Jones v Williams
[2024] NZHC 891
•24 April 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV2023-404-001826
[2024] NZHC 891
UNDER Part 19 High Court Rules 2016 and
ss 239AM and 239ADO of the Companies Act 1993
BETWEEN
RICHARD WARWICK JONES and KAREN FRANCES MATTHEWS
Applicants
AND
BRYAN EDWARD WILLIAMS
Respondent
Cont’d
Hearing: 27 September 2023 Appearances:
B Gustafson and K Kommu for Applicants in 2049 proceeding J A McMillan and I Hawkins for Applicants in 1926 proceeding and for Interested Parties in 2049 proceeding
J Marcetic and L J H Norton for Administrator
Judgment:
24 April 2024
Post-hearing submissions:
18 October 2023
JUDGMENT OF ANDERSON J
This judgment was delivered by me on 24 April 2024 at 3.00 pm pursuant to r 11.5 of the High Court Rules 2016.
.…………………………..
Registrar/Deputy Registrar
Solicitors:McFadden McMeeken Phillips, Nelson Chapman Tripp, Auckland
Dentons, Auckland
JONES v WILLIAMS [2024] NZHC 891 [24 April 2024]
CIV-2023-404-002049
UNDERPart 19 High Court Rules 2016, Part 15A Companies Act 1993
IN THE MATTER of an application for orders declaring
invalid or terminated a Deed of Company Administration
BETWEENMICHAEL ANDREW LOOKMAN and 187 BRIDGE TRUSTEES 53 LIMITED
as Trustees of the LOOKMAN FAMILY TRUST
Applicants
AND BRYAN EDWARD WILLIAMS
Respondent
TABLE OF CONTENTS
The applications[1]
Issues[8]
Part 15A[11]
Factual context [20]
Background to the applications[20]
Status of intellectual property[34]
The Administrator’s report under s 239AU of the Act[39]
The DOCA[49]
Dynamics[52]
Lookman Trustees’ application under s 239ACX [56]
The statutory context for creditor claims for voting purposes
within pt 15A[62]
Voting status of parties to shareholder agreements and
convertible loans [69]
Lookman Trustees’ position[69]
Administrator’s position[72]
Jones/Matthews’ evidence[75]Have any of the investor claimants “received their shares” —
who are shareholders?[79]
What was required for the investor agreements to be validcontracts?[85]
Effect of illegality[91]
Status of valid share purchase agreements[95]
Application of the above analysis to the shareholder andconvertible loan agreements[98]
Did any of the convertible loan agreements convert?[105]
Obligation to seek directions?[110]Summary[114]
Interest on creditor claims[116]
Does treatment of interest invalidate the DOCA?[123]
Status of Mollywop claim[126]
Was there an undisclosed voting arrangement in breach of s 239AX?[133]
Conclusions on Lookman Trustees’ application under s 239ACX[146]
Lookman Trustees’ application under s 239ADD [150]
Section 239ADD(2)(a) – information breach?[155]
Section 239ADD(2)(c) – can the deed be given effect without injustice? [175]
Section 239ADD(2)(d) – is the DOCA oppressive or unfairly
prejudicial or unfairly discriminative to one or more of the creditors? [182] Section 239ADD(2)(e) – administrator bias and misconduct?[198] Overall discretion under s 239ADD[202]
Jones/Matthews’ application under s 239AM [203]
Summary[205]
The applications
[1] Design Electronics Ltd (DEL) was placed in voluntary administration under pt 15A of the Companies Act 1993 (Act) on 25 July 2023 by its liquidator after a resolution of creditors passed supporting that step. Mr Bryan Williams was appointed administrator. DEL’s sole director is Mr Warwick Jones. The Companies Office Register shows that Mr Jones and his wife, Ms Karen Matthews each hold 50 per cent of the company.
[2] At the watershed meeting convened on 29 August 2023 under pt 15A, creditors voted in favour of DEL entering into a deed of company arrangement (DOCA). The resolution was passed by the very slimmest of margins, with a majority of persons admitted to vote as creditors representing 75.3 per cent in value voting in favour for a vote requiring a 75 per cent majority. The DOCA was executed on 19 September 2023.
[3] The trustees of the Lookman Family Trust (Lookman Trustees) had earlier placed the company in liquidation on 28 April 2023 following multi-year litigation. They voted against the DOCA. They consider the company should revert to liquidation and pursue Mr Jones for breaches of his directors’ duties to the company. At the watershed meeting they offered up $250,000 for this purpose.
[4] Lookman Trustees seek orders that the DOCA be declared void under s 239ACX of the Act or, if not void, should be terminated under s 239ADD. A key issue is that Lookman Trustees say the vote was passed on the basis of voting by persons who were shareholders not creditors, and on the basis of incorrect inclusion of interest on claims. They say a number of these persons were also party to an undisclosed voting arrangement in breach of s 239AX. Lookman Trustees also raise a range of issues with what they say is the unfair effect of the DOCA and about information provided to creditors.
[5] Mr Williams recommended entry into the DOCA. Lookman Trustees are critical of Mr Williams’ conduct of the administration which they see, in substance, as directed at pushing through the DOCA. They question his independence due to his
past involvement as administrator of another Jones company, YellowWood Consulting Group Ltd (YellowWood).
[6] Mr Jones and Ms Matthews as related creditors seek orders that their vote at DEL’s creditors’ watershed meeting be taken into account.1 If that were accepted, the issues around creditor voting would be academic given the level of the company’s indebtedness to them.
[7] Mr Williams opposes the orders invalidating or terminating the DOCA. He abides the Court’s decision on Mr Jones’ and Ms Matthews’ application.
Issues
[8]Very broadly, the issues are:
(a)Should the DOCA be declared void under s 239ACX of the Act and if so, should it be validated in my discretion?
(b)If not void or validated, should the DOCA be terminated under s 239ADD of the Act?
(c)Should an order be made under s 239AM(2B) that Mr Jones’/Ms Matthews’ related creditor votes count?
[9] As will become evident, those broad issues envelop a range of other component issues that need to be addressed, including on which I received post-hearing submissions.
[10] Before moving to the substance of the applications, more needs to be said about the statutory context.
1 Companies Act 1993, s 239AM(2B).
Part 15A2
[11] Part 15A is modelled on reforms in the United Kingdom and Australia. These were in turn influenced by Chapter 11 of the United States Bankruptcy Code 1928.
The law reform objectives were, among other things, to:3
provide a predictable and simple regime for financial failure that can be administered quickly and efficiently, imposes the minimum necessary compliance and regulatory costs on its users and does not stifle innovation, responsible risk taking, and entrepreneurialism by excessively penalising business failure; and
…
maximise the returns to creditors by providing flexible and effective methods of insolvency administration and enforcement which encourage early intervention when financial distress becomes apparent.”
[12] The object of pt 15A is to enable insolvent companies, or companies that may in the future become insolvent, to be administered in a way that:4
(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.
[13] The mechanism for the attainment of each object is a DOCA. The Act affords creditors considerable flexibility and contains only basic minimum content requirements for a DOCA. That flexibility is balanced against the Court’s powers to intervene to prevent unfair prejudice to dissentient creditors bound by a DOCA through mechanisms like s 239ADD of the Act.
2 The below summary is largely adopted from Cargill International SA v Solid Energy New Zealand Ltd [2016] NZHC 1817 [Cargill].
3 Insolvency Law Reform Bill 2005 (14-1) (explanatory note) at 2.
4 Companies Act, s 239A.
[14] Administration is intended to be a relatively short-term measure that freezes the company’s financial position while the administrator and the creditors determine the company’s future.5 After the administrator is appointed and takes control of the company, the Act requires the administrator to investigate the company’s affairs and form an opinion as to whether it would be in its creditors’ interests for:6
(a)the company to enter into a deed of company arrangement; or
(b)the administration to end; or
(c)a liquidator to be appointed.
[15] The timeframes for administration are tight. Part 15A anticipates that the process will be completed within approximately five weeks. Under s 239AU of the Act the administrator reports to creditors on the company’s business, affairs and financial circumstances and outlines the options available to creditors. The administrator must give an opinion on each option and recommend which option is in the best interests of creditors. A watershed meeting is then convened for creditors to vote on the future of the company, and whether a DOCA is to be executed. This has to be convened within 20 working days after administration starts,7 with the meeting following five working days later.
[16] For a resolution to pass (including in respect of execution of a DOCA), a majority of creditors, holding at least 75 per cent in value of those voting at the watershed meeting, must vote in favour of it.
[17] If the creditors resolve that the company execute a DOCA a deed administrator is appointed. The deed administrator then prepares a document setting out the proposed terms of the DOCA.
5 Cargill, above n 2, at [14].
6 Companies Act, pt 15A, sub-pts 7 and 8.
7 Unless that period is extended by the Court on application by the administrator: Companies Act, s 239AT.
[18] Once a DOCA 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 DOCA.8 A moratorium applies to anyone bound by the DOCA and the company is released from its debts to the extent provided for in the DOCA.
[19] The outline above speaks generally to the objectives and process under pt 15A. It needs to be focussed on the present facts. Here, DEL was already in liquidation. The effect of administration was to suspend liquidation. The purpose of administration was not to resuscitate an ailing company in terms of the first objective of pt 15A. Rather the purpose was to effect a means by which DEL’s assets would be realised more efficiently than in a winding up. The issue for creditors voting at a watershed meeting was whether they were better off under the proposed DOCA than if the company reverted to immediate liquidation.
Factual context
Background to the applications
[20] DEL was incorporated in 2001. Its primary business has been to sell and distribute electronic and software instrumentation and other technology-based products. Mr Jones acquired ownership of DEL from interests associated with his parents in 2011. In 2012, Ms Matthews became a shareholder.
[21] In 2003, Mr Jones founded RWG Org Ltd (ROL). ROL is a software and electronic systems design business. Mr Jones deposes that when he acquired DEL, it had substantially no intellectual property assets. Its business then was selling imported scientific instruments. ROL authorised DEL to add ROL’s technology into products DEL makes available to its customers. Mr Jones says ROL’s role has been to develop products, with DEL’s role being to prove these for the market and sell them. The latter involves clinical trials and commercialisation of the products.
8 Companies Act, ss 239ACS and 239ACT.
[22] DEL’s business now has four main elements. These being an internet service provider, a gas measuring business, a sensor and management system designed for commercial use, and an aged care monitoring system which is in its final stages of development.
[23] DEL has service contracts with a number of customers. Mr Jones says that these contracts are certain, long-running and profitable. He says they continue to generate revenue of around $400,000 per year, with a profit of some $200,000 per year if efficiently run. There is little value in DEL’s tangible assets. Putting aside any claims DEL might have against its director or related parties, any value in the company is in such intellectual property rights it owns and the service contracts.
[24] A dispute related to the ownership and development of DEL’s intellectual property lies partly behind Lookman Trustees’ applications, to which I return below. Lookman Trustees’ applications are made more generally against the background of litigation arising out of a 2016 agreement under which Lookman Trustees advanced funds to DEL.
[25] In November 2022, Lookman Trustees settled its most recent claim against DEL on terms which required $1.876 million to be paid by DEL in instalments. Upon default on the first instalment, Lookman Trustees ultimately obtained an order placing DEL in liquidation on 28 April 2023. Liquidators were appointed on 8 June 2023 who proceeded to prepare an information memorandum for potential purchasers. The liquidators issued the information memorandum in June 2023 but this received no response.
[26] Mr Jones approached Mr Williams to consider the affairs of and options for DEL and whether he would consent to act as administrator. Mr Williams prepared a report outlining his views and presented these to other creditors. As a result, at the request of creditors, the liquidators convened a meeting to vote on a resolution that Mr Williams be appointed administrator. The vote passed. Having regard to creditor support for this, the liquidators appointed Mr Williams as administrator on 25 July 2023.
[27] Jones/Matthews proposed terms of a DOCA for creditors to consider. I discuss its terms later. Mr Williams reported to creditors on the proposed DOCA in advance of a scheduled watershed meeting pursuant to pt 15A. He reported that in his view entry into DOCA would secure a better outcome for creditors than resumption of liquidation.
[28] At the watershed meeting on 29 August 2023, the resolution to proceed with the DOCA passed with 86.36 per cent by number (19 of 22) and 75.30 per cent (by value). Jones/Williams’ creditor votes for their claim of circa $1.68 million were not included because a court order is required for related creditor votes to count. Prior to the meeting, they had obtained interim orders enabling them to make an application for their votes to count, which later came before me with Lookman Trustees’ applications.9
[29] Three creditors voted against the resolution. Lookman Trustees was one of them. The other two were the liquidators and another investor, Tanswell-Smith Family Trust.
[30] Of those voting in favour of the resolution, 16 of the 19 creditors comprised six who are parties to share purchase agreements with DEL and 10 who are parties to convertible loan agreements. DEL had raised funds from these investors totalling in excess of $5 million over the period 2019-2023. All of these parties lodged creditor claims based on the sums invested. Many also claimed interest at contractual rates. The liquidators had previously rejected proofs of debt by the six signed share purchase agreement claimants on the basis that they were now shareholders, not creditors of the company. Lookman Trustees says there is now also evidence that a further three convertible loan holders have had their loans converted to shares and are not creditors.
[31] The Administrator took a different view on admission of the share purchase agreement parties as creditors. He admitted their claims for the purpose of voting at the watershed meeting. He took the view that the share purchase agreements and convertible loans were illegal contracts because of DEL’s failure to comply with requirements for the issue of shares. He valued their claims as being for the money
9 See Jones v Williams [2023] NZHC 2344.
invested, plus interest based on the Civil Interest Calculator from when the payments were made.
[32] The total claims admitted by the Administrator for the purpose of voting based on the figures he was using at the time of the watershed meeting were $9.25 million. Those voting in favour comprised $6.56 million with those against comprising $2.15 million.10 Creditors voting in favour included the Inland Revenue Department ($942,584),11 ANZ Bank Ltd ($16,182) and Buffer NZ Ltd ($200,070) which held a facility agreement. There were an additional $532,000 in value who abstained comprising Callaghan Innovation, Bank of New Zealand Ltd, and a landlord.
[33] At the watershed meeting, Lookman Trustees raised issues with the Administrator’s conduct of DEL’s administration and promoted the company reverting to liquidation to pursue Mr Jones for breaches of directors’ duties and reckless trading. Mr Lookman tabled an offer to creditors to fund the liquidators up to $250,000 to investigate Mr Jones’ conduct. Mr Jones rejects that he has been in breach of directors’ duties. Under the DOCA further investigations will not be pursued. Instead, a restructure will occur. I describe the terms of the DOCA below.
Status of intellectual property
[34] The recitals of the 2016 agreement by which Lookman Trustees invested recorded DEL’s ownership of intellectual property.12 However, a Commercial Development Agreement between DEL and ROL dated 30 May 2012 provides that ROL owns and licenses intellectual property to DEL for use in products that DEL then manufactures and distributes. By its terms ROL can terminate the licence on administration or liquidation of DEL.
[35] Jones/Williams say that practically all of DEL’s product offering relies on intellectual property of ROL. Lookman Trustees contend that if that is correct, then
10 These are approximate figures.
11 The preferential debt is in the vicinity of $117,000.
12 The Background recorded that DEL designs, develops and distributes products and services. Having described briefly the nature of the products and services it went on to say that DEL owns “Intellectual Property Rights” in the products and services. “Intellectual Property” is defined in substance as the intellectual property and proprietary rights, knowledge and expertise held by DEL.
Mr Jones as director has been using DEL investor funds and research and development tax credits to develop ROL intellectual property.
[36] Mr Jones deposes that DEL does own some intellectual property from its activities in bringing products to market. These include carrying out case studies and clinical trials and then commercialising the products. He says that investor funds and tax credits were used for these activities, which is an expensive process in the context of scientific instruments. He denies that DEL investor funds were used to develop ROL intellectual property.
[37] Mr Jones also deposes that the intellectual property arrangements set out above were made clear to investors.
[38] Mr Jones records that DEL owns the patent in the aged care monitoring product which remains at a trial stage. In February 2023, ROL (or Mr Jones and Ms Matthews) assigned this patent to DEL at no cost.13 According to the liquidators’ information memorandum to potential purchasers, development of the product started in March 2020 with the business said to be 90 per cent through the research and development stage. The information memorandum further records substantial projected sales once the product is in the market. It requires further investment to commercialise.
The Administrator’s report under s 239AU of the Act
[39] The Administrator’s report to creditors under s 239AU of the Act is dated 22 August 2023. After outlining the nature of DEL’s business he addressed the property of the company. He recorded that this was largely in its intangible assets. He referred to the intellectual property relating to the personal monitoring systems (the new aged care product) having been transferred to DEL. He went on to record that:
The ownership of intellectual property in relation to other inventions used by the Company is less clear. Either it is owned by the Company, or it is owned by another entity controlled by Warwick Jones and the Company has the right to use it.
13 I infer that investor funds were used for development of this as well.
[40] The Administrator went on to outline the affairs of the company. He referred to the December 2016 agreement with Lookman Trustees and to the subsequent investors since then. He recorded that while the subsequent investors’ agreements provided for shares to be issued, no shares appear to have been issued pursuant to those agreements. The report referred to the disputes with Lookman Trustees culminating in liquidation. The Administrator then recorded that liquidation gave rise to a motivation by subsequent investors to prevent the “destruction of value that would be imminent if the Liquidation were to continue”. He said he had been engaged to see if a harmonised outcome could be achieved between the investor groups but that there was continued disparity between them.
[41] As to the different views, he referred to the subsequent investor group having provided an offer for consideration whereas Lookman Trustees’ disparate position was recorded:
The Lender opposes any restructure proposal. The Lender does not believe the Company has a functional working product, a good management team or sufficient money to explore future product development opportunities. The Lender is concerned that the Company has a history of failed products and poor governance and management practices and says that a minimum of $5 million would be needed to successfully bring a working product to market.
[42]This is evidently a reference to the aged care monitoring product.
[43] The Administrator annexed externally prepared financial statements for DEL to 31 March 2022, a balance sheet as at 31 May 2023, and a profit and loss statement for the year to date. He also set out a statement of financial position as at the date of the report. This valued the business as having a nominal value only of $1. After deducting liabilities (including the claims under share purchase agreements and convertible loans) the statement identified a provisional shortfall of some
$4.85 million which was expected to increase.
[44] In outlining the options the Administrator advised that, as DEL was already in liquidation, the options available to the creditors at the watershed meeting were to return the company to liquidation or to agree to execute the DOCA.
[45] He then evaluated the two options. With respect to the liquidation option, the report emphasised that liquidators would have the power to investigate DEL’s affairs and consider possible claims they should make. Among other comments on this he observed:
(a)There was no shareholder current account balance payable to the company.
(b)The company had sustained considerable losses through its start-up/establishment phase funded by investor funds. He did not have enough information to form a fully concluded view on whether any reckless trading or other breach of duty claim would be available. The fact that losses have been funded by investors who were informed of DEL’s position indicated that a claim would face some serious obstacles.
(c)Such litigation would be lengthy (several years) and expensive. Significant funding would be required. And any recoveries would depend on Mr Jones’ ability to meet a judgment debt.
(d)All those factors suggested that litigation against Mr Jones would be unlikely to take place and/or unlikely to result in a meaningful improvement in the creditors’ position.
(e)He did not have sufficient information to comment on whether there may be voidable preferences but these would typically require litigation and such claims against arms-length suppliers were now more difficult.14
(f)Creditors should be aware that in liquidation, preferential claims to the company’s assets will be satisfied before ordinary unsecured creditors.
14 That is, following the Supreme Court decision in Allied Concrete Ltd v Meltzer [2015] NZSC 7, [2016] 1 NZLR 141.
[46] On the option of agreeing to execute the DOCA, the Administrator referred to this having been proposed by director and shareholders. He outlined its key elements and referred to a schedule with further detail. Under the DOCA the Administrator would be appointed Deed Administrator. The commercial essential terms are outlined by the Administrator below:
The Company would sell, and an entity to be established by a group of investor Creditors would purchase, most of the Company’s assets. The new entity (the “Purchaser”) would pay a purchase price to the Company of $350,000 (plus GST if any). Payment would be due thirty days after entry into the Deed of Company Arrangement.
Certain profitable Service Contracts would remain with the Company for the benefit of its Creditors. To allow the Company to provide the services under those Service Contracts:
(a)the Purchaser would agree to provide the Company with a licence (without charge) to use the Intellectual Property that is the subject of those Service Contracts; and
(b)Warwick Jones would agree to provide the Company with the services it needs to perform its obligations under the Service Contracts, on terms agreed with me as Deed Administrator.
I would apply to court to terminate the Liquidation.
Creditors would be required to file their Claims with me with supporting evidence. It would be my role to determine those claims in broadly the same way that a Liquidator would. I would then distribute the purchase price and other available income to Creditors, with priority given to the statutory preferential creditors. All other Creditor Claims would be paid rateably out of the remaining funds, according to the amount of each Claim.
All investor Creditors participating in the purchase of the Company’s assets as shareholders of the Purchaser would not make Claims as Creditors of the Company.
The Deed of Company Arrangement would terminate upon my certification that Creditors have been paid their full entitlements under it, or otherwise in accordance with statutory processes.
[47] The Administrator recorded that the creditors could vote to adjourn the meeting if, for example, they considered the Administrator ought to investigate matters further.
[48] He went on to express his opinion that the creditors resolve to execute the DOCA. His opinion and reasons for it are stated to be as follows:
Creditors should carefully consider the proposal put forward by the Director, subject to further negotiation, in the context of the other potential outcomes described in this report. An advantage for Creditors under that proposal is that numerous investor Creditors would not make a Claim that would compete with the other Creditors. If the counterfactual were to occur (that is, if the Liquidation were to resume), then any realisation value would have to be distributed across a far greater body of Creditors.
A further advantage is that the Company would obtain the ongoing value in the Service Contracts listed in the proposal. My opinion is therefore that a Deed of Company Arrangement structured in the manner proposed in the document provided is a better outcome for Creditors than resumption of the Liquidation.
The DOCA
[49] The DOCA as proposed was executed on 19 September 2023 following the creditors’ vote. It implemented the essential terms outlined by the Administrator in his report as set out in [46] above. Fundamentally, under the DOCA the service contracts and income from them stay with DEL, with Mr Jones continuing to manage them. A new company (NewCo) is established to buy the rest of the company’s assets from DEL for $350,000 funded by participating creditors who invest in that company. These participating creditors subordinate their debts/waive their claims against DEL. The suspended liquidation of DEL will terminate. Those participating in NewCo are defined in the executed deed to “include” 15 named investors plus Jones/Williams (the draft had included all 16).15
[50] The DOCA in its terms does not discharge any claims against Mr Jones or his interests. However, it is implicit that any such claims will not be pursued by DEL. The DOCA does place a moratorium on claims against DEL itself and related to its property.
[51] Lookman Trustees raise a number of issues with the DOCA that I will address in considering their application to terminate the DOCA under s 239ADD.
Dynamics
[52] Before turning to the specific applications, it is useful to step back to look at the dynamics at play here.
15 They are all persons who were parties to share purchase agreements and convertible loans.
[53] Lookman Trustees have been embroiled in a long history of litigation against DEL and Jones/Matthews. They are the largest creditor of the company. They have lost all goodwill in or trust of Mr Jones and consider the intellectual property position was misrepresented to them. The prospects of Lookman Trustees wishing to have continuing commercial dealings with Mr Jones in a NewCo is practically nil. They want Mr Jones to be held to account for what they consider to be a range of breaches of duty to DEL. They are not motivated solely by commercial outcomes.
[54] As the Administrator recorded, the benefit for those not investing in NewCo is that the service contracts continue, and the funds that become available are shared by a smaller pool of creditors due to subordination of the debts of the other creditors. There is also the $350,000 purchase price being paid to NewCo for assets if anything remains after administrator and legal fees.
[55] DEL’s assets have little value without Mr Jones’ cooperation in servicing those contracts and ROL continuing to allow DEL to use its intellectual property. Mr Jones advised that he had been funding the costs of DEL servicing its contracts during liquidation to preserve their value. As Lookman Trustees say, the DOCA means that Mr Jones avoids the scrutiny of his past conduct and the prospect of associated litigation if that proceeded. While that is certainly a significant benefit to Jones/Matthews, the DOCA enables the service contracts to continue and hence its present business to wind down. The restructure is also an avenue for those creditors who wish to participate to pursue the opportunity presented by the new aged care monitoring system product, which requires further investment to bring to market. Lookman Trustees’ view as expressed in the Administrator’s report is that at least
$5 million further investment is required.
Lookman Trustees’ application under s 239ACX
[56] Against the above background, I first consider Lookman Trustees’ application under s 239ACX. This permits the Court to rule on the validity of a DOCA if there is doubt, on a specific ground, whether the deed was entered into in accordance with, or complies with, pt 15A.
[57] On application, the Court, by s 239ACX(3)(a), “may declare the deed void or not void”.16 If the deed is declared void for contravention of a provision of pt 15A, the Court then “may validate the deed”, or any part of it, provided the Court is satisfied that the provision was substantially complied with, and no injustice will result for anyone bound by the deed if the contravention is disregarded.
[58] As Katz J observed in Cargill International SA v Solid Energy New Zealand Ltd, case law on the Australian equivalent to s 239ACX indicates that the provision is typically invoked with respect to procedural irregularities and is used less frequently than the equivalent provision to s 239ADD (termination of a DOCA that is oppressive, unfairly prejudicial or unfairly discriminatory).17 This reflects that pt 15A does not prescribe extensive process or content requirements for DOCA, so there is relatively little scope for breaches of mandatory requirements to occur.18
[59]Lookman Trustees rely on the following grounds for invoking s 239ACX:
(a)The Administrator wrongly admitted for voting the six creditor claims relating to payments made under the share purchase agreements and three converted convertible loan agreements.
(b)The Administrator wrongly accepted an interest component on the value of shareholder and convertible loan claims for the purposes of voting.
(c)The Administrator wrongly admitted for voting a creditor claim from Mollywop Investments Ltd Partnership (Mollywop) when it had been removed from the Limited Partnerships Register on 15 September 2021.
(d)That there were voting arrangements for the DOCA that were not disclosed by Mr Williams or by Mr Jones as required by s 239AX of the Act.
16 That is, the Court declares one way or the other.
17 Cargill, above n 2, at [28].
18 At [28].
[60] All but the last of these are issues with the admission or estimation of creditor claims for voting purposes. The position under the various investor agreements as to whether such persons are creditors and for what amount is complex. I accept that there is jurisdiction under s 239ACX on the basis that the above matters, together with the alleged voting arrangement, are sufficiently substantive to give rise to respectively “a doubt, on a specific ground” whether the DOCA was entered into in accordance with Part 15A.
[61] If creditors were wrongly admitted for voting, the DOCA resolution would not have passed. In respect to the inclusion of interest, the vote would not have passed on the principal figures that the Administrator adopted, but he says the vote would have passed if those figures were updated and corrected as they have since been, in light of new information.
The statutory context for creditor claims for voting purposes within pt 15A
[62] A person must be a “creditor” to vote at meetings held under pt 15A and to have standing to apply to Court. The Administrator admits or rejects creditor claims and estimates them for the purposes of voting. If a person who is not a creditor was permitted to vote then this would not “be in accordance with” pt 15A.19
[63] For the purposes of pt 15A “creditor” is defined by s 239C as including: “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.” Section 303 permits a “debt or liability, present or future, certain or contingent, whether it is an ascertained debt or a liability for damages” to be admissible as a claim against a company in liquidation.20 There is otherwise no incorporation (which would require necessary modifications) of the other provisions of pt 16 of the Act relating to admissible claims
19 Compare Polperro Corp Ltd v International Marine Services Ltd HC Auckland CIV-2006-404- 2390, 16 July 2007 where, based on evidence before him, Associate Judge Doogue determined that a party voting on a compromise was not a “creditor”. This was held to be a material irregularity in obtaining approval of the compromise and meant that the applicant creditor was not bound by the compromise.
20 See the definition of “creditor” in Companies Act, s 239C.
in liquidations.21 Possibly, some limited implication is necessary as axiomatic to s 303.22
[64] Section 239AK is the only provision that addresses the conduct of creditor meetings under pt 15A. It establishes the voting threshold required at meetings23 and provides that the administrator or his nominee is to chair them.24 Section 239AK also addresses estimation of the value of a creditor’s claim for the purposes of voting when a claim is uncertain:
(4)For the purposes of voting at a creditors’ meeting, the administrator may estimate the amount of a creditor’s claim that is for any reason uncertain.
(5)On the application of the administrator, or of a creditor who is aggrieved by an estimate made by the administrator, the court must determine the amount of the claim as it sees fit.
[65] Accordingly, the scheme is that an administrator may choose to make an estimate or instead may apply to Court. There is no obligation to take one course or another. The purpose of estimation in s 239AK is for voting, not a substantive decision on the value of the claim for the purposes of distribution. Where the administrator makes an estimate, they have done what they are required to do. In that sense, there is compliance with pt 15A. The administrator’s estimation of uncertain claims can be expected to be a robust and practical process given the short timeframes involved. If the administrator makes an estimate, any creditor aggrieved can challenge that outcome. This is not limited to the creditor whose claim is estimated.25
[66] There are Australian regulations applicable to voting at creditor meetings in both liquidation and administration.26 In New Zealand, similar regulations govern voting but only in creditor meetings in liquidation.27 These provide for appeals on the admission or rejection of a claim for voting purposes and also require a just sum to have been estimated for a creditor with a contingent or uncertain claim to vote. The
21 This can be contrasted with the incorporation by reference into pt 15A of certain of the sch 5 provisions relating to conduct of creditor meetings (s 239AK(1)).
22 Compare Selim v McGrath [2003] NSWSC 927, (2003) 47 ACSR 537 at [79].
23 Companies Act, s 239AK(2).
24 Section 239AK(3).
25 Re Taylor (a bankrupt) ex parte Dalgety and Co, Ltd [1934] NZLR 117.
26 Insolvency Practice Rules (Corporations) 2016 (Cth), div 75, subdiv C.
27 Companies Act 1993 Liquidation Regulations 1994, regs 19–22.
regulations include provision, where the administrator is in doubt as to the amount of the debt, to mark the claim as objected to, allowing the person to vote for the full amount claimed.28 As yet, there are no New Zealand equivalent regulations for administration under pt 15A.29
[67] Other than the right to apply to challenge an estimate as a person aggrieved, the only potential mechanisms for a creditor challenging the validity of the result of a vote is currently through an application to the Court under one of the more general mechanisms in pt 15A.
[68] In liquidations, under s 284 of the Act, a creditor may apply with leave to confirm, modify or reverse a liquidator’s decision.30 Part 16 contains a suite of provisions regarding creditors’ claims in liquidations. This includes s 307, which is a provision addressing estimation of claims. Section 239AK is modelled on this but its terms relate only to voting. Part 16 also includes s 311 (relied upon by Lookman Trustees on the issue of estimation of interest) which addresses interest on claims in liquidations. There is no equivalent provision in pt 15A.
Voting status of parties to shareholder agreements and convertible loans
Lookman Trustees’ position
[69] Lookman Trustees say that the Administrator wrongly admitted votes from six share purchaser claimants and three convertible loan holders whose loans have been converted to shares.
[70] Lookman Trustees say that these persons have “received their shares.” They say that the Administrator could (and should) have entered their names on the share register, exercising his statutory powers. These parties would then have been subordinated to other creditors, an outcome they must have agreed to willingly, given they agreed to be shareholders.
28 Regulation 20.
29 Promulgation of regulations concerning admission or rejection of claims for voting purposes in voluntary administration appears to be contemplated.
30 Companies Act, s 284(1)(b).
[71] Lookman Trustees acknowledge that the statutory requirements for issuing shares needed to be met, absent which the investor agreements are illegal contracts. They say there is no illegality because the share issues were made with the written agreement or concurrence by Mr Jones and Ms Williams. Lookman Trustees say that if the Administrator considered the contracts illegal, he ought to have applied for directions as to the relief the investors were entitled to. Instead, he accepted their votes as creditors.
Administrator’s position
[72] For the purposes of voting, the Administrator took the view that the share purchase agreements are illegal contracts in that none of the means through which shares can validly be issued under the Act were met and/or (in the case of the convertible loan agreements) the loans had not been converted to shares. The effect of illegality is said to be that there is a creditor claim for the amount paid or advanced for the shares. It is evident that the Administrator sought and obtained legal advice in coming to this position. He maintains that view.
[73] Alternatively, the Administrator says that even if any or all of the agreements are valid, they were never completed. New shares are only issued by the share register being updated by the company. This never occurred.31 Hence, he says the share purchase agreement claimants have cancelled their agreements by filing a claim as creditors in the liquidation and administration. They have a claim for return of their money back.
[74] The Administrator considers that none of the convertible loans have been converted to shares. He says that if he is incorrect that these agreements are illegal, then the claimants have their contractual rights to repayment under them.
Jones/Matthews’ evidence
[75] Mr Jones deposes that only he and Ms Matthews are shareholders. He says none of the share purchasers or convertible loan holders were registered as
31 Jones/Williams’ solicitors confirmed to the Administrator that the names of the various investors had not been entered on the Companies Register.
shareholders at the date of the watershed meeting, and that to the best of his knowledge none have claimed to be shareholders. He says that none of the convertible loans had been converted when liquidators were appointed.
[76] Following the hearing, Mr Jones provided an affidavit with his best recollection of the investor agreement documentation he and Ms Matthews signed and attached various documentation. I have relied upon this to assess the status of the agreements.
[77] The Administrator did not have the benefit of the signed documentation Mr Jones provided. I have come to a different conclusion than the Administrator on the issue of illegality of some of the agreements, in part because of that further documentation.
[78] All creditors were directed to be served around a week before the hearing but were unrepresented in the proceeding. There may well be further documentation that would inform the status of the investor claimants. My analysis of this and the consequences that then flow is constrained by the information before me. I express the views below for the purpose of the assessment of validity of the DOCA and estimate of claims.
Have any of the investor claimants “received their shares” — who are shareholders?
[79] Putting to one side whether the agreements are illegal, I consider first whether DEL has issued any further shares to any of the counterparties of the share purchase and convertible loan agreements. The answer is “no”.
[80] A company is obliged to maintain a share register.32 It is prima facie evidence of title.33 Section 96 of the Act defines a shareholder as the person whose name is registered as the holder of shares on the company’s share register.
32 Companies Act, s 87.
33 Section 89. The company is entitled to treat a registered holder of shares as the only person entitled to exercise rights and powers attaching to the shares.
[81] In some contexts, a “shareholder” may be given a broader meaning under the Act to mean a person entitled to be registered as a shareholder. The Court’s ability to rectify the register is premised on the register not always being determinative.34 For example, a “shareholder” has standing to apply under s 174 of the Act for relief as a prejudiced shareholder.35 “Shareholder” for the purpose of s 174 has been held to include someone who is entitled to be registered as a shareholder but where a company has failed to maintain its share register.36
[82] However, here, my enquiry is into whether the various agreements were yet completed by the issue of shares. By s 51 of the Act a share is issued when the name of the holder is entered on the company’s share register. None of the investor agreement counterparties are entered on the DEL share register. Their agreements remain executory. These claimants do not assert status as shareholders under the Act or for any purpose. Nor do they seek rectification of the register.
[83] Lookman Trustees rely on Singh v Patel to contend that inclusion on the company’s share register is not determinative of whether shares are issued.37 That case does not assist. There, the plaintiff failed in his contention that the defendant had converted his shares by changing shareholder information on the Companies Office Register without his authority. The Court held that this act was not inconsistent with ownership. Only registration of the transfer on the company’s own register would have that effect, and this had not occurred. I accept the Administrator’s submission that Singh supports instead the significance of the register. As well, it is a case about transfer, not issue, of shares.
[84] Accordingly, none of the investors are shareholders. Mr Jones and Ms Matthews remain the only shareholders in DEL.
34 Modern Built Investments Ltd v O’Brien [2021] NZCA 405 at [109]–[111], citing Haddow Nominees Ltd v Rarawa Farm Ltd [1981] 2 NZLR 16 (CA) at 25–26 (which related to provisions of the Companies Act 1955). See also Vey Group Ltd v Vance [2020] NZCA 232, [2021] 2 NZLR 541.
35 This provides that a “shareholder or former shareholder of a company, or any other entitled person” can apply.
36 Modern Built Investments Ltd v O’Brien, above n 34.
37 Singh v Patel [2021] NZCA 242, [2021] NZCCLR 14.
What was required for the investor agreements to be valid contracts?
[85] DEL’s only director, Mr Jones, did not meet the statutory requirements for the issue of any further shares in DEL.38 By s 40 of the Act the share purchase and convertible loan agreements were illegal contracts39 and invalid and of no effect unless by operation of s 107(2). Section 107(2) provides that shares may be issued otherwise than in accordance with the requirements for issuing shares if “all entitled persons have agreed or concur.” As relevant, shareholders are “entitled persons.”40
[86] The use of both “agreed” or “concur” suggests these two concepts cover somewhat different ground. Whereas “agreement” connotes active participation in coming to an accord, “concur” suggests approval of someone else’s statement or decision.41 Either way, the agreement or concurrence of the shareholder must be in writing.42 The section does not say “signed” in writing, but I have assumed that this is required.
[87] Mr Jones’ execution of any document in his capacity as a director on behalf of DEL does not constitute his agreement or concurrence. He is doing so as agent for the company. However, in a number of instances I will identify shortly, Mr Jones and Ms Matthews signed the agreements as guarantors of the obligations of DEL. They expressly agreed to do all things necessary to cause DEL to issue the shares when it is required to do so.
[88] The Administrator submits that in such cases Mr Jones and Ms Matthews are signing in a different “capacity” to their capacity as shareholder and hence cannot be said to agree or concur within s 107. I disagree. The Administrator relies on Walker v Castlereagh Properties Ltd.43 There, the agreement to issue shares was signed by a director of a subsidiary on behalf of that company. The director was also a director of
38 By the Companies Act ss 47 and 49 the Board was required to set the value of the share/convertible product and sign and deliver a certificate to the Companies Office stating various matters within a 10-working day timeframe. This did not happen.
39 Under the Contract and Commercial Law Act 2017 [CCLA], pt 2, sub-pt 5.
40 Companies Act, s 2.
41 Oxford English Dictionary (online ed, Oxford University Press), definition of “agree” and “concur”.
42 Companies Act, s 107(4). By s 107(5)(a) this can be an agreement to, or concurrence in, the particular exercise of the power to issues shares.
43 Walker v Castlereagh Properties Ltd [2014] NZHC 1638.
its holding company. Mander J rejected that through that agency the holding company had agreed or concurred in writing to the issue of shares. The director had not agreed to the share issue in her capacity as agent for the holding company. The decision was upheld on appeal in Castlereagh Properties Ltd v Walker, where the Court of Appeal regarded the appellant’s argument as submitting for a “‘near enough is good enough approach” to s 107(2) that was not supported by the legislative scheme.44
[89] That is not the current facts, where Mr Jones has signed as agent for the company, and Mr Jones and Ms Matthews have separately signed. When acting as individuals on their own behalf Mr Jones and Ms Matthews have only one “capacity”. Sometimes, it might be said that a shareholder is not signing a document in respect to their interest as a shareholder. But here, Mr Jones and Ms Matthews, the only two shareholders, agree in writing (by the guarantee) to ensure that the company performs the very obligation to issue shares. That must surely be sufficient for s 107(2). The contrary conclusion would be artificial.
[90] Similarly, in some instances, Mr Jones and Ms Matthews signed a form of shareholder agreement which was attached to the share purchase agreements at the time of execution. In doing so they have agreed, or at the least, concurred in, the issue of shares to which the agreement relates.
Effect of illegality
[91] By pt 2 sub-pt 5 of the CCLA an illegal contract is invalid and of no effect. No party is entitled to any property under a disposition (which includes a payment)45 made under those agreements.46 That is subject to the right of the parties to the contract to make a claim to the court for relief under the CCLA.47 The court may grant any relief it thinks just including, for example, validation, compensation, or restitution.48 Relief may be granted in the course of any proceeding or on an application made for that purpose.
44 Castlereagh Properties Ltd v Walker [2015] NZCA 481, (2015) 11 NZCLC 98-036 at [34].
45 CCLA, s 9.
46 Section 73.
47 Section 75.
48 Section 82.
[92] I have not identified any New Zealand authority on creditors’ claims in liquidation or administration specific to a claim under an illegal contract. None was cited to me. A claim for relief from the effects of an illegal contract by way of restitution sits within the scheme of the legislative codification of relief for other contractual consequences including for cancellation, contractual mistakes, and frustration. For example, a claim for discretionary relief upon cancellation of a contract sits in a similar space, yet I am not aware of authority suggesting that such claims cannot be proved or estimated in insolvency.
[93] Such a claim is subject to the exercise of the Court’s discretion but the claimant is a “creditor.” The claim is a form of “contingent liability” for which an expansive approach is appropriate.49 Nor does it make the estimation of the proof a matter that cannot be estimated for voting purposes due to being hypothetical or speculative, or to be assessed relative to litigation risk in the voting, as Lookman Trustees contended. The value of that claim is uncertain for the purposes of voting and is subject to estimation to which s 239AK applies.
[94] The investor parties do not seek validation. They have lodged a claim for return of their money. Subject to the issue of whether any interest should have been added, in my view the Administrator was right to estimate claims where the contract is illegal as having the value of the amount of the disposition (investment) made.
Status of valid share purchase agreements
[95] I concluded earlier that no agreements have been completed by the issue of shares. The share purchase counterparties claimed in the liquidation as creditors. In doing so they were claiming their money back. Their shares had not been issued to them in accordance with the contractual terms of their agreements.
49 Bradbury v Commissioner of Inland Revenue [2015] NZSC 80, [2015] 1 NZLR 739; Re Nortel GmbH [2013] UKSC 52, [2014] AC 209 at [93] per Lord Neuberger and [136] per Lord Sumption. Compare BE Australia WD Pty Ltd (subject to a deed of company arrangement) v Sutton [2011] NSWCA 414, (2011) 285 ALR 532; and see the obiter comments in H Investments Ltd (in liq) v Official Assignee [2018] NZCA 76, [2019] NZCCLR 11 at [95] made without reference to the position after Bradbury.
[96] Lookman Trustees contend that the Administrator should have completed the share purchase agreements by registering the investors as shareholders. I disagree. He considered them all to be illegal contracts. For any that were not illegal (discussed below), the counterparty had demonstrated by claiming in the liquidation that they did not want to proceed with the contract. In those circumstances, the counterparties had cancelled their agreements by lodging proofs of debt. Therefore, the creditor claim was still correctly assessed as for the return of the investment.
[97] The Lookman Trustee parties also say that even if the agreements were void for lack of compliance with s 40, the shareholder claimants “agreed willingly” to be subordinated behind DEL’s creditors, “for that is the nature of a shareholding”. Again, I disagree. If the shareholder agreements were illegal contracts or had not been completed, the status of claims by the parties to be creditors turns on the legal characterisation of their claim, not what their previous readiness to become shareholders might signify. 50
Application of the above analysis to the shareholder and convertible loan agreements
[98]I turn to the specific agreements.
[99] Over the period between May 2019 and 30 July 2021, DEL entered into seven convertible loan agreements all in substantially the same form. This included an agreement with the Tanswell-Smith Family Trust (who voted against the DOCA). In each of these cases, Ms Matthews and Mr Jones signed as guarantors.51 All “entitled persons” have agreed or concurred within s 107(2). These are valid agreements. The counterparties can claim under the contract.
[100] Another two counterparties entered into a series of convertible loans in 2019/2020 using a different form headed “Kiwi Keep Investment Simple Security” or “KISS”.52 These do not include any guarantee or shareholder agreement
50 See, for example Kiwimilk Ltd v Kiwimilk Distribution Ltd [2015] NZHC 2604, [2016] NZCCLR 8 at [51].
51 A number of these do not appear to be witnessed but that is not critical either for the validity of the guarantee or the question of agreement of concurrence: Pioneer Insurance Co Ltd v White Heron Motor Lodge Ltd (2008) 10 NZCLC 264,407 (HC) at [52].
52 Camden entered into two “KISS” agreements while Gaylard entered into four at differing times.
demonstrating agreement or concurrence by Mr Jones and Ms Matthews. Mr Jones’ supplementary affidavit can be read as indicating that he and Ms Matthews signed these agreements. That is not apparent based on the copies of the agreements provided. Accordingly, on the basis of the information before me, they are illegal contracts. For reasons I outlined earlier, the value of their claim in the liquidation was correctly assessed as for the amount invested (subject to any interest issue).
[101] There are then six share sale agreements signed between 2 March 2020 and August 2022. I have sighted five of these, all of which are in substantially the same form. Obtusely, these name Mr Jones and Ms Matthews as guarantors in the definition of parties but there is no guarantee nor provision for signing as guarantors.
[102] They each annexed a form of shareholder agreement. Mr Jones’ evidence is that in most instances (which he identified), when he and Ms Matthews signed the share purchase agreement, they also put their signature to the attached shareholder agreement. In my view, where that occurred, this constitutes agreement by Mr Jones and Ms Matthews to the issue of shares to which the agreement relates.
[103] It is likely some share purchase agreements complied with s 107(2) and some did not. So, share purchase agreements were either illegal contracts or had never been completed. However, for those that are valid, given the relevant counterparty cancelled the contract by lodging a proof of debt, in both categories of case I consider the Administrator was correct to characterise these as creditors for the value of the amount paid.
[104] Finally, subsequent to the shareholder agreements, the Mollywop convertible loan was entered into only in March 2023. There is no assertion that the loan was converted to shares. I address this agreement below, as it raises distinct issues.
Did any of the convertible loan agreements convert?
[105] There remains a factual issue raised by Lookman Trustees that three of the convertible loan holders (counterparties Mayger, Taylor, Marshall and Turner) had converted their loan to DEL into shares. They point to a form of shareholders’ agreement which was attached to the Tanswell-Smith Family Trust convertible loan
agreement that records these parties as shareholders for the number of shares associated with their convertible loan agreements. The document is signed only by the Tanswell-Smith Family Trust.
[106] At face value this suggests that the parties named had earlier exercised their right to convert to shares. But similarly, all of the various share purchase agreements and convertible loans referred to all the prior investments made as if all shares to that point had been issued.53 Again taken at face value, that would imply that all prior noteholders had given notice converting their loans to shares. Yet it is unlikely that this occurred, particularly where some agreements were entered into at around the same time. It is not supported by any other evidence and it was not Lookman Trustees’ position that all loans had been converted. Accordingly, I do not draw a conclusion from listing of prior convertible loan counterparties as shareholders in the Tanswell- Smith draft shareholder agreement that those counterparties had converted their loans to shares.
[107] In fact, the Mayger’s proof of debt seeks interest from December 2021 based on “notice under convertible loan agreement”. That is contrary to the proposition that the Maygers had converted the loans to shares but consistent with them having given notice that the loan was required to be repaid. I also have Mr Jones’ evidence that none of the loans were converted. I proceed on the basis that the convertible loan holders had not given notice to convert their loans to shares.54 The valid convertible loans remained unconverted.
[180] It is also relevant that the DOCA does not discharge any potential claims against Mr Jones, and as is required by pt 15A, the DOCA provides that 10 per cent of creditors can require a meeting to vote on DEL being placed in liquidation.87 Therefore while the DOCA does mean the date for looking back at liability for antecedent potentially voidable transactions is impacted if DEL is ultimately placed in liquidation again, the litigation possibility is not foreclosed.
[181]I am satisfied that the deed can be given effect without injustice.
Section 239ADD(2)(d) – is the DOCA oppressive or unfairly prejudicial or unfairly discriminative to one or more of the creditors?
[182]The threshold ground in s 239ADD(2)(d) is that:
(d)the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be done or made under the deed would be,—
(i)oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more of the creditors or
(ii)contrary to the interests of the company as a whole;
…
86 Compare Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd, above n 69, at [286]-[291] in the context of exercise of the discretion where one of the threshold grounds has been met.
87 DOCA, cl 14; Companies Act, s 239ADF.
[183] The applicant bears the onus of satisfying the Court that the deed and the relevant provisions are oppressive, unfairly prejudicial or unfairly discriminatory.88
[184] In determining this issue, the Court does not make a judgement founded upon “mere possibility or speculation” on the outcomes, but on the characteristics of the deed as they are seen to be at the date of the hearing. The Court should be satisfied that its adverse effect is, at least, highly likely.89
[185] Whether a DOCA is operating or is highly likely to operate in an oppressive or unfairly prejudicial manner requires examination of the whole effect of the deed, bearing in mind the scheme of pt 15A, and the interests of other creditors, the company and the public generally.90 The test focusses on what is “unfairly” prejudicial or discriminatory, which underscores that some differentiation, discrimination and prejudice may be acceptable. A claimant must also demonstrate some form of unfairness in the operation of the deed.91
[186] To determine whether the DOCA is oppressive, unfairly prejudicial or unfairly discriminatory, the approach is to compare the result under the DOCA to the result that may have been obtained in liquidation.92 Where there is no commercial common interest between classes of creditors, the administrator should take steps to ensure that the DOCA is no less beneficial to all creditors than a liquidation.93
[187] Generally, the substantive merits of a compromise or DOCA are an issue for the creditors and the Court’s role does not involve substituting its views of the compromise for that of the required majority of creditors.94
88 Cargill, above n 2, at [94], citing Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (No 2) [2011] FCA 178, (2011) 82 ASCR 300 at [179].
89 At [94], citing the University of Sydney v Australian Photonics Pty Ltd [2005] NSWSC 412, (2005) 53 ACSR 579 at [37].
90 At [95], citing Sydney Land Corp Pty Ltd v Kalon Pty Ltd (1998) 26 ACSR 427 (NSWSC) at 430.
91 At [114], citing Mourant & Co Trustees Ltd v Sixty UK Ltd (in admin) [2010] EWHC 1890 (Ch), [2010] BCC 882 at [67].
92 At [96].
93 At [114], citing Lam Soon Australia Pty Ltd (admin apptd) v Molit (No 55) Pty Ltd (1996) 22 ACSR 169 (FCA) where a lessor received less than full repayment but more than they would receive in liquidation while other creditors received full repayment.
94 At [97], citing Bank of Tokyo-Mitsubishi UFJ Ltd v Solid Energy New Zealand Ltd [2013] NZHC 3458 at [182].
[188] The key substantive issue raised by Lookman Trustees is whether the DOCA is unfair to the creditors who do not participate as investors in NewCo relative to those who do.
[189] Lookman Trustees say that DEL’s assets are being stripped for the benefit of the participating creditors who invest in NewCo, including Mr Jones, who escapes scrutiny for his past conduct. They say the non-participating creditors will receive a lesser return than liquidation on the basis that they would see more return from succeeding in pursuing claims against Mr Jones.
[190] Lookman Trustees relied upon Grant v CP Asset Management Ltd.95 In Grant the Court of Appeal held that the deed was unfairly discriminatory because it had the effect of altering the statutory priorities when the counterfactual for the company was that the company would go into liquidation and those priorities would be preserved.
[191] The law outlined above confirms that discriminatory treatment is not sufficient. The discriminatory treatment must be unfair. In most of these cases the differentiation between creditors was made to secure the continuation of the company’s business by, for example, the payment of trading creditors. Here, the intention of the DOCA is to enable DEL to preserve its underlying existing business where its service contracts deliver up value.
[192] I am not satisfied that the effect of the DOCA is unfairly discriminatory to those not investing in NewCo. This is not a situation, like in Grant where the applicant preferred creditor was going to participate in the deed distributions on a pari passu basis. To the contrary, the claims of those participating in NewCo (including Jones/Matthews) will be subordinated so any distributions the remaining creditors receive from DEL will be increased by virtue of a smaller pool of creditors.
[193] It is true that the DOCA means that some creditors will pursue the opportunity they see presented by the aged care monitoring product. This was technically an available avenue for all creditors, although I accept it was not practically likely to be pursued by Lookman Trustees, or creditors such as the IRD.
95 Grant v CP Asset Management Ltd [2013] NZCA 452, [2014] NZCCLR 5 at [43].
[194] However, the key barrier to the claim under this head is the relative position under the DOCA compared with liquidation.
[195] As I said earlier, litigation would be a lengthy and expensive process. Any recoveries would depend on Mr Jones’ ability to meet a judgment debt. It was comfortably open to the Administrator and the voting creditors to determine that the real value of that prospect was highly speculative and that the relative uncertainties of the commercial return under the DOCA were preferable.
[196] In my view the litigation scenario is more speculative than the possible DOCA outcome. The DOCA enables some value to be captured from the company’s existing contracts which it cannot otherwise do without certainty as to the use of ROL’s intellectual property. In addition, there is the payment of $350,000 which would otherwise be unavailable. The investors in NewCo subordinate their debts. In return they receive the possible upside of the investment in NewCo. Viewed relative to the liquidation scenario, the DOCA is not unfairly prejudicial or discriminatory to those that do not invest in NewCo.
[197] For these reasons I do not accept a basis under this head of s 239ADD(2)(d) to set aside the DOCA.
Section 239ADD(2)(e) –administrator bias and misconduct?
[198] Lookman Trustees challenged the independence of the Administrator and also asserted misconduct arising from the matters I have addressed substantively above. A source for bias in favour of Mr Jones is said to be that Mr Williams had been administrator of YellowWood. The allegation is that he has conducted his role with a view to achieving a resolution in favour of the DOCA.
[199] Lookman Trustees say that the Administrator made efforts to inflate the claims to enable the resolution to pass, failed to disclose the Mollywop position to the meeting, and did not properly investigate Mr Jones’ conduct or the status of the investor agreements. The asserted deficiencies in the information provided by the Administrator are also included as demonstrating the Administrator’s agenda.
[200] It is not suggested Mr Williams is disqualified. There was no application for his removal. Mr Williams was the appropriate contradictor in applications to invalidate or terminate the DOCA.96
[201] In the context of the present applications, the allegations of misconduct only have relevance if they manifested in a reason to terminate or invalidate the deed. I have dealt with the substantive issues. The Administrator appears to have taken legal advice throughout. I disagreed with some of his conclusions on information now available to me. I decline to make conclusions on allegations that in effect assert bad faith or improper motive by the Administrator when these allegations are strongly denied by him and in the absence of cross-examination.
Overall discretion under s 239ADD
[202] For the reasons above, even had one of the s 239ADD grounds been established, I would not have exercised my discretion to terminate the DOCA.
Jones/Matthews’ application under s 239AM
[203] I have concluded that the DOCA was not entered into other than in accordance with pt 15A and is not void. Given that conclusion, Jones/Matthews’ application that their votes be taken into account is moot.
[204] I do not engage in assessing whether I would have granted Jones/Matthews’ application under s 239AM. This would only become relevant if, contrary to my decision, the DOCA should be declared void under s 239ACX and if there was a follow-on conclusion that the DOCA should not be validated. But in that event, Jones/Matthews’ application under s 239AM would be considered on the basis of whatever different assessments led to different conclusions than mine under s 239ACX. It is illogical and of no utility for me to embark on that enquiry.
96 Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd, above n 75 at [69]-[70].
Summary
[205]In summary:
(a)I declare that the DOCA is not void under s 239ACX.
(b)I dismiss Lookman Trustees’ application to terminate the DOCA under s 239ADD.
(c)In light of these conclusions, Jones/Matthews’ application under s 239AM that their votes are counted on the resolution is moot.
[206] If the parties cannot agree costs, I will receive submissions on costs as follows:
(a)submissions for the Administrator and Jones/Matthews within 14 days; and
(b)submissions by Lookman Trustees within a further 14 days.
Anderson J
1
17
0