Jones v Williams

[2023] NZHC 2344

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2023-404-1826

[2023] NZHC 2344

UNDER

part 19 of the High Court Rules and

ss 239AM and 239ADO of the Companies Act 1993

BETWEEN

RICHARD WARWICK JONES and KAREN FRANCES MATTHEWS

Applicants

AND

BRYAN EDWARD WILLIAMS

Respondent

Hearing:

25 August 2023

Appearances:

T B Fitzgerald for Applicants J Marcetic for Respondent

K Cocks for the Liquidators
C Osborne for the Lookman Family Trust

Judgment:

25 August 2023

JUDGMENT OF ISAC J

[Voluntary administration orders under the Companies Act 1993]

Introduction

[1]    Design Electronics Ltd (DEL) was placed in liquidation on the application of one of its creditors on 8 June 2023. Following a creditors’ meeting and vote, the company was placed in voluntary administration under Part 15A of the Companies Act 1993 and Mr Bryan Williams, the respondent, was appointed its administrator. The administration has the effect of suspending the company’s liquidation and passes effective control of the company to the administrator.1

1      Companies Act 1993, ss 239U and 239AC.

JONES & ANOR v WILLIAMS [2023] NZHC 2344 [25 August 2023]

[2]    On 22 August 2023, Mr Williams delivered his administrator’s report. In that report, he stated his view that a proposed deed of company arrangement (DOCA) would likely result in a better outcome for DEL’s creditors compared to what they might expect in the company’s liquidation.

[3]    Mr Williams has now also called a watershed meeting, which is to be held on 29 August 2023.2 The purpose of the watershed meeting is to enable creditors to vote on a proposal that DEL enter into the DOCA.

[4]    While DEL’s liquidation is currently suspended by operation of s 239AC of the Companies Act, if DEL’s creditors do not resolve to enter into the DOCA, DEL’s liquidation will most likely resume at the end of the watershed meeting.3

[5]    The applicants are Mr Richard Jones and Ms Karen Matthews. They are DEL’s shareholders and Mr Jones is its director. They also claim to be substantial creditors of the company. The outcome of the vote on the resolution may turn on whether the applicants, as related parties of DEL, are entitled to have their votes counted. The administrator must disregard a related creditor’s vote on a resolution at a creditors’ meeting “unless the court orders otherwise”.4 However, a feature of the Companies Act’s voluntary administration provisions is that they appear to contemplate that related creditors may apply for such orders after the watershed meeting has taken place. In particular, s 239AM(2)–(2A) of the Companies Act provides:

(2)A related creditor may apply to the court for an order that its vote be taken into account.

(2A)     A related creditor that intends to apply for an order must,—

(a)before a vote is taken on the resolution, give notice in writing to the administrator that the creditor—

(i)is a related creditor; and

(ii)intends to apply to the court for an order that its vote be taken into account; and

(b)within 10 working days of the creditors’ meeting, make an application to the court.

2      Pursuant to s 239AT.

3      Section 239E(1)(a)–(c).

4      Section 239AM(1).

(emphasis added).

[6]    The difficulty that arises for the applicants in this case is that DEL’s liquidation might well resume automatically if the resolution fails and before their application to have their related creditor’s vote taken into account has been determined by the Court. That is due to the combination of two provisions. The first, s 239E(2), provides that the administration of a company may end in a range of instances, including:

(d) if the watershed meeting ends without a resolution that the company execute a deed of company arrangement, the administration ends at the end of that meeting…

[7]The second, s 239AMB(2), is in these terms:

Despite any application under section 239AM or 239AMA, the outcome of the vote on the resolution is valid and effective unless the court orders otherwise.

[8]    Accordingly, the applicants have filed an urgent without notice originating application for orders:

(a)That the voluntary administration not end by operation of s 239E(2)(d) of the Act if the watershed meeting ends without a resolution that DEL execute a DOCA until the later of:

(i)10 working days after the watershed meeting;

(ii)The determination of the application for orders that the applicants’ votes must be taken into account by the administrator;

(iii)Any other application made pursuant to s 239AM of the Act in respect of the watershed meeting;

(b)Alternatively, deeming the resolution in favour of the DOCA to have been passed validly if it would have been had the applicants’ votes been taken into account, pending a determination by the Court on their application under s 239AM of the Act;

(c)In the alternative, declaring that s 239AZ of the Act empowers a voluntary administrator to adjourn a watershed  meeting pursuant to   s 239AZ of the Act;

(d)That, if a resolution at the watershed meeting fails, but would have passed if the applicants’ votes had been taken into account, the applicants’ votes be taken into account by the respondent; and

(e)That leave be reserved for the applicant, the voluntary administrator, or any creditor of DEL to apply to vary these orders on 5 working days’ notice.

[9]    The application was referred to me as Duty Judge and I convened an urgent hearing at 2.15pm on 25 August 2023. The creditors have not been served with the application but it has been made available on a Pickwick basis to the liquidators, who were represented at the hearing. Ms Cocks on their behalf indicated they were content to abide. One creditor, the Lookman Family Trust, also appeared by counsel.

Consideration

[10]Given the urgency of the matter my reasons are of necessity brief.

[11]   First, I am satisfied that it is appropriate in the interests of justice to grant leave to commence the proceeding by way of originating application under r 19.5 of the High Court Rules 2016. Urgency combined with the application’s narrow focus support that conclusion.

[12]   Second, I also am satisfied that it is appropriate to make the order extending the voluntary administration until the expiry of 10 clear working days after the watershed meeting.

[13]The application is brought under s 239ADO. It provides:

239ADO Court’s general power

(1)The court may make any order that it thinks appropriate about how this Part is to operate in relation to a particular company.

(2)For example, the court may terminate the administration under subsection (1) if the court is satisfied that the administration should end—

(a)because the company is solvent; or

(b)because the provisions of this part are being abused; or

(c)for some other reason.

(3)The court’s order may be made subject to conditions.

(4)The court may make an order under this section on the application of—

(a)the company or a shareholder of the company; or

(b)a creditor of the company; or

[14]   Section 239ADO of the Act is modelled on s 447A of the Australian Corporations Act 2001 (Cth). That section similarly provides the Court with broad powers to make “such orders as it thinks appropriate about how this Part is to operate in relation to a particular company”.

[15]   While the leading Australian case on the Court’s role under the equivalent provision has taken a relatively wide view of the meaning of the Australian equivalent of s 239ADO,5 Mr Fitzgerald responsibly acknowledges that the power is not unlimited. In particular, the Court should only become involved to ensure that the objectives of pt 15A are achieved.6 It has therefore been suggested that some ‘nexus’ is required between the proposed orders and the operation of pt 15A.7

[16]   The objects of pt 15A are to provide for the business, property, and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or as much as possible of its business, to continue in existence, or, if that is not possible, results in a better return for the company’s creditors and shareholders than an immediate liquidation.8

5      Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270, (2000) 172 ALR 28.

6      Blacktown City Council v Macarthur Telecommunications Pty Ltd (admin apptd) [2003] NSWSC 883, (2003) 47 ACSR 391.

7      Re New Tel Ltd (in liq) [2004] FCA 1154, [2004] 210 ALR 270 at [7]–[8].

8      Companies Act 1993, s 239A.

[17]   Mr Williams’ report to creditors of 22 August 2023 contains his opinion that the DOCA provides a better outcome for them than the resumption of the liquidation:

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.

[18]   To these two potential benefits Mr Fitzgerald also pointed to a purchase price that would be payable to DEL if the DOCA is approved of $350,000.

[19]   Given Mr Williams’ opinion, I am satisfied that there is a nexus between the first order sought by the applicants and the purposes of Part 15A of the Companies Act. Further, as the applicants are essentially trying to preserve their position pending the determination of their application regarding the status of their votes in the watershed meeting, the current application is not dissimilar to an application for an interim injunction. In the circumstances of the present case, the same considerations may be viewed  as a helpful guide to the  exercise of the Court’s discretion under     s 239ADO, namely whether there is a serious issue to be tried, where the balance of convenience lies, and the overall justice of the case.

[20]   Having regard to that framework, I am also satisfied on the material available that it is appropriate to grant the first order sought. It will preserve the ability of not only the applicants but also other potentially affected creditors to apply to the Court for an order that their vote should be taken into account by the administrator. And the relevant balance of convenience also favours granting the order. If it is not made, there is a risk that an immediate liquidation could result in a worse outcome for creditors. There is a risk Mr Jones and Ms Matthews’ application to have their votes taken into account at the watershed meeting may also be rendered nugatory. The delay is likely to be relatively confined, and ultimately may be inconsequential if:

(a)the necessary 75 per cent voting threshold to approve the DOCA is reached without the applicants’ votes being taken into account; or

(b)the 75 per cent threshold cannot be reached even if they are.

[21]   For these reasons, I am persuaded that the application should be granted, but only in relation to the order sought at [1(a)] of the notice of originating application of 24 August 2023.

Conclusion and result

[22]   Leave to commence the proceeding by way of originating application is granted.

[23]   Subject to further order of the Court, I make an order under s 239ADO(1) of the Companies Act 1993 that the voluntary administration of Design Electronics Ltd (in liquidation and voluntary administration) not end by operation of s 239E(2)(d) of the Act if the watershed meeting scheduled for 29 August 2023 (including any adjournment of that meeting) ends without a resolution that the company execute a deed of company arrangement, until the later of:

(a)ten (10) clear working days after the watershed meeting;

(b)the determination of the application made by the applicants for the orders set out in paragraph 1(d) of the notice of originating application dated 24 August 2023; or

(c)any other application made pursuant to s 239AM of the Act in.

[24]   In all other respects the application is adjourned pending the outcome of the watershed meeting and any other applications to the Court.

[25]   I direct the administrator to serve the application on the creditors of the company, such service to be effected by email if the creditor’s email address is known.

[26]Leave to apply on 24 hours’ notice is reserved. Costs are also reserved.

Isac J

Solicitors:

Bell Gully, Auckland for the Applicants

Chapman Tripp, Auckland for the Respondent