Voluntary administration: helpful guidance in first court decision on Deeds of Company Arrangement

The High Court, ruling last week on the first case to be brought under the Deed of Company Arrangement (DOCA) provisions in the voluntary administration (VA) regime, has provided useful guidance to insolvency practitioners on how to run a watershed meeting and how to draft a DOCA.

Two important rules have emerged:

  • an administrator chairing a creditors’ meeting may use the casting vote only when votes are deadlocked in number, and

  • unless a DOCA accounts for statutory preferences, the Courts will likely set it aside as oppressive and unfairly prejudicial to preferential creditors.

This Brief Counsel looks at the implications of the decision, and questions whether the result is correct.

The background to the case

Commissioner of Inland Revenue v Grant1 was an application by the Commissioner to hold a DOCA void, or to terminate it.

In their report, the administrators of Jones Publishing Ltd recommended that unsecured creditors vote for the proposed DOCA.  They acknowledged that the IRD, as a preferential creditor, would get a better outcome in liquidation and advised the IRD to vote against the DOCA. 

At the watershed meeting, ten creditors voted for the resolution to adopt the DOCA and one (the IRD) voted against.  The ten creditors in favour were owed around 70% of the total debt, while the IRD was owed around 30%.  In order to adopt the resolution, the administrators purported to use a casting vote in favour of the resolution and held that the resolution had passed.

When may an administrator chairing a creditors’ meeting use a casting vote?

Section 239AK(2) of the Companies Act 1993 provides that, to be adopted, a resolution must be supported by a majority in number of the creditors voting, representing 75% in value of those creditors.

The section also gives the chair (the administrator) a casting vote.  As there is no casting vote in Compromises under Part 14 of the Act, the question of how the casting vote is to be used is a new one for practitioners.

Traditionally, a casting vote must be expressly created and can only be cast to break a deadlock when votes for and against are evenly balanced.  But in Australia, the VA regulations are seen as taking the concept further than is usual to give administrators the power to decide between the interests of the creditors with a majority in number and those with a majority in value.2

At the Jones Publishing watershed meeting, the chairperson adopted an approach similar to the Australian rules.  But the Court has ruled that, in the New Zealand VA regime, a casting vote may only be used to achieve a majority where there is a deadlock in the number of votes for and against the resolution, not to meet the “75% in value” requirement.  In making this ruling, the Court has adopted a different view to the leading New Zealand texts in the area.

On the facts in the Jones Publishing case, the purported casting vote was not a casting vote, and so the DOCA was held to be void.  There was no deadlock of votes for and against the resolution, and the administrator had no authority to use the “casting vote” simply because the majority in number voted one way, and the value effectively voted the other way.  That was not a deadlock.  Rather, the threshold had simply not been met.

What are the consequences of this approach?

The Judge acknowledged that such an approach may give certain creditors an effective veto and essentially “disenfranchise” the other creditors.  The Court considered that the intent of Parliament was that: 

“[creditors] holding, jointly or collectively, more than a quarter in value of a company’s debts are given substantially greater powers in connection with the company’s affairs than other creditors, quite irrespective of the number or the total value of their debts as long as they do not amount to 75% of the total value”.

The Court also gave some guidance on the use of a casting vote.  There is no presumption that it should be used to vote either for or against the DOCA, or for or against the way that the 75% value was voted.  Administrators must exercise the power honestly, and in accordance with what appear to be the best interests of the creditors (although there was no suggestion that this had not occurred in this case).  

Was the casting vote intended to have a wider function in New Zealand?

In our view, yes.  The New Zealand statute was designed to follow the Australian regime in large part and so included the reference to a casting vote - which inclusion the High Court’s decision effectively makes redundant.

The Court reached its conclusion by treating the majority in number and 75% in value requirements as thresholds.  If those thresholds were not met, then the vote failed.  On that logic, if there is an evenly balanced number of creditors voting for and against the DOCA, then the threshold requirement of a majority in number is simply not met, and the resolution should immediately fail.

Interestingly, the Legal Committee Report in Australia recognised the inherent difficulties with the casting vote and proposed that the threshold should be amended in Australia to a majority by value only, thereby eliminating the casting vote.3  To date the thresholds have not however been amended in Australia. 

When will a DOCA be oppressive and unfairly prejudicial?

Had the casting vote been valid, the Court would still have overturned the DOCA.  Its treatment of the IRD preferential debt was, in the Court’s view, oppressive and unfairly prejudicial.  A DOCA may be terminated by the Court if those criteria are met.

In the Jones Publishing case, over 83% of the IRD’s debt would have been preferential under Schedule 7 of the Companies Act in a liquidation.  The administrators acknowledged this by recommending that the IRD vote against the DOCA.  Despite this, they provided no special treatment in the DOCA for the IRD’s debts.  The Court, in reliance on the established Australian judicial approach, stated that:

“…[administrators] proposing DOCAs where debts preferential in liquidation are amongst the company’s total indebtedness, should propound schemes which recognise that factor to a degree at least, or explain why no such recognition is proposed”.

Though voluntary administration is not a liquidation and Schedule 7 Companies Act 1993 preferences do not arise, both processes deal with circumstances where there are likely to be insufficient funds for all creditors to be satisfied.  A DOCA is likely to be deemed oppressive and unfairly prejudicial by the Courts if the administrators do not account for certain debts becoming preferential in a liquidation, or fail to explain why such recognition is not proposed.

In our view, this decision shows that, while the Courts will support a compromise between the body of creditors generally and the company, the Courts are unlikely to approve of any alteration of position as between the creditors.  Administrators should in our view think twice before they propose a DOCA which alters legal entitlements as between creditors.  It is the role of both administrators and the Courts to maintain the integrity of the VA process. 


This decision provides clear guidance to voluntary administrators on the scope of their powers in using casting votes and proposing DOCAs.

  • A chairing administrator’s casting vote may only be used to break a deadlock in number of votes for and against a resolution.  To use it otherwise risks the DOCA being void.  Creditors holding more than 25% of the total debts being voted therefore have significant control over whether a DOCA is approved.

  • When using a casting vote, there is no presumption that the casting vote be voted in a particular manner.  It must be used honestly and in the best interests of those affected.

  • Where there are preferential debts, administrators should acknowledge those preferences in drafting the DOCA, or else risk the DOCA being terminated by the Court as oppressive and unfairly prejudicial.

Our thanks to Janko Marcetic for writing this Brief Counsel.


1  HC Auckland CIV-2009-404-7388, 25/5/2010, Hugh Williams J

Corporations Regulations (Amendment) Statutory Rules 1993 No. 135 (C’th).

3  Legal Committee of the Companies and Securities Advisory Committee, Corporate Voluntary Administration – Report, June 1998 (Australia).

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Related topics: Restructuring & insolvency; Deeds of Company Arrangement; Voluntary administration

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