Gibson v Solid Energy New Zealand Limited
[2016] NZHC 2939
•6 December 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-3022 [2016] NZHC 2939
UNDER Part 15A of the Companies Act 1993 and
Part 19 of the High Court Rules
IN THE MATTER
of Solid Energy New Zealand Limited and all other companies listed in Schedule A of the originating application (all subject to Deed of Company Arrangement) (the “Solid Administration Group”)
BETWEEN
BRENDON JAMES GIBSON GRANT ROBERT GRAHAM
Applicants
AND
SOLID ENERGY NEW ZEALAND LIMITED AND ALL OTHER COMPANIES IN THE SOLID ADMINISTRATION GROUP
Respondents
Hearing: On the papers Counsel:
R B Stewart QC and L A OʼGorman for applicants
M V Robinson for respondentsJudgment:
6 December 2016
JUDGMENT OF KATZ
This judgment was delivered by me on 6 December 2016 at 3:00pm pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
Solicitors: Buddle Findlay, Barristers and Solicitors, Auckland
Simpson Grierson, Barristers and Solicitors, Auckland
Counsel: R B Stewart QC, Barrister, Auckland
GIBSON v SOLID ENERGY NEW ZEALAND LIMITED & ORS [2016] NZHC 2939 [6 December 2016]
Introduction
[1] This is an application by Brendon Gibson and Grant Graham of KordaMentha, as Deed Administrators of all companies in the Solid Energy Group of companies (“Solid Administration Group”), seeking directions under s 239ADR of the Companies Act 1993 (“Act”) or, in the alternative, orders under s 239ADO of the Act to vary a deed of company arrangement (“DOCA”) entered into by the respondents on 17 September 2015. The DOCA has been entered into under Part
15A of the Act. The respondents consent to the granting of the orders sought.
[2] The issue on which direction is sought is:
Who is entitled to vote at a creditors’ meeting convened under clause 23.1 of the DOCA to approve a proposed variation? In particular, do former “Creditors” whose debts have been fully paid and discharged have any such voting rights?
[3] A variation of the DOCA is required so that an asset that is to be realised over a four year period can be transferred to, and managed by, a bare trustee on behalf of creditors (“Trust Proposal”). This will allow the Deed Administration to end by March 2018, as anticipated under the DOCA. Mr Gibson deposes that it is not in the best interests of creditors that the Deed Administration continues beyond March 2018, for reasons that are set out in his affidavit. As presently drafted, however, the DOCA does not allow for the Trust Proposal. The DOCA will therefore need to be varied by a vote of creditors under clause 23.1 of the DOCA.
[4] The Deed Administrators submit that (either as a matter of interpretation or implied term) clause 23.1 already implicitly requires any voting parties to have an ongoing “Claim” (and therefore an economic interest in the relevant issues) in order to vote at a creditors’ meeting. Directions are sought, however, in order to provide certainty on this issue.
[5] In the alternative, the Deed Administrators seek orders varying clause 23.1 to expressly limit the creditors who can vote on a variation to the DOCA to those who continue to have an ongoing claim against a Solid Energy company.
Part 15A – The statutory regime
[6] It is helpful to first consider the specific statutory context in which the issue arises.
[7] The DOCA has been entered into under Part 15A of the Act. The object of Part 15A is to enable insolvent companies, or companies that may in the future become insolvent, to be administered in a way that:1
(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b)if it is not possible for the company or its business to continue in existence, results in a better return for the company’s creditors and shareholders than would result from an immediate liquidation of the company.
[8] Part 15A fills a gap that previously existed in New Zealand’s corporate insolvency framework. It provides broader protection and greater flexibility to companies wishing to consider corporate rescue as an alternative to immediate liquidation.
[9] Part 15A affords creditors considerable flexibility, as it prescribes only basic minimum content requirements for a deed of company arrangement. Unique deeds of company arrangement can accordingly be developed, tailored to the particular circumstances of a troubled company, within certain broad legislative parameters but otherwise restricted only by the wishes of creditors and the ingenuity of drafters. The flexibility inherent in Part 15A is, however, balanced against the Court’s power to intervene to prevent unfair prejudice to dissentient creditors bound by a deed of company arrangement.
[10] Once the deed of company arrangement is executed and effective it binds the company (and its directors, officers and shareholders), the deed administrator and the
company’s creditors in respect of claims as at the “cut-off day” specified in the deed
1 Companies Act 1993, s 239A.
of company arrangement. A moratorium applies to anyone bound by the deed of company arrangement and the company is released from its debts to the extent provided for in the deed of company arrangement. Correspondingly, the deed of company arrangement does not apply to, or govern, debtor/creditor relationships or debts that arise after the relevant “cut-off day”.
[11] The substantive merits of a proposed DOCA is an issue for the affected creditors, subject to the residual power of the Court to prevent abuse of the procedure in the form of oppression or unfair prejudice. Whether a deed operates (or is highly likely to operate) in a way that is oppressive or unfairly prejudicial requires examination of the whole of the effect of the deed, bearing in mind the scheme of Part 15A, and the interests of other creditors, the company and the public
generally.2 Fairness is a matter of balancing all the interests involved in terms of the
policies underlying Part 15A. The relevant inquiry is fundamentally what position those creditors would have been in, in liquidation, relative to their position under the deed of company arrangement.3
[12] Key to the above regime is:
(a) the concept of the “cut-off day”, as that determines which creditors (and related claims) are subject to the terms of the deed of company arrangement, and which are not (especially those arising after the “cut-off day”); and
(b)the creditors’ interests involved at the “cut-off day”, compared with how those interests would be dealt with in a liquidation.
[13] The definition in clause 1.1 of the DOCA makes it clear that the relevant “cut-off day” is the “Appointment Date,” being 13 August 2015. That clarity is important given the significance of the “cut-off day” for determining which creditors
(and related claims) are subject to the terms of the DOCA.4
2 Cargill International SA v Solid Energy New Zealand Ltd [2016] NZHC 1817 at [95].
3 At [95], quoting Thomas v H W Thomas Ltd [1984] 1 NZLR 686 (CA) at 693-695, recently cited in Draskovich v Goodfellow [2016] NZHC 496.
4 Companies Act, s 239ACN(2)(i).
Is it necessary for a person to have a current claim against a Solid Administration Company in order to be able to vote at the proposed creditors’ meeting?
[14] The statutory context I have outlined makes it clear that the voting rights in Part 15A are intended to enable creditors to vote on matters in a DOCA that affect their economic interests (compared with the alternative of liquidation), with dissenting creditors bound if the requisite voting thresholds are met, but subject to the safeguards against prejudice and abuse.
Relevant case law
[15] A number of cases have considered whether creditors have any standing to challenge insolvency restructures where they are “out of the money”. In each of the following three cases, the Court held that the opposing creditors did not realistically have any remaining economic interest in the company, so no actionable duties were owed to them. The Deed Administrators submitted that, if this is true of creditors who still have claims but are “out of the money”, it must be even more so where the debts of former creditors have been fully paid and discharged.
[16] In Re Mytravel Group Plc5 the scheme provided for the assets and undertaking of the company to be transferred to “Newco”, with the bulk of the facility lending turned into equity in Newco, leaving behind the subordinated bonds. The bondholders objected to the jurisdiction of the Court to hear the application without a meeting of shareholders and certain creditors first being convened. The scheme needed to be changed for other reasons, but Mann J nevertheless observed that he would have declined this aspect of the application because bondholders realistically had no remaining economic interest in the company. Their dissent, in
those circumstances was immaterial.6
5 Re Mytravel Group Plc [2004] EWHC 2741 (Ch), [2005] 1 WLR 2365. The subsequent Court of Appeal decision (Re MyTravel Group Plc [2004] EWCA Civ 1734, [2005] 2 BCLC 123) did not address the “economic interest” ruling in the first instance judgment and instead narrowly focused on a procedural question which had arisen. The validity of the economic interest test was never resolved as the parties reached an out of court settlement.
6 At [71] – [72].
[17] In Re Bluebrook Ltd7 the Court considered an application for the approval of three schemes of arrangement, each between one company and its Senior Lenders. The schemes were approved by the requisite majority at a meeting of scheme creditors, but were opposed by subordinated creditors who alleged the schemes operated unfairly to deprive them of any valuable rights against the companies. Mann J concluded that there was insufficient evidence to demonstrate “a realistic chance that the value of the group [was] in excess of the value of the Senior Debt”.8
On that basis, the effect of the schemes as part of the overall restructure arrangement
did not work unfairly against the subordinated creditors, who had no relevant economic interest in the scheme companies.9
[18] In Saltri III Ltd v MD Mezzanine SA SICAR,10 the plaintiff mezzanine lenders contended that a security trustee had not complied with its obligation to exercise reasonable care to obtain the fair market price for the assets subject to the securities, and that a restructure had been effected without proper authority and was therefore void. On the facts, the mezzanine lenders “were ‘under the water’ by a very large margin”.11 There was no suggestion that the assets could have sold for more than the senior debt. Accordingly, the Court held that the mezzanine lenders had not suffered any loss and there was no actionable breach of any duties owed to them.12
Ordinary meaning of creditor
[19] It is well established that, in its ordinary meaning, the term creditor requires an existing debt between the two relevant parties.13 If there is no longer an existing debt, then the relevant person no longer has the status of a creditor, but would be a “former” creditor. In a number of cases, the Court has considered the status of creditors who had been repaid, in the context of liquidation/adjudication proceedings, and held that such persons were no longer creditors for the purposes of
the respective proceedings.
7 Re Bluebrook Ltd [2009] EWHC 2114 (Ch), [2010] BCC 209.
8 At [51].
9 At [80].
10 Saltri III Ltd v MD Mezzanine SA SICAR [2012] EWHC 3025 (Comm), [2013] 1 All ER (Comm) 661.
11 At [208].
12 At [141], [212] and [213].
13 Galvanising (HB) Ltd v Fisk [2015] NZCA 529, (2015) 14 TCLR 204 at [47]; Lawson v Official
Assignee HC Auckland M1217/95, 11 August 1997 at 18.
[20] For example, Sam’s Fukuyama Food Service Ltd v RWJ Enterprises Ltd Trading as Lucky Seafood Restaurant concerned an application for the recall of an order for liquidation. Associate Judge Abbott concluded that the order should not have been made as the plaintiff had been repaid and therefore was “no longer a creditor”. 14
[21] In Harrington v Te Mania Livestock Ltd, which concerned a liquidation application, Associate Judge Matthews considered (obiter) that the plaintiff “ceased to be a creditor” of the defendant company as his debt was repaid shortly after proceedings were issued.15
[22] In Wight v Eckhardt Marine GmbH the Privy Council considered that an individual who was a creditor at the date of the winding up should not be allowed to participate in the distribution when he or she has been paid and is no longer a creditor at all:16
It therefore seems to their Lordships that the principle of pari passu distribution according to the values of debts at the date of winding up does not necessarily lead to the conclusion that someone who was a creditor at that date must be allowed to participate in the distribution even when he is no longer a creditor at all. There is nothing unfair, or contrary to principle, in a rule which requires that anyone who claims to participate in a distribution should have the status of a creditor at the time when he makes that claim. It would be strange if the court can have regard to subsequent events in valuing a creditor’s contingent claim at much less than it would have been thought to be worth at the date of the order but not to the fact that someone has ceased to be a creditor at all.
Interpretation of the relevant provisions in the Act
[23] I will first consider the correct interpretation of the relevant statutory provisions in Part 15A, before turning to consider the interpretation of the equivalent
provisions in the DOCA.
14 Sam’s Fukuyama Food Service Ltd v RWJ Enterprises Ltd Trading as Lucky Seafood Restaurant
HC Auckland CIV-2011-404-6558, 14 December 2011 at [8].
15 Harrington v Te Mania Livestock Ltd [2016] NZHC 785 at [2].
16 Wight v Eckhardt Marine GmbH [2003] UKPC 37, [2004] 1 AC 147 at [33].
[24] The Deed Administrators wish to convene a creditors’ meeting under s 239ADF of the Act, which relevantly provides that:
(1) The deed administrator—
(a) may at any time convene a meeting of the company’s creditors to consider a variation to, or the termination of, the deed; and
(b) must convene a meeting if requested to do so in writing by creditors whose claims against the company are not less than 10% in value of the total value of all creditors’ claims.
…
(4) The notice given to the creditors must set out any resolution for varying or terminating the deed that is to be considered by the meeting.
(emphasis added)
[25] “Creditor” is defined in s 239C of the Act as including:
(a) a person who, in a liquidation, would be entitled to claim in accordance with section 303 that a debt is owing to that person by the company; and
(b) a secured creditor
[26] Section 303 defines an admissible claim in a liquidation as being “a debt or liability, present or future, certain or contingent, whether it is an ascertained debt or a liability for damages”. Not surprisingly, past debts are not included in the statutory definition. Fines, monetary penalties and certain costs are also excluded.
[27] I must determine whether the term “creditor” in s 239ADF embraces all persons who were entitled to claim in a liquidation at the outset of the administration process, despite having since been fully repaid, or whether the term is limited to those persons who would still be entitled to claim in a liquidation as at the date that notice is given of the creditors’ meeting. In other words is the creditor pool “set in stone” as at the “cut-off day”, or can it diminish as creditors are fully paid?
[28] Some guidance can be found in s 239ADF(1)(b), which provides that the deed administrators must convene a meeting if requested to do so in writing by creditors whose claims against the company are not less than 10 per cent in value of
the total value of all creditors’ claims. This clearly envisages that the relevant creditors for the purposes of s 239ADF are creditors whose claims have some current value, not (former) creditors who have been paid in full. Even if all of the creditors who have been fully repaid were to attempt to requisition a meeting they would not be able to do so, as their claims have no value. The fact that (former) creditors have no statutory entitlement to call for a meeting to vary the DOCA clearly reflects their lack of ongoing economic interest in the operation of the deed. Given that such persons do not even have the ability to call for a meeting, it cannot have been intended that they would have the (much more significant) entitlement of voting at such a meeting.
[29] Similarly, the vote of a creditor who no longer has a claim would carry zero value in respect of the requirement to have a majority in number represent
75 per cent in value of those creditors voting.
[30] I also note that the definition of “creditor” in s 239C of the Act refers to a person being a creditor if they are entitled to claim that a debt “is owing” by the company, not that a debt “was owing”. Determining who is a “creditor” for the purposes of convening a meeting to vary the DOCA therefore requires the Deed Administrators to consider who still falls within the statutory definition in s 239C (which incorporates the definition of admissible claims in s 303) in the present, not at some previous time. In other words, which of the original creditors (being those who were entitled to vote on the DOCA) still have a debt or liability, present or future, certain or contingent, owing to them by a Solid Energy company?
[31] The statutory intent, in my view, is clear. Only those creditors who continue to have an ongoing claim are entitled to approve a variation to a deed of company arrangement. It would make no commercial sense for creditors who have had their debts paid in full to be entitled to attend and vote on a deed of company arrangement that no longer affects them, potentially to the prejudice of creditors who are deeply affected by the proposed amendments. There is nothing to suggest that Parliament intended such an outcome.
Interpretation of the relevant provisions in the DOCA
[32] I now turn to the provisions in the DOCA that are intended to broadly reflect and implement the statutory provisions I have outlined above.
[33] Clause 23.1 of the DOCA relevantly provides that the DOCA may be varied only by a variation approved by the Creditors of each member of the Solid Administration Group at a meeting convened under section 239ADF of the Act.
[34] Clause 1.1 of the DOCA defines “Creditor” as:
Creditor means any person who would have been entitled to prove in a liquidation of any member of the Solid Administration Group, if the relevant member of the Solid Administration Group had been liquidated and the liquidation was taken to have commenced on the Appointment Date and includes the Secured Creditors.
[35] The present difficulty arises because, interpreted literally, this clause arguably defines the creditor group (for all purposes) at a fixed point in time, namely those creditors who would have been entitled to prove in a liquidation of any member of the Solid Energy Group, if the nominal date of liquidation was assumed to be the date on which the Deed Administrators were appointed.
[36] Once a deed of company arrangement is executed and effective it binds the company (and its directors, officers and shareholders), the deed administrator and the company’s creditors in respect of claims as at the “cut-off day” specified in the deed of company arrangement. In this case, the DOCA defines “Claim” as follows:
Claim means all debts payable by, and all claims against any member of the Solid Administration Group (whether present or future, certain or contingent, ascertained or sounding only in damages, or otherwise), being debts or claims any of the circumstances giving rise to which occurred, or which arise from a contract or relationship entered into, on or before the Appointment Date that would be admissible to proof against any member of the Solid Administration Group in accordance with the Companies Act, if the relevant member of the Solid Administration Group had been liquidated and the liquidation is taken to have commenced on the Appointment Date and includes any claim against any member of the Solid Administration Group by a Secured Creditor (but, for the avoidance of doubt, excludes any debts or claims in respect of RPS)
[37] It is clear that the creditor pool cannot increase after the “cut-off day”, but can it decrease? The definition of “Creditor” in the DOCA is silent on the issue of whether a person who is a creditor at the outset of the administration remains a creditor after they have been paid and their “Claim” extinguished.
[38] One of the key principles of contractual interpretation is that a court should prefer a common sense construction that gives effect to the purpose of the clause in its contractual context. For example, in Firm PI 1 Ltd v Zurich Australian Insurance Ltd the Supreme Court emphasised that the law generally favours a commercially sensible construction, or “purposive construction”, that is consistent with business
common sense.17 In Air New Zealand Ltd v New Zealand Air Line Pilots’
Association Inc,18 the Court of Appeal adopted the following statement of principle of Lord Neuberger in Arnold v Britton:
When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to ‘what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean’, to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] AC
1101, para 14. And it does so by focussing on the meaning of the
relevant words … in their documentary, factual and commercial context. That meaning has to be ascertained in light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of [the contract], (iii) the overall purpose of the clause and the [contract], (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party’s intentions.
[39] Applying these principles to the present situation I am satisfied that the true meaning of clause 23.1 of the DOCA, either as a matter of interpretation or by necessary implication, is that only those creditors who have on-going claims, and are thus subject to on-going exposure, are entitled to vote on DOCA variations. I have
reached this view for the following key reasons.
17 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [62], [77]–[79] and [88]-[93].
18 Air New Zealand Ltd v New Zealand Air Line Pilots’ Association Inc [2016] NZCA 131, [2016]
2 NZLR 829 at [35], citing with approval Lord Neuberger in Arnold v Britton [2015] UKSC 36, [2015] AC 1619 at [15].
[40] First, the DOCA must be interpreted in its broader statutory context. As I have set out above, Part 15A affords creditors considerable flexibility, as it prescribes only basic minimum content requirements for a deed of company arrangement. At all times, however, the Act must prevail and it is not permissible for those who avail themselves of the Part 15A procedure to derogate from the minimum statutory requirements. The “rights” to both enter into a DOCA, and then subsequently vary it, are statutory in nature. The Act sets out the minimum content requirements of those rights. While it is possible for the DOCA to “flesh out” what is required, for example in terms of the processes and administrative procedures to be followed, it cannot derogate from the minimum statutory requirements. As I have outlined above, the Act, correctly interpreted, does not envisage that those who are not current creditors will be able to vote at a meeting called to consider varying a deed of company arrangement. Indeed, allowing them to do so could potentially prejudice the rights and interests of those who are current creditors of the company.
[41] It was not open to the parties, in my view, to depart from the statutory regime regarding entitlement to vote at a variation meeting. Nor do I believe that they objectively intended to do so, given there is no commercial rationale for allowing “former” creditors to vote on a variation to a deed. Providing former creditors (whose debts have been fully paid and discharged) with a voting right would be inconsistent with the very purpose of the voting rights in Part 15A, which is to give a decision-making power to those whose economic interests are affected (subject to the majority thresholds and protections against prejudice and abuse). Creditors as at the “cut-off day” whose claims have subsequently been paid and extinguished no longer have any remaining economic interest in the company. Their interests are no longer affected by decisions about the residual sale and distribution process provided for under the DOCA. There is no legal basis for any ongoing duties to be owed to them in respect of the remaining sale and distribution process, or for them to have voting rights in respect of those decisions. Those creditors have benefited from the DOCA by receiving full repayment, as opposed to whatever pro rata distribution they would have received (if any) in a liquidation, so no issues of prejudice can arise.
[42] Further, as I have noted above, the natural and ordinary meaning of the term “creditor” generally requires that a debt is currently owed. The definition of “creditor” in s 239C of the Act defines is linked to a claim that a debt “is owing” by the company, not that a debt “was owing”. There are no apparent reasons why the parties might have intended a different meaning here.
[43] The DOCA, under clause 5.2, provides for the payment, release and extinguishment of some Claims early on in the Deed Administration, with the balance of Claims (as compromised) to be paid, released and extinguished at the Final Distribution Date (March 2018). Trading Creditors who have been paid no longer have a “Claim” as defined in the DOCA. As noted above, the vote of a Creditor that no longer has a Claim would carry zero value in respect of the requirement to have a majority in number represent 75 per cent in value of those creditors voting.
[44] Taking all of these matters into account, I am satisfied that the objective intention of the parties to the DOCA cannot have been that creditors who no longer have any Claim would still qualify as having a right to vote on a variation to the DOCA under clause 23.1. To the extent that it is necessary to imply a term into the DOCA to this effect I am satisfied that the traditional tests for implied terms set out in BP Refinery (Westernport) Pty Ltd19 are satisfied on the facts.
[45] In summary, I am satisfied that:
(a) the interpretation of clause 23.1 advanced by the Deed Administrators reflects common-sense and the commercial purpose of the voting regime in the DOCA;
(b)only creditors who have ongoing (current) claims have an interest in the Trust Proposal and as such should determine the issue;
19 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC).
(c) former Creditors would not be prejudiced by the variations sought, given that they have no economic interest in the outcome of the Trust Proposal;
(d)it would be inequitable for the vote of a party that is unaffected by the ongoing realisation process under the DOCA to be able to influence the outcome of a vote on the Trust Proposal in any way and it could potentially be oppressive or prejudicial to those creditors who do have an economic interest in the outcome;
(e) a full meeting of present and former creditors at the proposed variation meeting would result in unnecessary expense and inconvenience for the Solid Administration Group and current creditors; and
(f) The interpretation advanced by the Deed Administrators is consistent with the statutory framework and the objectives of Part 15A.
Result
[46] I direct under s 239ADR of the Act that:
(a) for a creditors’ meeting convened under clause 23.1 of the DOCA, only those creditors who continue to have an ongoing “Claim” under clause 1.1 of the DOCA are entitled to approve a variation to the DOCA (“Claim Creditors”); and
(b)a meeting is properly convened under s 239ADF of the Act by serving a notice under s 239ADF(2)(a) on the Claim Creditors.
Katz J
2
7
1