind the DOCA is to resuscitate a company, and if giving priority to certain creditors would scupper that plan, the courts may consider it appropriate for preferential creditors not to be recognised in the usual Schedule 7 way. 

An example, given by the Federal Court of Australia1, is where a company needs to retain its skilled workers if it is to survive, and so pays the skilled workers’ wages arrears but lets the unskilled workers go.  If that company’s creditors agree to such an arrangement in a DOCA for the purpose of keeping the company afloat, the Court may deem such a scheme to be acceptable.  That is because the creditors’ opinions count.

The future of voluntary administration?

Voluntary administration is already used much less in New Zealand than in Australia.  The Court of Appeal’s ruling means that voluntary administration is at risk of remaining a seldom-used insolvency process in this country.

The Court of Appeal’s clarification of the limited utility of the casting vote mechanism effectively raises the necessary support thresholds, rendering the whole VA process more uncertain, and therefore less attractive as an insolvency option.
If our regime was indeed intended to replicate the Australian regime in important respects, we believe that the Ministry of Economic Development should consider promoting an amendment to our law.  We should consider adopting the detailed regulations that, in Australia, give the chair’s casting vote greater power and meaning.

Chapman Tripp’s commentary on the earlier High Court judgment is available here.

Our thanks to Julia Learner, Solicitor, for writing this Brief Counsel.

For further information, please contact the lawyers featured.

Footnotes

  1. Commonwealth v Rocklea Spinning Mills Pty Ltd [2005] FCA 902, at para 30.

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