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The High Court has confirmed the orthodox position that liquidators’ power to deal with company assets is subject to the rights of secured creditors over their charged property.1 The terms of the relevant security agreement determine the secured party’s rights.
Context
The issue arose in the context of exercise of voting rights attached to shares subject to security. The sole shareholder of the parent company of a group passed a resolution appointing liquidators to that company. The same day, the liquidators of that parent company purported to pass special resolutions appointing themselves as liquidators of all of the group’s subsidiary companies.
The relevant subsidiary companies already had receivers appointed pursuant to first-ranking general security agreements (GSAs). The appointing secured creditor and the receivers objected to the purported liquidator appointments to the subsidiary companies. They said that the shares in those companies were secured property in favour of the bank under the GSAs, and that the liquidators had therefore not been entitled to exercise voting rights in the shares to pass the resolutions. They sought a declaration that the liquidators were invalidly appointed to the subsidiary companies. (Chapman Tripp acted for the receivers.)
Starting point: terms of the GSAs
The Court said the terms of the relevant GSAs were the proper starting point in assessing validity of the purported liquidator appointments.
Those GSAs granted the bank security over all of the companies’ present and after-acquired property. They provided that the companies could not deal with the secured property without the bank’s consent (other than in the ordinary course of business, on ordinary arm’s-length commercial terms and for proper value). Most importantly, the GSAs provided that the companies’ rights to deal with the secured property would immediately cease on any event of default. The GSAs allowed for the bank to appoint receivers with powers to take possession of the secured property and to deal with that property as if they were its absolute owner.
In light of those provisions, the Court found that the bank’s right as secured creditor to deal with the secured property was unaffected by the liquidation of the parent company. While the appointment of liquidators to the parent company had terminated the receivers’ agency relationship with that company, agency was not the source of the receivers’ powers to deal with the secured property. The relevant GSA was the source of these powers.
Under that GSA, the bank and the receivers were empowered to exercise the parent company’s entitlement as shareholder of its subsidiaries to vote on a liquidator’s appointment. That is a power attaching to share ownership. The parent company itself (and, by extension, the liquidators of that company) could only exercise that entitlement with the bank’s consent. But the company had surrendered even that conditional right when it had defaulted on its obligations under the GSA. The parent company therefore did not have voting power in relation to its shares in the subsidiary companies; that power had been surrendered to the bank under the GSA.
The Court concluded that the liquidation of the parent company did not affect the bank’s right to exercise the parent company’s entitlement to vote the shares of its subsidiaries. In the circumstance of the GSA, only the bank had that right—the liquidators did not. The Court declared the purported liquidators’ appointments to the subsidiary companies invalid.
Standing
A preliminary issue was whether the bank and the receivers could seek leave to bring the application under s 284(1) of the Companies Act 1993.
The bank asserted it had standing to seek the declaration because it was a “creditor” of the company for the purposes of s 284. The receivers said they had standing as the effective “shareholders” of the companies.
The Court found that, even though the bank was a secured creditor that would otherwise be excluded from the ambit of liquidation, it would nonetheless be entitled to raise a creditors’ claim under s 303 of the Act for a “debt or liability, present or future, certain or contingent”, which claim would turn on the inadequacy or surrender of the bank’s security. It therefore granted leave to the bank to bring the application, saying it would have come to same conclusion on the same grounds had it been required to exercise its inherent jurisdiction to grant leave.
Given that conclusion, the Court found it unnecessary to consider whether the receivers were “shareholders” for the purposes of s 284 (though it said it inclined to the view that they were not).
Chapman Tripp comment
The decision underscores the primacy of property rights in the company insolvency context. It reaffirms that liquidators’ powers of custody and control over a debtor company’s assets are subject to such contractual security arrangements as may exist over those assets.
The judgment also provides welcome guidance on the role and scope of s 254 of the Companies Act, which states that “a liquidator may, but is not required to, carry out any duty or exercise any power in relation to property that is subject to a charge”. The respondent liquidators had relied on that provision as permitting them to pass the special resolutions without the bank’s knowledge or consent.
The Court disposed of the purported liquidators’ argument in brief, recording in a footnote that the liquidators’ reliance on the provision was “misplaced”. The parent company, upon its default under the GSA, had surrendered its right to vote on a liquidator’s appointment; there was no power available for it to exercise under s 254.
1. Bank of New Zealand v Grant [2023] NZHC 1507, accessible here.
Our thanks to Louis Norton for his help in preparing this Brief Counsel.
