Administrator's casting vote can only be used as a tie-breaker on number, not value
The Court has, for the first time in NZ, considered the use of an administrator's casting vote under s239AK of the Companies Act 1993 to approve a deed of company arrangement (DOCA) proposal. This section provides that a resolution is adopted at a meeting of creditors in an administration if a majority in number, representing 75% in value of the creditors, vote in favour of the resolution. It also provides that the administrator has a casting vote.
In this case, the administrator had exercised his casting vote to approve a DOCA where the majority of creditors - but less than 75% in value of creditors voting - voted in favour of the DOCA. The Commissioner of Inland Revenue, who voted against the DOCA, sought to set the DOCA aside.
The Court held that a casting vote under s239AK(3) may only be used where there are equal numbers of creditors voting for and against the resolution, and those voting for it collectively hold 75% or more of the value of the company's debts. It was only in those circumstances that the vote was hung: where there was a split in number and value, a resolution fails and there is no need for a casting vote. This is different to the Australian position, where the legislation allows the use of a casting vote where there is a split between number and value. The casting vote must be exercised honestly and in accordance with the best interests of those affected.
Because the votes in this case amounted to less than 75% in value of creditors voting, the administrator's casting vote was invalid and the DOCA was set aside.
Although not strictly necessary given its decision on the casting vote, the Court went on to consider whether the DOCA was oppressive to the Commissioner. It considered that preferential creditors are justified in expecting the DOCA terms to acknowledge the special position of debts that would be preferential in a liquidation. If no preference is given, there should be an explanation why. As the DOCA in this case did not accord special treatment to the Commissioner's preferential debts and only allowed for them to receive pari passu with other creditors, the Court held that, had the DOCA not been set aside on other grounds, it would nonetheless have declared it invalid for being oppressive and unfairly prejudicial to the Commissioner.
Commissioner of Inland Revenue v Grant (HC Auckland CIV-2009-404-7388, 25 May 2010)
Blue Chip borrowers released from loan agreements and security on basis of oppression
In a decision released on 6 May 2010, the Court of Appeal has held that GE loan agreements to a retired couple who were Blue Chip investors were oppressive within the meaning of the Credit Contracts and Consumer Finance Act 2003 ("CCCFA"). The proceeding is a test case for many investors in a similar position.
Under Part 5 of the CCCFA, the courts are given power to reopen a credit contract where the terms are oppressive, the creditor is acting in an oppressive manner, or the debtor has been induced to enter the contract by oppressive means. The courts then have the power to make such orders as are necessary to remedy the relevant matters. The Court of Appeal has remitted the case to the High Court for consideration of the appropriate remedy.
The decision is significant for mortgage lenders in that it suggests something of a presumption towards a finding of oppression where lending is on the basis of asset values without the lender having considered the borrower's ability to service the debt. Further, the Court highlights the perceived potential for injustice in self-certification mortgages.
The Court found that there had been oppression notwithstanding GE's claim to be an "innocent lender" without knowledge of the relevant circumstances, as the mortgage origination had been carried out by a third party. The judgment of the Court indicates an acknowledgement that there was no clear relationship of agency in the conventional sense. However, the Court was prepared to adopt a broader approach to attribution in the circumstances of the case. The Court of Appeal's judgment sends a strong message that the courts will not allow lenders to rely on delegation of loan origination functions to a third party to act as a defence to a claim to reopen a credit contract on the grounds of oppression.
Bartle v GE Custodians Limited [2010] NZCA 174
Insolvency Practitioners Bill removes barrier to appointment of liquidators and administrators with a business relationship with a secured creditor
The Insolvency Practitioners Bill ("Bill"), released on 27 April 2010, introduces a "negative licensing" system for insolvency practitioners, which will give the Registrar of Companies the power to restrict or prohibit individuals from providing a corporate insolvency service for periods of up to five years.
Of interest to practitioners and secured creditors will be a proposed amendment to the disqualification criteria in s280(1)(cb) of the Companies Act 1993. In particular, practitioners who have (or whose firm has) a continuing business relationship with secured creditors of the insolvent company would no longer need court approval to be appointed as a liquidator or voluntary administrator.
This is a departure from Cabinet's original intention, which was to repeal sections s280(1)(ca) and (cb) of the Companies Act 1993, which prohibit the appointment of an insolvency practitioner (or their firm) where they have provided professional services to the insolvent company, or had a continuing business relationship with the company, its majority shareholder, directors, or any secured creditors. The court still has the power to approve appointments.
It was originally thought that these provisions (introduced to reduce conflicts of interest, and to prevent the appointment of "debtor-friendly" insolvency practitioners) were excessively restrictive. However in practice, the courts have undertaken a pragmatic and realistic approach to applications by practitioners for leave to act where these provisions apply. A recent example is Re Rapson Holdings Ltd (HC Auckland CIV-2010-404-2319, 26 April 2010), in which the Court granted leave to practitioners to act as liquidators where the practitioners' firm, KPMG, had provided advisory and auditing services to MARAC, a secured creditor of the insolvent company.
It would appear that as the conflict of interest provisions appear to be working, and do not unduly obstruct the efficient appointment of liquidators, the decision to repeal these provisions in their entirety has been rescinded. Instead, the Bill removes only the reference to secured creditors in s280(1)(cb).
Other aspects of the Bill include an extension of the automatic disqualification criteria for liquidators listed in section 280(1) of the Companies Act 1993 and for receivers in section 5(1) of the Receiverships Act 1993. In particular, certain family members of a person who has, within the two years immediately preceding the commencement of a liquidation, been a shareholder, director, auditor, or receiver of the insolvent company or of a related company, would be disqualified from appointment.
Persons convicted of a dishonesty offence would also be disqualified. Also excluded are accountants and lawyers struck off their respective professional registers, and practitioners banned from practising in specified countries such as Australia.
The Registrar of Companies will maintain a register of practitioners who are prohibited from practising, or who are permitted to practise only under supervision.
Commerce Minister Simon Power has said that he hopes the Bill will come into force by July 2011.
The Bill has been some time coming, and was possibly delayed in part by the change in Government. It was previously proposed that a bill implementing the negative licensing system would be introduced in Parliament in December 2008. The Joint Insolvency Committee and INSOL New Zealand were consulted on the proposed negative licensing system. We will continue to monitor the progress of the Bill.
A copy of the Bill is available at http://www.med.govt.nz/upload/72508/Insolvency-Practitoners-Bill.PDF.
Fake liquidator results in criminal charges
The Insolvency Practitioners Bill may give increased comfort about the standard of insolvency practitioners, but it can do little to control practitioners who don't even exist. A case in point is two shareholders who avoided court ordered liquidation by appointing their own fictional liquidator named "Babubhai Patel". Investigators concluded that Mr Patel did not exist and the liquidation was a sham. It did not help that an affidavit filed in Mr Patel's name was later found to have been drafted on the computer of the one of the shareholders, or that the final liquidator's report was filed from an address which turned out to be a shopping mall in China. Not surprisingly, the report concluded that the creditors would not be paid any of the $100,000 owing to them.
This creative response to insolvency is unlikely to have a happy ending for one of the pair, who faces charges of carrying on business fraudulently - whilst her business partner has, for now, avoided charges by escaping to Hawaii.
Trans-Tasman single cross border insolvency proceeding gathers momentum
In a speech on 14 April 2010, Commerce Minister Simon Power said that the Trans-Tasman Outcomes Implementation Group has made substantial progress towards a single cross-border insolvency proceeding. The Group is an inter-governmental group formed to advance certain outcomes identified by Prime Ministers John Key and Kevin Rudd in the Joint Statement of Intent last August.
Amongst other proposals, the Group is working towards a single cross-border insolvency proceeding where an insolvent entity has interests on both sides of the Tasman. It is proposed that a single proceeding would:
- address the possibility of forum-shopping;
- facilitate information gathering, the securing and realisation of property and attempts at corporate reorganisation;
- improve coordination between concurrent administrations and court proceedings;
- provide court and administrative assistance to practitioners;
- address any regulatory gaps; and
- improve transparency and certainty under existing trans-Tasman arrangements.
In addition, the Group is working on a proposal that an insolvent company under administration should face equivalent outcomes on both sides of the Tasman and that each country should recognise those outcomes. The rationale for this proposal is that individuals and firms should not be able to avoid consequences of their conduct by moving or filing across the Tasman.
Liquidator's summary judgment claim in knowing receipt: viable alternative to voidable transaction claims
In an appropriate case, a claim for knowing receipt is a useful tool for liquidators to recover improper payments made by a company. Unlike other remedies of the Companies Act 1993, an action for knowing receipt can be brought regardless of whether the relevant transaction was entered into before the company was put in liquidation, or whether the company was insolvent at the time of or as a result of the transaction. It can also result in a proprietary interest in certain assets, rather than just an unsecured claim.
A finance company, Five Star, paid the wife of a former manager $505,000 over a period of four years. The liquidator sought summary judgment against the wife, alleging that the husband was a 'quasi' director and she knew the payments were made in breach of fiduciary duty. The wife contended that the payments were connected to the sale of her shares in a company and, in any event, that she received the payments in good faith and was innocent of any wrongdoing. It was held that it was clear no sale of shares took place and accordingly the payments were made in breach of fiduciary duties, were a misappropriation of company funds and recoverable by the liquidator on behalf of the company.
Under New Zealand law, constructive knowledge is sufficient to establish knowing receipt. It is sufficient that a defendant has knowledge of circumstances which would put an honest and reasonable person on inquiry. The Court held that the wife could not rely on her assumption that the money she was receiving from Five Star was for her sale of shares as Five Star had no reason to be making payments to her. The circumstances of the case would have alerted an ordinary person to ask questions about the payments. The Court held she had notice that she was receiving money she had no right to and described her explanation for the payments as "ludicrous".
Five Star Finance Ltd (in liq) v Williams (HC Auckland CIV-2009-404-5422, 17 March 2010)
Contract interpreted to include a liquidator in the definition of "administrator"
The question of whether the appointment of a liquidator amounts to the appointment of an "administrator" under an event of default clause was recently considered by the Supreme Court of South Australia. The Court held that the ordinary meaning of the word "administrator" is wide enough to include a liquidator, and there is no reason to read the word "administrator" in the relevant shareholders' deed as a term of art.
ITC Ltd v Timbercorp Ltd (in liq) [2009] SASC 342.
Trustee company unable to set aside statutory demand on grounds of inconvenience and lack of trust assets
Newmarket Trustees was a bare corporate trustee for the clients of a firm of solicitors. In this capacity, it was trustee for 118 different trusts. One such trust had unsatisfied tax obligations for which Newmarket Trustees, as a trustee, was personally liable. The Commissioner of Inland Revenue issued a statutory demand against Newmarket Trustees, against which it argued that the demand ought to be set aside on "other grounds" (s290(4)(c)) of the Companies Act 1993.
These "other grounds" included that Newmarket Trustees was merely a corporate trustee for a number of different trusts; and that although it was the registered proprietor of properties and shareholder in client companies, it had no assets in which it held a beneficial interest. Further, it was argued that liquidation would cause considerable inconvenience. Liquidation would require the appointment of a new trustee for the 118 trusts; transfer of the 145 properties of which it was a registered proprietor; consent of the mortgagees for those transfers; and execution and preparation of numerous share transfers and other formalities relating to the transfer of shares.
Newmarket Trustee also argued that it had no involvement in the day-to-day management of the relevant trust and ought not to be held accountable for a co-trustee's failure to disclose that the trust had not met its tax obligations.
The Court rejected these arguments, noting that "the general policy of the Companies Act 1993 that insolvent companies should be put into liquidation, if a creditor seeks such an order, should not be departed from lightly". Exercising the discretion to set aside a demand on other grounds was an exceptional power which must be confined to cases which clearly justify departure from the fundamental principle that insolvency should bring the end of the company's existence. Moreover, the fact that Newmarket Trustee took no active part in the day-to-day management of the trust could not be advanced as an excuse justifying the exercise of the discretion, and the Court would not endorse any waiver by a trustee of its obligations.
Newmarket Trustees Ltd v Commissioner of Inland Revenue (HC Auckland CIV-2009-404-8108, 14 April 2010)
Liquidation not always "just and equitable", even when shareholders are deadlocked
The "just and equitable" ground for putting a company into liquidation is often relied upon in shareholder disputes, particularly if the company is deadlocked. However, the Court is only prepared to liquidate a company as a final resort, particularly if the shareholders' agreement allows for alternative procedures.
In a recent case, the Court refused to put the company into liquidation, because the parties' contractual arrangements envisaged that liquidation was only available after alternative dispute resolution mechanisms had been used, a share buy-out process was available to shareholders who wished to exit the company, and liquidation should be a last resort.
Pelf Limited was incorporated for the purposes of purchasing land and carrying on a joint venture in relation to the farming of that land. The shareholders' relationship broke down, and the second and third plaintiffs sought to obtain a sale of the assets of the company which would, in effect, have resulted in the winding up of the company's farming operations which were its core activity. The company was deadlocked because a minimum of a special resolution (which was unable to be reached) was required to unlock the dispute between the parties.
In considering the Court's jurisdiction to wind up a company on the basis that it is just and equitable, the Court noted that the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. The shareholders agreement provided for the plaintiffs to be able to apply to wind up only after a mediation or arbitration was unsuccessful. Where formal steps to negotiate a settlement had not been explored, it would be wrong for the Court to exercise its discretion to liquidate the company.
Finally, the Court found that it remained open to the plaintiffs to withdraw their capital by invoking the share transfer mechanism, even if this would not give the plaintiffs their desired result of retaining the farm property (which was not a contractual right afforded to either party).
Allan v Pelf Ltd (HC Christchurch CIV-2009-409-2263, 22 March 2010)
Mortgage held not in substitution of a prior charge, and therefore voidable
The Court declared that a mortgage granted to Golden City Developments Limited, six months prior to its liquidation, was a voidable charge under section 293 of the Companies Act 1993. The Court rejected the mortgagee's argument under section 293(1A)(a) that the mortgage was in substitution for a prior charge given before the specified period - namely, a beneficial interest in land that was to be the subject of a joint venture development.
The mortgagee relied on a written agreement with Golden City, under which he claimed that Golden City would hold in trust for him a share of land. The Court concluded that description of the alleged trust obligation did not constitute security for the performance of a contractual obligation, or have the effect of giving the mortgagee priority over other creditors. Further, the existence of a prior charge was inconsistent with Golden City's accounts (which recorded the payments by the mortgagee as unsecured liabilities), and there was nothing in Golden City's records to support the mortgagee's position. Accordingly, the existence of a prior charge was not accepted and the mortgage was set aside.
The Court also rejected the mortgagee's argument under section 296(3) of the Act that he had accepted the mortgage in good faith and reasonably altered his position as a consequence of it.
Mayo-Smith v Raynal (HC Auckland CIV 2009-485-570, 3 May 2010)
Appointment of an interim liquidator does not stop time running on the limitation period for claims
Orion lodged a creditor's claim with the liquidators of Erueruiti Investments Limited. The claim arose out of events said to have taken place on 24 December 2002. The liquidators of Erueruiti rejected Orion's claim because they believed Orion's six year limitation period to bring the claim had expired before the commencement of liquidation. Orion, however, contended that the limitation period stopped running on the appointment of interim liquidators (for a period of six months), before Erueruiti went into liquidation.
French J held that the rule that the limitation period for a claim stops running on the winding up of a company does not apply to interim liquidations. The rationale for stopping the limitation period on the appointment of liquidators is the liquidator's duty to determine creditors' rights and distribute the company's assets under the special statutory scheme. The interim liquidator's duty, in contrast, is to preserve the status quo pending the hearing of the liquidation application. The statutory scheme of winding up a company only comes into being on the making of the liquidation order, and not on the appointment of interim liquidators. Therefore, the rule does not apply until the making of a liquidation order.
The second rationale for the rule is the existence of s248(1)(c) of the Companies Act 1993, which expressly stays proceedings against a company in liquidation. However, the Act is silent in relation to interim liquidations and the question was raised as to whether Parliament intended to do away with the rule's application to interim liquidators (the 1955 Act had stay provisions for both liquidations and interim liquidations). This issue was immaterial as French J stated that, notwithstanding the absence of an express provision for stay upon appointment of an interim liquidator, the Court would have still held that time does not stop running.
Orion International Ltd (in liq) v Horne (2010) 10 NZCLC 264,641
Deeds of company arrangement cannot release guarantors without consent of creditor
The High Court of Australia has confirmed that a DOCA cannot operate to force creditors to release third parties from claims which creditors of the company might have against them. The Australian statute is identical to the Companies Act 1993 in relation to the scope of DOCAs to bind creditors and this judgment will therefore be likely to apply in New Zealand.
The decision concerned rights to bring claims against related companies within the Lehman Brothers group for negligence, misleading and deceptive conduct and similar claims arising out of investments made in products issued by the Lehman entities which were subject to the DOCA.
The High Court held that DOCAs could not bind creditors to release those claims against third parties without the creditor's consent and the DOCA was therefore void and of no effect.
Similar reasoning would apply to any term of a DOCA which purports to release a guarantee given to a creditor, for example, by a director of a company.
Should proponents of DOCAs wish to achieve a release of such claims against third parties, it could be achieved contractually by making the operation of a DOCA conditional upon releases being granted. That will often be impractical, particularly with large estates. In those matters, there may be greater flexibility with a scheme of arrangement under Part XV of the Companies Act 1993. The Australian equivalent of schemes of arrangement have recently been held to have the flexibility to bind creditors to release claims against third parties.
Lehman Brothers Holdings Inc v City of Swan & Ors [2010] HCA II (30 March 2010)
