The High Court has issued its first major decision under Part 15A of the Companies Act, rejecting a multi-faceted challenge by Cargill International to the Solid Energy Deed of Company Arrangement (DOCA).
The ruling provides important guidance on the operation of New Zealand’s voluntary administration regime.
Chapman Tripp acted for Solid Energy’s lenders, the fourth respondents in the proceeding.
Solid Energy was placed into voluntary administration in August 2015 with Messrs Gibson and Graham of KordaMentha appointed deed administrators. A draft DOCA was circulated and subsequently approved by an overwhelming majority of Solid Energy’s creditors at a watershed meeting on 17 September 2015.
Cargill argued that the DOCA was invalid for contravention of Part 15A, and was oppressive, unfairly prejudicial or discriminatory. Cargill’s primary complaints were directed at:
- the powers and functions of a creditors’ committee established under the DOCA (the Participants Committee), which it argued usurped the proper role of the deed administrator
- liability releases in favour of directors, deed administrators and Participants Committee members
- the independence and impartiality of the deed administrators, and
- its classification as a Participant Creditor (likely to receive 35–40 cents in the dollar) rather than a Trading Creditor (to be paid in full).
Validity of the DOCA
Justice Katz found that the role of the Participants Committee did not contravene Part 15A. She held that the core role of a deed administrator is simply to ensure due implementation of the DOCA.
In matters falling outside those core functions, creditors are free to agree their own arrangements (subject to the protections contained in Part 15A). Accordingly, a deed administrator’s substantive functions and powers (if any) will derive solely from the terms of the DOCA itself. While it is open to creditors to provide for a deed administrator to assume a managerial role, they are not required to do so:
…as part of the flexibility inherent in Part 15A, it is open to the creditors to agree (and record in a deed of company arrangement) that such decisions are to be made by someone else, for example an investment bank, an industry expert, the board of the company or a creditors’ committee.
There was also no requirement for a creditors’ committee appointed under a DOCA to be perfectly representative (here, the committee comprised the five major lenders and the Crown, as shareholder).
Regarding the liability releases, Her Honour distinguished the High Court of Australia’s decision in Lehman Brothers, holding that the releases did not purport to abrogate creditors’ pre-administration claims against third parties. She:
accepted that a release of claims against parties owing duties to the company (such as the directors), not to individual creditors, is quite different from the release of valuable creditor rights against related companies (as was the case in Lehman) or third party guarantors, and
- gave weight to the fact that the liability clauses were expressed to apply “only to the maximum extent permitted by law”, finding on that basis that related non-challenge clauses contained in the DOCA did not, and did not purport to, oust the Court’s jurisdiction under s 239ACX.
In relation to potential post-administration claims against the deed administrator and Participants Committee members, Her Honour held that creditors were entitled to agree the conditions of the appointment of those who are to perform functions under the DOCA:
Depriving insolvency practitioners of the ability to negotiate and agree reasonable limitations of their liability in highly complex corporate rescue situations would likely undermine the ability to secure the appointment of high calibre and experienced professionals to relevant roles. This would risk undermining the utility of the Part 15A regime.
Ultimately, Her Honour found that it was unnecessary and inappropriate to attempt to determine the precise meaning of the liability clauses in the abstract.
Oppression and unfair prejudice
Her Honour held, consistent with Australian authority, that to determine whether or not a DOCA is oppressive, unfairly prejudicial or unfairly discriminatory to creditors, one must compare the result under the deed to the result which would have obtained under liquidation - not to that which might have been obtainable under a hypothetical alternative DOCA.
The Court’s role does not involve substituting its views for that of the required majority of creditors. Nor does it involve the Court in second guessing the wisdom or sense of fairness of creditors in voting by the required majorities in favour of the proposal.
There was no evidence that the appointment of Messrs Gibson and Graham of KordaMentha as deed administrators was unfairly prejudicial to, or unfairly discriminatory against, Cargill. Pre-appointment work, including involvement in the drafting of a proposed DOCA, is not unusual in the corporate insolvency context and does not preclude subsequent appointment as a deed administrator.
Further, differential treatment of creditors under a DOCA is not sufficient of itself to justify termination, particularly where that differential treatment is necessary to preserve the going concern value of the underlying business. Cargill did not have an ongoing trading relationship with Solid Energy, and its ongoing support was not required in order to Solid to continue trading. Accordingly, there was nothing unfair in its classification as a Participant Creditor.
Although she did not have to decide the issue as it was not pleaded and the respondents were prejudiced by it being raised at a late stage, Her Honour gave a preliminary view that there was nothing inherently objectionable in a DOCA culminating in a solvent liquidation.
Chapman Tripp comments
The decision is lengthy, as were the arguments presented to the Court. Overall, however, it confirms the utility and flexibility of Part 15A as a corporate rescue mechanism.
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