IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2015-404-2355 [2016] NZHC 1817
BETWEEN CARGILL INTERNATIONAL S.A.
Applicant
AND SOLID ENERGY NEW ZEALAND LIMITED (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
First Respondent
SPRING CREEK MINING COMPANY (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
Second Respondent
Hearing: 9, 10, 11, 12, 13 May 2016
Counsel D J Chisholm QC and J P Nolen for applicant T C Weston QC, A E Ferguson and K E Morrison for first and second respondents R B Stewart QC, L A OʼGorman and A L Harlowe for third respondents D R Kalderimis and K Yesberg for fourth respondents
Judgment: 5 August 2016
JUDGMENT OF KATZ J
This judgment was delivered by me on 5 August 2016 at 4:30pm pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
Solicitors: Lowndes, Auckland Wilson Harle, Auckland Buddle Findlay, Auckland Chapman Tripp, Wellington Counsel: D J Chisholm QC, Auckland T C Weston QC, Auckland R B Stewart QC, Auckland
CARGILL INTERNATIONAL S.A. v SOLID ENERGY NEW ZEALAND LIMITED & ANOR [2016] NZHC 1817 [5 August 2016]
BRENDON JAMES GIBSON, and GRANT ROBERT GRAHAM
Third Respondents
ANZ BANK NEW ZEALAND LIMITED, BANK OF NEW ZEALAND, COMMONWEALTH BANK OF AUSTRALIA, WESTPAC NEW ZEALAND LIMITED, and DEUTSCHE BANK AG
Fourth Respondents
Table of Contents
Introduction ...... [1]
Background to the DOCA ...... [6]
Part 15A of the Companies Act 1993 ...... [13]
Cargill’s section 239ACX challenges - Does the DOCA contravene Part 15A?...... [27]
Section 239 ACX - The legal principles……………………………….………...[27]
Does the role of the Participants Committee contravene Part 15A?...... [29]
Does the DOCA contravene Part 15A by unlawfully restricting creditors’ statutory entitlement to vary the DOCA?...... [53]
Do the clauses in the DOCA compromising Solid Energy’s or creditors’ claims against third parties (or releasing the liability of third parties) contravene Part 15A? ...... [60]
Do the “non-challenge” clauses in the DOCA contravene Part 15A?...... [84]
Does the “no set off” clause contravene Part 15A?...... [89]
Cargill’s s 239ADD challenges – Is a provision in the DOCA oppressive, unfairly prejudicial to, or unfairly discriminatory against Cargill? ...... [92]
Section 239ADD – The legal principles……………………………………….....[92]
Has Cargill been prejudiced due to a lack of independence on the part of the deed administrators?...... [99]
Was Cargill unfairly classified as a Participant Creditor rather than as a Trade Creditor?...... [110]
Does the DOCA treat the Lenders preferentially, in a way that unfairly prejudices Cargill?...... [122]
Has Cargill been unfairly prejudiced by the limitation of liability clauses in the DOCA?...... [127]
Cargill’s solvent liquidation complaint………………………………………… [133]
Summary and conclusion ...... [137]
Result ...... [140]
Introduction
[1] Solid Energy New Zealand Limited (“SENZ”) is the largest coal mining company in New Zealand. It was formed in 1987 as a state owned enterprise. The second respondent, Spring Creek Mining Company, is a subsidiary of SENZ. I will refer to SENZ and Spring Creek Mining Company, collectively, as “Solid Energy”.
[2] On 13 August 2015 the Solid Energy Group was placed into voluntary administration.1 Brendon Gibson and Grant Graham of KordaMentha were appointed administrators and a draft deed of company arrangement (“DOCA”) under Part 15A of the Companies Act 1993 (“Act”) was circulated to creditors. The applicant, Cargill International SA (“Cargill”), held approximately six per cent of the Solid Energy Group’s total outstanding debt. Despite Cargill’s opposition to the DOCA, it was approved at the watershed meeting2 called by the administrators on 17 September 2015 by 94 per cent of creditors in value and 99 per cent in number. The DOCA was then executed by the various companies in the Solid Energy Group. Messrs Gibson and Graham were appointed deed administrators.
[3] Cargill was aggrieved at being classified as a Participant Creditor in the DOCA, rather than as a Trading Creditor. If it had been classified as a Trading Creditor it would have received full payment of its debt, rather than the 35 to 40 cents in the dollar that non-Trading Creditors (known as “Participant Creditors”) will receive. This remains a ground of complaint, although a relatively minor one. Cargill’s challenges to the DOCA are now significantly more wide ranging, as reflected in its 155 page written submissions.
1 Pursuant to s 239I of the Companies Act 1993. 2 The meeting of creditors called by the administrator to decide the future of the company and, in particular, whether the company and the deed administrator should execute a deed of company arrangement.
[4] Under Part 15A the Court has power to intervene where:3
(a) a deed of company arrangement is invalid for contravention of Part 15A (s 239ACX); or
(b) a deed of company arrangement is oppressive, unfairly prejudicial to, or unfairly discriminatory towards one or more creditors (s 239ADD).4
[5] Cargill challenges the DOCA on both of these grounds and seeks orders that the DOCA be declared void and unenforceable. Alternatively, it seeks orders that the DOCA be terminated or varied. I will consider Cargill’s various grounds of challenge in turn, after first summarising the relevant factual background and key elements of the statutory regime under Part 15A.
Background to the DOCA
[6] Cargill’s debt relates to its involvement in an unsuccessful joint venture with Solid Energy relating to the Spring Creek mine, which has now ceased operating. The parties entered into a settlement deed on 1 February 2012 that compromised various claims that Cargill had against Solid Energy in relation to the joint venture. The settlement deed modified certain obligations in respect of offtake agreements and other arrangements between the parties in respect of the mine. Pursuant to the settlement deed Spring Creek Mining Company agreed to pay Cargill USD 18 million on 1 December 2017. Payment could be accelerated by Cargill if an event occurred which affected SENZ’s creditworthiness.
[7] In early 2013 Solid Energy’s financial position started to deteriorate. This appears to have been largely driven by a decline in the forecast price of coal, coupled with a high New Zealand dollar, significant levels of borrowing to fund diversification activities, and an increase in the underlying fixed cost structure
3 I note that there have been only a relatively small number of cases decided under Part 15A in New Zealand, and only one significant challenge to a DOCA, which was ultimately decided on a procedural point relating to the use of a deed administrator’s casting vote. See Grant v Commissioner of Inland Revenue [2011] NZCA 330, [2012] 1 NZLR 235. 4 Section 239ADO also provides a general power to make appropriate orders about how Part 15A is to operate in relation to a particular company.
of the business. In February 2013 Solid Energy announced that it was in discussions with the Banks and Treasury on the debt and equity support it required for future operations. Various reports and reviews were prepared, including by PwC, KordaMentha (for the fourth respondent banks (“Lenders”)) and Deloitte (for Treasury). In October 2013, following a report by KordaMentha to the Crown and Lenders on various insolvency options, a creditors’ compromise was undertaken, pursuant to Part 14 of the Act, to enable Solid Energy to keep trading. Unfortunately, despite that creditors’ compromise, Solid Energy’s financial position continued to deteriorate during 2014.
[8] Following a fairly lengthy period of review and dialogue with its major creditors, the Solid Energy Group was placed into voluntary administration in August 2015. As I have noted above, the DOCA was approved by an overwhelming majority of creditors at the watershed meeting on 17 September 2015. The DOCA is highly complex. Total creditor debt of approximately $600 million is involved. The DOCA and the annexed Restructured Debt Deed (“RDD”) establish a framework for an orderly sale and realisation of Solid Energy’s assets.
[9] The Participant Creditors (who include both Cargill and the Lenders) had to compromise their debts in order for Solid Energy to be able to keep trading during the managed sell down period. The Solid Energy Group will continue in operation for up to two and a half years, under its own management, to enable an orderly sell down of assets, including the Group’s coal mines. Participant Creditors are anticipated to receive 35 to 40 cents in the dollar, whereas the DOCA provides for Trading Creditors to be paid in full. For all creditors, the projected return under the DOCA is significantly greater than the projected liquidation outcome of 15 to 20 cents in the dollar.
[10] Cargill does not dispute that it would receive a significantly worse return overall if the DOCA were invalidated and the Solid Energy Group was placed in liquidation. Cargill does not believe, however, that, if its challenge to the DOCA is successful and the DOCA is declared void or terminated, liquidation will automatically result. The Lenders, on the other hand, say that liquidation would be inevitable in such circumstances. It is common ground that, without the support of
the Lenders, Solid Energy would be insolvent. Nevertheless, Cargill’s view is that, if the DOCA is set aside, it will be able to negotiate a commercial resolution with the Lenders that will see it achieve a better return on its debt than it does under the current DOCA. At the risk of oversimplification, the essential aim of these proceedings, from Cargill’s perspective, is to improve its negotiating position with the Lenders, so that it can achieve an outcome whereby it is treated preferentially to them (and other major creditors), rather than sharing in any recoveries pari passu.
[11] If Cargill is wrong in its view that liquidation can be avoided if the DOCA is invalidated, then the consequences for Solid Energy, its creditors (including Cargill), and third parties (including post administration creditors and Solid Energy’s employees) will be serious. The evidence before me is that over $300 million in value would likely be lost to the creditors of the Solid Energy Group in a liquidation. Further, the Group’s 600 or so employees would lose their full redundancy entitlements, which are preserved in the DOCA,5 and also their jobs, assuming the liquidator ceased operating the Solid Energy business as a going concern. The Participant Creditors would likely receive about half the return they would have received under the DOCA. The Trading Creditors (who have now been paid in full) could face voidable preference claims.
[12] Cargill’s commercial motives are of limited relevance if, in fact, the DOCA contravenes Part 15A, or prejudices Cargill or discriminates against it. Cargill is, of course, entitled to bring proceedings in order to prove such matters, regardless of its wider commercial motives for doing so. The commercial context I have outlined is relevant in at least two respects, however. First, the bona fides of some of Cargill’s more abstract and highly “technical” claims need to be assessed against this broader context. Second, both Cargill’s commercial motivations and the potential impact on third parties of the Court making the orders sought are potentially relevant to issues of relief.
5 In a liquidation, employee redundancy entitlements are capped at $20,000.
Part 15A of the Companies Act 1993
[13] The DOCA was 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:6
(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.
[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. It commences with the appointment of an administrator.7 After taking control of the company, the administrator investigates the company’s affairs and forms an opinion as to whether it would be in its creditors’ interests for:8
(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 administrator then reports to creditors (through the mechanisms of a first creditors’ meeting and a watershed meeting) on the company’s business affairs and financial circumstances and outlines the options available to creditors.9 The administrator must give an opinion on each option and recommend which option is in the best interests of creditors. The time frames are tight. The first creditors’ meeting must be held within eight working days after the date on which the
6 Companies Act, s 239A. 7 Section 239D. 8 Section 239AE. 9 Part 15A, Subparts 7 and 8.
administration began.10 The watershed meeting, (the creditors’ meeting to decide the future of the company, including in particular whether a deed of company arrangement should be executed) must be convened within 20 working days after the commencement of the administration, unless that period is extended by the Court.11
[16] The ultimate outcome of a voluntary administration is determined by a majority of creditors (50 per cent by number and 75 per cent in value) voting at the watershed meeting.
[17] If the creditors resolve at the watershed meeting that the company execute a deed of company arrangement then a “deed administrator”, who may or may not be the same person as the “administrator”, is appointed to be the administrator of the deed of company arrangement.12 The deed administrator must then prepare a document that sets out the proposed terms of the deed of company arrangement.13 Voluntary administration ends either when a deed of company arrangement is executed by the company and a deed administrator, creditors resolve that the administration should end, or creditors appoint a liquidator by resolution passed at the watershed meeting.14
[18] 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 of company arrangement.15 A moratorium applies to anyone bound by the deed of company arrangement16 and the company is released from its debts to the extent provided for in the deed of company arrangement.17
[19] Part 15A fills a gap that previously existed in New Zealand’s corporate insolvency framework.18 It provides broader protection and greater flexibility to
10 Section 239AN(2). 11 Section 239AT. 12 Section 239B and Subpart 12 generally. 13 Sections 239ACN and 239ACO. 14 Section 239E. 15 Sections 239ACS and 239ACT. 16 Section 239ACU. 17 Section 239ACW. 18 The key elements of the legislative history were not in dispute and were helpfully set out in detail in the submissions of Mr Kalderimis, on behalf of the Lenders.
companies wishing to consider corporate rescue as an alternative to immediate liquidation.19 Voluntary administration is a different concept to liquidation under Part 16 of the Act, which is designed simply to realise and distribute a company’s assets.20 As Sir Roy Goode explains:21
The primary objective of administration is not to bury the company forthwith but to restore it to profitable trading where possible and, in the event that liquidation becomes unavoidable (as is usually the case), to deal with the business or assets in such a way as to produce better dividends for creditors than if the company had gone into winding up from the outset.
[20] In late 2005, when Part 15A was proposed, existing corporate rescue mechanisms had significant limitations. Neither Part 14 compromises (introduced as part of the 1993 Act) nor Part 15 schemes of arrangements (available under the Companies Act 1955) provide automatic moratoria on creditor enforcement action to allow a company time to negotiate with creditors.22 Informal non-statutory debt moratoria or work-outs are flexible, but have limited utility as they cannot bind dissentient creditors.
[21] Receivership can also operate as a form of corporate rescue, and is widely used in New Zealand. But it is triggered primarily for the benefit of secured creditors, and is not designed to preserve the overall value of a company for all stakeholders.23 The concept of voluntary administration is designed to deliver the benefits of modern receivership to all creditors and stakeholders.24
[22] Part 15A is modelled on reforms in the United Kingdom and Australia, which had sought to address similar concerns regarding a lack of an effective formal corporate rescue procedure. These Commonwealth regimes, were in turn, influenced by Chapter 11 of the United States Bankruptcy Code 1978.25
19 See, generally, David Brown and Thomas Telfer Personal and Corporate Insolvency Legislation: Guide and Commentary to the 2006 Amendments (LexisNexis, Wellington, 2007). 20 Companies Act, s 253; Brown and Telfer, above n 19, at 40. 21 Roy Goode Principles of Corporate Insolvency Law (4th ed, Sweet & Maxwell, London, 2011) at [11-29]. 22 Brown and Telfer, above n 19, at 41-42. 23 At 40; Lindsay Hampton and others Brookers Insolvency Law & Practice (looseleaf ed, Thomson Brookers, 2007) at [VAIntro.01]. 24 Finally, statutory management is an insolvency procedure unique to New Zealand, but must be initiated by the Crown and is rarely used: Lynne Taylor and Grant Slevin The Law of Insolvency in New Zealand (Thomson Reuters, Wellington, 2016) at [1.3.3(5)]. 25 At [32.1]-[32.1.2].
[23] New Zealand’s relevant insolvency law reform process was commenced in the late 1990s, with a series of independent reports,26 Law Commission reports and a Ministry of Economic Development paper on business rehabilitation. In May 2002, the Ministry of Economic Development recommended the adoption of the Australian voluntary administration regime (with certain adjustments) in New Zealand, given the Closer Economic Relations agreement with Australia and the programme of coordination of commercial law, including insolvency law.27
[24] The Insolvency Law Reform Bill was introduced in December 2005. Its overall policy objectives were to, among other things:28
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.
[25] The Bill was divided into three separate Bills (including what became the Companies Amendment Act 2006, which inserted Part 15A) which were each passed and received Royal assent on 7 November 2006.
[26] Part 15A affords creditors considerable flexibility, as it prescribes only basic minimum content requirements for a deed of company arrangement.29 The Companies (Voluntary Administration) Regulations 2007 (“VA Regulations”) provide default provisions, including relating to deed administrators and to creditors’ committees, but these are not mandatory and may be excluded by the terms of a deed of company arrangement.30 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,
26 Most notably David Brown Corporate Rescue (Ministry of Economic Development, 2000). 27 Business Rehabilitation, Discussion Document (Ministry of Economic Development, 2002). See also Brown and Telfer, above n 19, at 39. 28 Insolvency Law Reform Bill 2005 (14-1) (explanatory note) at 2. 29 Companies Act, s 239ACN. 30 VA Regulations, reg 3 and Schedule 1; Companies Act, s 239ACN(3).
however, balanced against the Court’s power to intervene to prevent unfair prejudice to dissentient creditors bound by a deed of company arrangement.
Cargill’s section 239ACX challenges - Does the DOCA contravene Part 15A?
Section 239 ACX - The legal principles
[27] Under s 239ACX the Court may rule on the validity of a deed of company arrangement if there is a doubt, on a specific ground, that it was entered into in accordance with Part 15A, or complies with Part 15A. On an application under s 239ACX:
(a) the Court may declare the deed void or not void;
(b) if the deed is void for contravention of a provision of Part 15A, the Court may validate the deed, or any part of it, provided the Court is satisfied that:
(i) the provision was substantially complied with; and
(ii) no injustice will result for anyone bound by the deed if the contravention is disregarded;
(c) if the Court declares that a provision of the deed is void, it may vary the deed, but only if the deed administrator consents.
[28] Case law relating to the Australian equivalent to s 239ACX indicates that the provision is typically invoked with respect to procedural irregularities. It appears to be used much less frequently than the Australian equivalent provision to s 239ADD (which provides for termination of a deed of company arrangement that is oppressive, unfairly prejudicial or unfairly discriminatory). This likely reflects that Part 15A does not prescribe extensive process or content requirements for deeds of company arrangement, so there is relatively little scope for breaches of mandatory requirements to occur. In particular, s 239ACN simply prescribes minimum content
requirements.31 These matters are all covered in the DOCA. I therefore accept the respondents’ submission that there is nothing expressly required to be included in the DOCA that is not included. Nevertheless, Cargill submitted that the DOCA contravenes Part 15A in a number of respects. I will address each ground of challenge in turn.
Does the role of the Participants Committee contravene Part 15A?
[29] Cargill’s key challenge under s 239ACX related to the role of the Participants Committee.
[30] A key feature of the DOCA is the establishment of a Participants Committee to undertake various functions during the managed sell down period. The members of the Participants Committee are the five major Lenders (who together hold 68 per cent of the Participant Creditor debt) and the Crown, as shareholder representative.
[31] Cargill does not allege that the Participants Committee has acted improperly or that it has done anything, or omitted to do anything, that has specifically prejudiced Cargill. Rather, Cargill’s complaint is that there should not be a Participants Committee at all, or at least not one with the wide ranging powers and functions conferred on it by the DOCA in this case.
[32] More specifically, Cargill alleges that the wide powers and discretions vested in the Participants Committee amount to an unauthorised delegation of the deed administrators’ statutory powers, while the deed administrators themselves are relegated to a largely mechanical or administrative role. Cargill submitted that the Participants Committee controls the administration of the DOCA but can act without accountability or supervision, owes no duties, has unfettered discretions, and has little or no liability. Some of the specific concerns expressed by Cargill included that:
(a) The members of the Participants Committee owe no statutory duty to any person including any creditor or any Solid Energy Group member.
31 A deed of company arrangement may expressly exclude any of the default provisions set out in Schedule 1 of the VA Regulations.
(b) The Participants Committee are not subject to the direct supervision of the Court. For example, there is no power to apply to the Court for their supervision or replacement or to require them to remedy a default.
(c) The Participants Committee must agree to the sales process and any changes to the agreed sales milestones and is entitled to receive all information required by the process. They are also involved in determining the final distribution date and must agree which assets are unsaleable.
[33] Cargill noted that creditors of the company are disqualified from being appointed as either an administrator or a deed administrator, without leave of the Court.32 Yet the Participants Committee, comprising a group of major creditors, is able to direct the deed administrators in key respects. Cargill submitted that the overall scheme of Part 15A requires that an independent deed administrator ultimately control the DOCA, albeit with the ability to obtain guidance from the Court as needed. In this case, however, the deed administrators have essentially agreed to delegate their powers and discretions to a particular group of creditors, and it is they who control the overall sell down process under the DOCA.
[34] At its heart, Cargill’s submission is that the discretions and powers given to the Participants Committee mean that it is effectively undertaking the role of the deed administrators, but under a different name and with no protections being afforded to compromised creditors (other than those on the Participants Committee), contrary to Part 15A.
[35] Mr Kalderimis, counsel for the Lenders, addressed this aspect of Cargill’s claims, on behalf of all of the respondents. He rejected the suggestion that the Participants Committee is an improper innovation that contravenes either the spirit or the letter of Part 15A and submitted that creditors’ committees are well recognised in
32 Companies Act, ss 239F(2), 239ACD(2) and 280(1). See also s 239AP(2).
insolvency practice. For example, the INSOL International Statement of Principles for a Global Approach to Multi-Creditor Workouts states:33
FOURTH PRINCIPLE: The interests of relevant creditors are best served by co-ordinating their response to a debtor in financial difficulty. Such co- ordination will be facilitated by the selection of one or more representative co-ordination committees and by the appointment of professional advisers to advise and assist such committees and, where appropriate, the relevant creditors participating in the process as a whole.
[36] The respondents submitted that it is neither uncommon nor improper for creditors’ committees to perform decision-making functions. For example, receivers can act on the direction of creditors’ committees (provided they act in good faith and for a proper purpose).34 Equally, in syndicated lending, a security trustee or facility agent may act on the direction of creditors, and creditors may form a committee to provide such direction.35 Further, the VA Regulations expressly contemplate that a creditors’ committee might form part of a deed of company arrangement implementation process.36 Part 15A does not restrict or prescribe the functions or powers that can be conferred on a creditors’ committee appointed under a deed of company arrangement. On the contrary, although the VA Regulations prescribe certain default provisions relating to membership and meetings of a creditors’ committee appointed under a deed of company arrangement, these provisions are not mandatory and can be excluded.37 In all other respects, the committee’s composition, functions and powers will derive solely from the deed itself.
[37] In this case, the respondents submitted, the role of the Participants Committee provides essential flexibility in the DOCA process and is an expression of pragmatic creditor intent. In a context where control of the company has passed back to its directors, and the role of the deed administrator is not to manage the business, the use of a creditors’ committee is a sensible way to achieve an appropriate degree of creditor oversight, given that the entire asset sale process is being conducted for the
33 INSOL International Statement of Principles for a Global Approach to Multi-Creditor Workouts (Insol International, London, 2000) at 2-3; Cited in Taylor and Slevin, above n 24, at [1.3.1]. 34 Receiverships Act 1993, s 18; See Peter Blanchard and Michael Gedye The Law of Private Receivers of Companies in New Zealand (3rd ed, LexisNexis, Wellington, 2008) at [11.28]. 35 See eg Redwood Master Fund Ltd v TD Bank Europe Ltd [2002] EWHC 2703 (Ch), [2006] 1 BCLC 149. 36 VA Regulations, Schedule 1, cls 10-15. 37 Regulation 3; Companies Act, s 239ACN(3).
benefit of creditors. The role and functions of the Participants Committee do not contravene any specific provisions of Part 15A or the general scheme of that Part.
[38] As I have outlined above, under s 239ACX the Court may rule on the validity of a deed of company arrangement if there is a doubt, on a specific ground, that it was entered into in accordance with Part 15A, or complies with Part 15A. Cargill has failed to persuade me that the provisions relating to the Participants Committee contravene Part 15A. That is not to say that a creditors’ committee established under a deed of company arrangement will not attract close scrutiny from the Court in an appropriate case. The flexibility inherent in Part 15A is not intended to enable one group of creditors to ride roughshod over the interests of others, through the mechanism of a creditors’ committee or otherwise. If there was any suggestion of that occurring, a Court would have no hesitation in intervening.
[39] Cargill alleges here, however, that the establishment of the Participants Committee is unlawful per se as being in breach of Part 15A. I have not been persuaded that that is so. Cargill’s argument, in my view, is underpinned by flawed assumptions regarding the required role of deed administrators under Part 15A and a corresponding assumption that that role has been usurped by the Participants Committee. The Participants Committee does not, however, perform functions or exercise powers that are reserved exclusively under Part 15A to the deed administrators. On the contrary, the role of deed administrators is not rigidly prescribed by the Act. Subpart 12 of Part 15A sets out basic formal requirements regarding deed administrators, including who may act as a deed administrator,38 the consent required for appointment,39 remuneration40 and resignation of deed administrators,41 as well as removal of a deed administrator by the court.42 The deed administrator has certain administrative duties and powers: he or she may apply to the Court for directions,43 must prepare a document setting out the terms of the deed of company arrangement,44 must execute the deed of company arrangement,45 must
38 Section 239ACD. 39 Section 239ACE. 40 Section 239ACK. 41 Section 239ACI. 42 Section 239ACJ. 43 Section 239ADR. 44 Section 239ACN(1).
file accounts46 and must notify termination of the deed by creditors.47 The DOCA, however, does not remove any of those statutory functions or powers from the deed administrators, by conferring them on the Participants Committee or otherwise.
[40] Schedule 1 of the VA Regulations provides, by default, for various substantive powers to be conferred on deed administrators. These include powers necessary to manage the business of a company, or powers comparable to those conferred on a liquidator by Schedule 6 of the Act.48 These default provisions, however, can be expressly excluded by the deed if the creditors agree, for example because the deed administrator is not required to manage the business of the company.49 The default provisions have been excluded in this case. The deed administrators’ role is therefore a narrow one in the particular (and possibly somewhat unusual) circumstances of this case.
[41] Accordingly, although Cargill is correct in its submission that the deed administrators’ role under the DOCA is largely administrative or mechanical in nature, that does not, in itself, contravene Part 15A. The Act does not mandate that a deed administrator is required to either manage the business or make commercial decisions concerning future asset sales and distribution processes. As the respondents submitted, as part of the flexibility inherent in Part 15A, it is open to the creditors to agree (and record in a deed of company arrangement) that such decisions are to be made by someone else, for example an investment bank, an industry expert, the board of the company or a creditors’ committee.
[42] The comparison that Cargill sought to draw in its submissions between the role and powers of an administrator or liquidator and those of a deed administrator is not apt, or at least is not apt in this particular case. The limited scope of a deed administrator’s powers stand in contrast to the broad powers and duties of an administrator, who has the control of the company’s business, property and affairs, and may carry on that business and manage the property and affairs.50 An
45 Section 239ACO. 46 Section 239ACZ. 47 Section 239AEA. 48 VA Regulations, Schedule 1, cl 2. 49 Companies Act, s 239ACN(3); VA Regulations, reg 3 and Schedule 1. 50 Sections 239U and 239V(2)(b).
administrator is the company’s agent.51 The appointment of an administrator has the effect that a director of the company must not exercise or perform a function or power as a director of the company.52
[43] Unlike an administrator or liquidator, however, a deed administrator’s substantive functions and powers (if any) derive solely from the terms of the deed of company arrangement. In essence, it is up to the parties to define the scope of the deed administrator’s role and they may, or may not, include the default provisions in the VA Regulations. Unlike in a voluntary administration, directors’ powers and functions are not suspended during the appointment of a deed administrator. Rather, when a voluntary administration comes to an end (including by deed of company arrangement), the powers of the directors and other officers of the company are revived.
[44] Accordingly, while it is open to creditors to provide in a deed of company arrangement for the deed administrator to assume a managerial role, they are not required to do so. Part 15A confers a high degree of flexibility on creditors to tailor a deed of company arrangement to suit their own particular requirements. In this case, the deed administrators’ powers under the DOCA are fairly limited, similar perhaps to the role of the deed administrators in Re Recycling Holdings Pty Ltd.53 Their primary functions are receiving and adjudicating proofs, distributing the deed fund, and exercising such discretions as they have under the DOCA.
[45] The creditors in this case (by a very large majority) voted for a DOCA which provided, at the end of the administration period, for the running of the companies and implementation of the sales process to be re-vested in the various Solid Energy Boards, rather than the deed administrators. There are clear commercial reasons why they might prefer such a course, given the directors’ industry knowledge and experience. As for the role of the Participants Committee, its members have extensive experience in the managed sell down of assets and are no doubt highly motivated (due to their own self interest) to achieve the best possible result for all creditors in the sales process. It was open to the creditors, as a whole, to conclude
51 Section 239W. 52 Section 239X. 53 Re Recycling Holdings Pty Ltd [2015] NSWSC 1016, (2015) 107 ACSR 406 at [94].
that their interests would be best served by having such a committee play a key commercial decision-making role in relation to the difficult and challenging issues that will, no doubt, arise in what is apparently one of the most complex administrations in New Zealand’s history.
[46] Cargill relied heavily in its submissions on the fact that the Lenders would themselves be disqualified from acting as deed administrators under s 239ACD. The necessary corollary of this, Cargill submitted, is that they should not be entitled to wield decision-making power under the DOCA. As I have noted above, however, the core role of a deed administrator is simply to ensure due implementation of the deed of company arrangement. That supervisory function requires an appropriate degree of independence. But in relation to matters falling outside the deed administrator’s non-delegable functions, and subject to the various protections in the Act (including those relating to fairness, oppression and discrimination), creditors are free to agree their own arrangements. This is consistent with the flexibility that Part 15A was intended to provide.
[47] The establishment of the Participants Committee does not absolve the deed administrators from court oversight pursuant to s 239ADS. The deed administrators are responsible for carrying out their statutory functions and implementing the DOCA (including, in this case, acting on lawful instructions of the Participants Committee in certain matters). To the extent that the deed administrators are required by the DOCA to act on instructions from the Participants Committee, however, they must still bring an independent mind to whether it is lawful for them to do what the Committee wishes. Indeed clause 13.7 of the DOCA expressly provides that:54
Notwithstanding anything to the contrary in this Deed or any Restructuring Document, the Deed Administrators are not obliged to do or omit to do anything if, in their sole opinion, such thing would or might constitute a breach of any law or regulation or a breach of any duty or render it liable to any person.
[48] Accordingly, although the Participants Committee may give instructions to the deed administrators under the DOCA, to the extent set out in the DOCA, the
54 Clause 25.5 of the RDD is to similar effect.
deed administrators are only required to act on those instructions if, in their sole opinion, they can do so lawfully. Further, if the deed administrators’ implementation of the wishes or directions of the Participants Committee gives rise to any prejudice to creditors or shareholders, an application can be made to the Court for relief pursuant to s 239ADS.55 Indeed, the Participants Committee itself is subject to court oversight under the broad general power in s 239ADO.
[49] Cargill also challenged the composition of the Participants Committee, essentially on the basis that it should have been appointed as a member. Mr Wantschek’s evidence on behalf of Cargill was that:56
[Cargill] would understand the creation of a Participants Committee if it was designed to be representative of the Participant Creditors generally.
[50] Such a submission cuts across Cargill’s more general submission that the role of the Participants Committee is unlawful per se. In any event, the composition of the Participants Committee does not breach any specific provision of Part 15A or the overall scheme of that Part, as required by s 239ACX. There is no requirement for a creditors’ committee to be perfectly representative.57
[51] The membership of the Participants Committee comprises the five major Lenders and the Crown. The proposed composition of the Committee was disclosed to creditors in advance of the watershed meeting and was approved by an overwhelming majority of creditors at that meeting (with no objection recorded). It is not for the Court to second guess the creditors’ decision as to who is best placed to perform the tasks required of the Participants Committee. I note, however, that the Lenders have specialised skills and expertise in the managed sell down of assets and, further, have the most at stake in the DOCA process with total combined debt of $259 million, amounting to 68 per cent of total Participant Creditor debt. Other significant Participant Creditors – including the largest note holder, TSB – are not members of the Committee.
55 See eg Redwood Master Fund Ltd v TD Bank Europe Ltd, above n 35. 56 Mr Wantschek is the Global Lead, Projects and Investments for Cargill. 57 Companies Act, ss 239AN(1)(a) and 239AR; VR Regulations, Schedule 1, cls 10-15.
[52] Further, the interests of the Lenders in the asset sale process are fully aligned with other Participant Creditors. In particular, they have a shared interest in maximising returns from the agreed sales process for the benefit of all Participant Creditors. The members of the Participants Committee will receive the same pro rata share as all other Participant Creditors, including Cargill, in any sale proceeds.
Does the DOCA contravene Part 15A by unlawfully restricting creditors’ statutory entitlement to vary the DOCA?
[53] Section 239ADA of the Act provides that creditors may vary a deed of company arrangement by a resolution passed at a meeting convened under s 239ADF, provided that the variation is not materially different from the proposed variation set out in the notice of meeting.
[54] Cargill submitted that the DOCA contravenes Part 15A by unlawfully restricting creditors’ statutory entitlement to vary a deed of company arrangement. This issue is hypothetical in that there is no suggestion that any creditors (other than perhaps Cargill) actually wish to vary the DOCA. As for Cargill, it has not initiated the s 239ADA process and presumably has no intention of doing so, in the absence of support from any other creditor. Nevertheless Cargill is, of course, entitled to have this issue determined “in the abstract” under s 239ACX.
[55] Clause 21.3(d) of the DOCA provides that the deed will automatically terminate on the happening of various events, including:
(d) other than a variation to this Deed approved by Solid and the Participants Committee, the Creditors of any member of the Solid Administration Group pass a resolution terminating or varying this Deed (in any respect and including termination or variation of the Deed pursuant to clause 4.3 (Consequence of non-satisfaction of the conditions) at a meeting convened under section 239ADF of the Companies Act).
[56] The creditors are therefore entitled to call a meeting under s 239ADF and vary the DOCA at that meeting. If that variation is approved by Solid Energy and the Participants Committee, then the DOCA will continue in effect, as varied. If, however, Solid Energy and the Participants Committee do not approve the variation, then the DOCA will automatically terminate.
[57] Cargill submitted that clause 21.3(d) contravenes ss 239ADA and 239ADF by unlawfully restricting creditors’ statutory entitlement to amend the DOCA as they see fit. The respondents denied that clause 21.3(d) contravenes Part 15A. Rather, they say, it simply prescribes a binary consequence of the DOCA being varied pursuant to s 239ADA: subsequent approval by Solid Energy and the Participants Committee, or termination.
[58] I have not been persuaded that clause 21.3(d) of the DOCA contravenes ss 239ADA and 239ADF of the Act. Section 239ACN(2)(g) expressly provides that a deed of company arrangement must specify “the circumstances in which the deed terminates”. The creditors have agreed that if a variation to the DOCA is not approved by Solid Energy and the Participants Committee, then the DOCA will terminate. In my view it was open to the creditors to agree that and include it in the DOCA. There appear to be commercially sound reasons why the Participants Committee, as representatives of the Participant Creditors (being the only creditors compromising their debts under the DOCA), might require the ability to review variations to the DOCA before agreeing to be bound by them.
[59] For the same reasons, the fact that Solid Energy and the deed administrators (acting on the lawful instructions of the Participants Committee) have limited variation powers in respect of the ancillary restructuring documents is also not inconsistent with ss 239ADA and 239ADF. Those limited variation powers supplement, but do not oust, the statutory variation powers.
Do the clauses in the DOCA compromising Solid Energy’s or creditors’ claims against third parties (or releasing the liability of third parties) contravene Part 15A?
[60] The DOCA (and the ancillary restructuring documents) includes various releases, limitations of liability and/or indemnities for the directors, the Participants Committee, and the administrators and deed administrators. (For ease of reference I will refer to the relevant clauses collectively as “the liability clauses”).
[61] In respect of the directors the key provisions are:
(a) Release of claims against Directors: Clause 7.3(a) of the DOCA provides that, “to the maximum extent permitted by law, each Creditor…releases and discharges the Directors from all actions… rights, claims, demands [etc]…however arising prior to the Restructuring Effective Date58,…except to the extent arising out of wilful misconduct or criminal conduct by that Director”.59 Clause 7.3(b) provides that clause 7.3 is not severable from the Deed.
(b) Final distribution: Under clause 12.2(g), the final distribution date cannot occur until the deed administrators have given notice that various conditions have been satisfied, including that the Solid Energy Group, the security trustee and the deed administrators (acting on instructions from the Participants Committee) have released any claims against directors.
[62] In respect of the Participants Committee, the administrators and the deed administrators, the key provisions are:
(a) Participants Committee, Administrators and Deed Administrators not personally liable: Clause 6.10 of the DOCA provides that, “to the maximum extent permitted by law, no member of the Participants Committee or the Administrators or the Deed Administrators have, or will be taken to have adopted, ratified or in any other manner become personally liable under any arrangement or agreement between any member of the Solid Administration Group and any Post Administration Creditor, any Trading Creditor or any Participant Creditor or any Secured Creditor in any circumstance, including without limitation as a result of…performing any
58 The Restructuring Effective Date is the date that deed administrators confirm that each of the conditions precedent contained in Schedule 1 to the DOCA have been satisfied. 59 Directors is defined as meaning the Solid Directors and the Subsidiary Director each in their respective capacities as directors of Solid and/or each Administration Subsidiary. The “Solid Directors” are the five current directors, who are signatories to the DOCA.
obligations or exercising any rights under, this Deed or any Restructuring Document”.
(b) No Personal Liability: Clause 15.6 of the DOCA provides that “the Administrators and the Deed administrators shall have no personal liability for any acts, matters or omissions relating to things done or not done in that capacity in good faith and without gross negligence, including (without limitation and to the maximum extent permitted by law) any liability relating to” various specific matters including such things as “any amounts payable by the Administrators or the Deed administrators for services rendered, goods bought or property hired, leased, used or occupied by or on behalf of any member of the Solid Administration Group”, a failure by another party to the DOCA to observe their own obligations under the DOCA, and so on. Further, if a court holds the administrators or deed administrators personally liable in respect of any matters relating to the administration or deed administration then, provided the administrator or deed administrator has acted in good faith and without gross negligence, their liability is limited to $5,000. Clause 15.6 is expressed to be not severable from the DOCA (clause 15.6(e)).
(emphasis added)
[63] Cargill submitted that the liability clauses contravene ss 239ACN(2), 239ACS and 239ACT of the Act.60 The key provision is s 239ACT(1), which provides that a “deed of company arrangement binds all creditors in respect of claims that arise on or before the cut-off day…specified in the deed” (the date on or before which creditors’ claims must have arisen if they are to be admissible under the deed).
[64] Cargill submitted that the purpose of a deed of company arrangement is limited to making arrangements for the payment of the debts owed by the company
60 Cargill also relied on the Companies Act, ss 239B (definition of deed of company arrangement) and 239ACW (effect of deed on Company’s debts) in this context.
to its creditors. While other parties may be bound by the terms of a deed of company arrangement, for example the deed administrator, shareholders and directors, a deed does not and cannot confer rights on them. Clauses releasing the liability of third parties, such as directors or administrators, are therefore beyond the legitimate scope of a deed of company arrangement. Such clauses contravene Part 15A and are unenforceable.
[65] Cargill relied on the decision of the High Court of Australia in Lehman Bros Holdings Inc v City of Swan in support of this submission.61 Those proceedings concerned a deed of company arrangement entered into in respect of Lehman Brothers Australia Limited. The deed also purported to provide a moratorium and release of creditor claims against other companies in the Lehman Group. With reference to the equivalent Australian provisions to ss 239ACS and 239ACT of the Act,62 the Court held that:63
But none of these observations confronts the critical observation that s 444D(1) limits the extent to which a deed of company arrangement binds creditors. Creditors are bound ‘so far as concerns claims’ against the subject company that arose before a specified date. And it is s 444D(1) alone which makes a deed of company arrangement binding on creditors.
Because creditors are bound under s 444D(1) only to the limited extent identified in that provision, the assent of some creditors (even a majority by number and value of those who vote) to giving up claims against another does not bind other creditors to do so. No creditor is bound to give up such claims because the Act does not bind them beyond the limit prescribed by s 444D(1). More particularly, the Act does not bind creditors to give up a claim against a person other than the subject company – here, Lehman Australia.
[66] On this analysis, a deed of company arrangement cannot be used as a tool to release pre-existing creditor claims or debts relating to parties other than the company in administration. In Lehman Bros the deed was found to be void as a whole because the provisions in question were integral to the overall proposal put to creditors and therefore not severable from the balance of the deed. Cargill submitted
61 Lehman Bros Holdings Inc v City of Swan [2010] HCA 11, (2010) 240 CLR 509. Lehman Bros was referred to in a District Court case: Atlas Resources Ltd v Aull [2011] DCR 101 (DC). See also Paul Heath and Michael Whale (eds) Insolvency Law in New Zealand (2nd ed, LexisNexis, Wellington, 2014) at [15.80]. 62 Corporations Act 2001 (Cth), ss 444D and 444G. 63 Lehman Bros Holdings Inc v City of Swan, above n 61, at [52]-[53].
that the same should apply in this case, given the “no severance” clauses in the DOCA.
[67] Cargill also referred to the recent Supreme Court of New South Wales decision of Re Eastmark Holdings Pty Ltd.64 The deed before the Court in that case included a release clause in which the creditors released and indemnified the released parties, being the subject company, the administrators, deed administrators, receivers and senior creditors, from “all claims, rights and entitlements of, and amounts owing to, [the relevant creditor] in respect of its claim”. “Claim” was defined as meaning, in essence, a claim that would have been provable by the creditor in a winding up of the relevant company. The obligation of the administrators to distribute the relevant deed fund to creditors was dependent upon such a release being provided. Following the reasoning in Lehman Bros the Court held that the release clause was void. It was, however, severable from the deed. The releases were also void because they had not formed part of the proposal that was voted upon at the meeting of creditors, and were not discussed at the creditors’ meeting. As a result, there was never an intention to include third party releases.
[68] Returning to the liability clauses before the Court here, the respondents denied that they contravene Part 15A and submitted that they are reasonable and proportionate in all the circumstances. In relation to the directors’ releases, they noted that the clauses only apply to the current directors (those named as parties to the DOCA) and do not limit potential claims against previous Solid Energy directors. All of the current directors joined the Solid Energy Board after the company had already encountered financial difficulties. Creditors wished to secure their ongoing support to facilitate an orderly sales process and maintain going concern value. Mr Sare of the Bank of New Zealand65 deposed that this was a trade-off that creditors were willing to make. Further, the overwhelming support for the DOCA at the watershed meeting supports such a view.66 Mr Gibson deposed that, following due enquiries, no prima facie claims were identified against the current directors, in any event. Mr Sare gave evidence to similar effect.
64 Re Eastmark Holdings Pty Ltd (recs and managers appointed) (subject to a deed of company arrangement) [2015] NSWSC 1437. 65 Mr Sare is the Head of Strategic Business Services at the Bank of New Zealand. 66 Compare Re Ansett Australia Ltd [2001] FCA 1439.
[69] As for the clauses relating to the deed administrators and the Participants Committee, the respondents noted that they relate solely to their respective roles under the DOCA, and do not affect creditors’ pre-administration claims. The respondents submitted that, properly interpreted, s 239ACT(1) does not prohibit a deed of company arrangement from limiting claims against functionaries which may arise in connection with, and as part of an overall arrangement to facilitate, the efficient implementation of a deed of company arrangement. If Eastmark stands for the proposition that creditors cannot even limit post-administration liabilities for deed administrators or other functionaries, the respondents submitted that it should not be followed in New Zealand. The respondents observed that the decision in Eastmark was given orally, the day following the hearing.
[70] With respect to claims against the administrators, the respondents noted that cl 15.6 is not expressed as a release but as a liability limitation applying a gross negligence standard. They argued that it cannot be objectionable per se to restrict administrators’ liability, as this is the practical effect of the statutory indemnity in s 239ADL. Further, there is Australian authority confirming that an administrator may obtain contractual protection through a deed of company arrangement.67 Moreover, administrators, like directors, owe their duties to the company in administration (and to that extent to creditors generally), but not to individual creditors.68 As with the director releases, the clause relating to administrator releases does not purport to release creditors’ personal claims, because it is not clear that any such claims can or do exist.
[71] Although the issue is not without difficulty, I have concluded that the liability clauses do not contravene Part 15A. It is significant, in my view, that the relevant clauses are expressed to apply only “to the maximum extent permitted by law”. Accordingly, on their own terms, the clauses do not have effect to the extent that a Court deems the relevant release or limitation impermissible.69 The present DOCA is therefore distinguishable on this basis from the deeds that were before the courts in Lehman Bros and Eastmark.
67 See Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd (No 2) [2001] NSWSC 791, (2001) 39 ACSR 622 at [64]. 68 Viscariello v Macks [2014] SASC 189 at [68]. 69 See Esanda Ltd v Clark (1985) 159 CLR 543 (HCA).
[72] The use of wording such as “to the maximum extent permitted by law” is fairly common in contract drafting, including in the context of release or limitation of liability clauses. Qualifying the liability clauses “to the maximum extent permitted by law,” signalled, in this case, that the parties to the DOCA acknowledged that some legal restrictions may well apply to restrict the scope of the clauses. The use of such wording is particularly helpful when the legal position is not entirely clear. In this case, for example, there is a paucity of authority on Part 15A of the Act, and no decisions that have considered whether Lehman Bros should be applied in New Zealand, or how far the ambit of the principles in that case might extend. The use of wording such as “to the maximum extent permitted by law” accordingly maximises the scope of the relevant release or limitation of liability clauses, without purporting to go beyond what the Court would consider to be acceptable. Similar wording is often found in non-compete clauses.
[73] Courts, generally, do not have any issue interpreting or applying such clauses, or determining what the “maximum extent permitted by law” might be. For example, Allied Farmers Investments Ltd v Elgin Investments Ltd (in rec)70 concerned the right of parties to exclude rights of set off. Associate Judge Osborne found that:
[54] ...Required by law is to be given its natural meaning, given that it is a careful exception to what is otherwise an all-encompassing stipulation. The legal context of the exception supports the conclusion that required by law means precisely what it says – it has been recognised in the cases…that a complete exclusion of rights of a set-off may not be possible in the case of set-off which arises from statutory provisions.
[74] In Gillespie v Guest a trust deed provided:71
To the extent permitted by law no Trustee of the trusts of this Deed shall be subject to any duties except the duty to act honestly and the duty not to commit wilfully any act known by such Trustee to be a breach of trust and the duty not to omit wilfully any act when the omission is known by such Trustee to be a breach of trust AND no such Trustee shall be liable for the consequences of any act or omission or for any loss not attributable to such Trustee’s own dishonesty or the wilful commission by such Trustee of any act known by such Trustee to be a breach of trust or to the wilful omission by such Trustee of any act when that omission is known by such Trustee to
70 Allied Farmers Investments Ltd v Elgin Investments Ltd (in rec) HC Auckland CIV-2010-409- 656, 20 July 2010. 71 Gillespie v Guest (No 2) [2013] NZHC 669 at [7].
be a breach of trust nor shall any Trustee be bound to take any proceedings against a co-executor or co-trustee for any breach or alleged breach of trust by that co-executor or co-trustee.
[75] Associate Judge Bell found that the exclusion clause did not exclude liability for the “irreducible core of obligations resting on a trustee from which it is not possible to exempt from liability by clauses such as clause 24”.72 In other words the exclusion was valid, but only to the extent permitted by law.
[76] The respondents submitted that the DOCA, at a minimum, binds Solid Energy, the directors and the deed administrators as a matter of agreement73 and also pursuant to s 239ACS(b), (c) and (d), on the basis that s 239ACS states that a deed of company arrangement binds the company, its directors, officers and shareholders and the deed administrator, without qualification.
[77] Section 239ACT, which is the key provision that Cargill alleges is contravened by the liability clauses, provides that a deed of company arrangement binds all creditors in respect of claims that arise on or before the cut-off day. The liability clauses in this case, unlike the clause in Lehman Bros, do not purport to abrogate creditors’ pre-administration claims against third parties. In relation to the directors’ releases, I note that director’s duties are owed to the company itself, and not to individual creditors.74 I accept the respondents’ submission that a release of claims against parties owing duties to the company, not to individual creditors, is quite different from the release of valuable creditor rights against related companies,75 third party guarantors76 or even director guarantors.77
[78] In relation to the limitations of liability in favour of the administrators, deed administrators and Participants Committee members, the relevant clauses appear to be directed primarily to defining the terms of future engagement of functionaries under the DOCA rather than compromising creditors’ pre-administration claims and,
72 At [47]. And see [48]. 73 See MYT Engineering Pty Ltd v Mulcon Pty Ltd [1999] HCA 24, (1999) 195 CLR 636 at [24] and [25]; and Surber v Lean [2000] WASCA 380, (2000) 36 ACSR 176. 74 Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242 (CA) at 249; see also Mason v Lewis [2006] 3 NZLR 225 (CA) at [51]. 75 Lehman Brothers Holdings Inc v City of Swan, above n 61. 76 Atlas Resources Ltd v Aull, above n 61. 77 Re Andersens Home Furnishing Co Pty Ltd (1996) 14 ACLC 1,710 (QSC).
to that extent at least, are arguably valid. Cargill has not been able to point to any provision of Part 15A which prohibits creditors from agreeing conditions of the appointment of those who are to perform functions under the deed of company arrangement.
[79] Depriving insolvency practitioners of the ability to negotiate and agree reasonable limitations of their liability in highly complex corporate rescue situations would likely undermine the ability to secure the appointment of high calibre and experienced professionals to relevant roles. This would risk undermining the utility of the Part 15A regime. Indeed, the evidence before me was that liability clauses similar to those in the DOCA are fairly standard in New Zealand deeds of company arrangement.
[80] With respect to claims against administrators, cl 15.6 is not expressed as a release but as a liability limitation, setting a gross negligence standard. There is no statutory restriction against insolvency practitioners negotiating liability limitation protection in a deed of company arrangement. There is force in the respondents’ submission that it cannot be objectionable per se to restrict administrators’ liability, as this is the practical effect of the statutory indemnity in s 239ADL. Indeed, in Cresvale Far East Ltd v Cresvale Securities Ltd (No 2) it was observed that an administrator under a deed of company arrangement has a significantly greater opportunity than a liquidator to obtain contractual protection, since in the normal case the deed administrator has previously been the voluntary administrator of the company and, in the latter capacity, he or she has had a substantial influence on the contents of the deed.78
[81] The respondents also submitted, in essence, that creditors who vote in favour of a deed of company arrangement will be bound to its terms as a matter of contract, even if those terms extend beyond the scope of Part 15A.79 They accepted, however, that dissentient creditors (such as Cargill in this case) could not be so bound. On this
78 Cresvale Far East Ltd v Cresvale Securities Ltd (No 2), above n 67, at [64]. 79 Relying on MYT Engineering Pty Ltd v Mulcon Pty Ltd, above n 73, at [24] and [25]; Surber v Lean, above n 73; Cresvale Far East Ltd v Cresvale Securities Ltd (No 2), above n 67, at [23]; Atlas Resources Ltd v Aull, above n 61, at [37] and [51]. See also Taylor and Slevin, above n 24, at [32.11.7(1)].
analysis, the liability clauses may be interpreted narrowly in respect of Cargill, but more broadly in respect of other creditors. I find such a proposition unattractive, and potentially unworkable in practice, although at least some support for that approach may arguably be gleaned from the decision of Rares and Perram JJ, in the Federal Court of Australia Full Court’s Lehman Bros decision. Their Honours observed that Pt 5.3A of the Corporations Act 2001 (Cth) (the Australian equivalent to Part 15A) does not prevent creditors consensually arriving at a wider arrangement or compromise, the effect of which could be included in a deed of company arrangement, to adjust their legal rights, interests, liabilities and obligations as “part of an overall rescue package for the insolvent company”.80 Presumably, however, their Honours envisaged a situation where creditors were unanimous not where, as here, there are dissenting creditors.
[82] Ultimately, I have concluded that it is neither necessary, nor appropriate, to attempt to determine the precise meaning of each liability clause in the abstract. If Cargill, any other creditor, or any other party to the DOCA, were to bring proceedings against the directors, administrators, deed administrators or Participants Committee, those persons would only be able to rely on the relevant liability clause as a bar to proceedings to the “maximum extent permitted by law”. If the claim was a pre-administration claim against a director then, following the reasoning in Lehman Bros, a Court might well conclude that the relevant liability clause is ineffective to that extent. A different view may well be taken of post-administration claims, particularly against the administrators or deed administrators.
[83] The issue is currently entirely hypothetical. Although Cargill’s submissions identified some general matters that it suggested could potentially be investigated, no actual claims against the directors, the Participants Committee, the administrators or the deed administrators have been identified, and certainly no claims that could be brought by creditors. The administrators, during the course of their investigations, did not identify any prima facie claims against any directors, past or present. There is therefore no live dispute against which the precise scope of the liability clauses can or should be measured. As the relevant clauses only operate to the maximum
80 City of Swan v Lehman Brothers Australia Ltd [2009] FCAFC 130, (2009) 260 ALR 199 at [92].
extent permitted by law, however, I have not been persuaded that they contravene Part 15A in and of themselves.
Do the “non-challenge” clauses in the DOCA contravene Part 15A?
[84] Clauses 7.3 and 15.6 of the DOCA purport to prohibit creditors from challenging the liability clauses (“no-challenge” clauses). Cargill submitted that these provisions contravene s 239ACX, given that s 239ACX confers jurisdiction on the Court to rule on the validity of a deed of company arrangement (or a provision of it).
[85] The respondents submitted that this argument is, again, a purely technical one. In these proceedings Cargill is challenging the legal validity of both the DOCA generally and the liability clauses specifically. None of the respondents have suggested that it is not entitled to do so. The respondents further submitted that, to the extent that the clauses have legal effect, they are relevant to the exercise of the Court’s discretion, but do not exclude it.
[86] In my view the non-challenge clauses, correctly interpreted, do not oust the Court’s jurisdiction under s 239ACX or purport to do so. Both of the clauses relate to liability clauses that are expressed to apply “to the maximum extent permissible by law”. In itself, such wording appears to anticipate the possibility of court intervention, as only a Court can determine what “the maximum extent permitted by law” is. Further, clause 15.6(d) expressly contemplates the possibility of court proceedings and that a “court of competent jurisdiction” may hold the administrators or deed administrators personally liable in respect of matters relating to the administration or deed administration of Solid Energy.
[87] Although I am not aware of any specific case law relating to “no challenge” clauses in the context of deeds of company arrangement, there is case law dating back almost 300 years that considers the correct interpretation of similar clauses in the estates context.81 Subject to the precise drafting of the relevant clause, a
81 See for example Cleaver v Spurling (1729) 2 P Wms 526, 24 ER 846 (Ch); Cooke v Turner (1846) 15 M & W 727, 153 ER 1044 (Ch); Rhodes v Muswell Hill Land Co (1861) 29 B 560, 54 ER 745 (Ch); Warbrick v Varley (No 2) (1861) 30 B 347, 54 ER 923 (Ch); Adams v Adams [1892] 1 Ch 369 (CA); Re Williams [1912] 1 Ch 399 (Ch).
condition not to challenge or dispute a will is not void for uncertainty, nor as being contrary to public policy, nor prohibited by any positive law. English courts have reconciled the competing interests at stake by holding no challenge clauses to be valid and enforceable, but finding that they are not triggered by an action to enforce a beneficiary’s legitimate rights. Such clauses therefore have no effect where, for example, the challenge is successful in striking down the will in its entirety. Further, such clauses do not oust the court’s jurisdiction to interpret a will and enforce its terms.
[88] Applying similar reasoning to this case, the “no challenge” clauses in the DOCA, correctly interpreted, cannot oust the Court’s jurisdiction to rule on the correct interpretation and scope of the liability clauses. Their scope, like similar clauses in the estates context, is therefore very likely to be fairly limited in practice. It follows that the no-challenge clauses do not contravene s 239ACX. They do not oust the Court’s jurisdiction under that section to rule on the validity of the liability provisions in the DOCA (as the Court has been asked to do in this case).
Does the “no set off” clause contravene Part 15A?
[89] Although the issue was not raised in Cargill’s pleadings, in its submissions it asserted that clause 19 of the RDD contravenes s 239AEG regarding mutual credit and set-off. Mr Chisholm QC acknowledged, on behalf of Cargill, however, that this issue is “relatively minor in the scheme of things”.
[90] In any event, I have concluded that there is no substance to the point. Section 239AEG relates to the way in which a creditor’s claims must be calculated for the purposes of admission under a deed of company arrangement. In contrast, clause 19 of the RDD relates to the satisfaction of indebtedness due under the DOCA. That is, if there is an ongoing relationship under which a creditor is to make payment to Solid Energy (such as for the supply of coal), the creditor cannot set off money due to Solid Energy against its debt under the DOCA. The purpose of clause 19 is simply to require all creditors, even those with access to debtor funds, to await payment under the agreed Payment Waterfall. This is fair and unobjectionable, and does not contravene Part 15A.
[91] I now turn to consider the various arguments advanced by Cargill in relation to s 239ADD of the Act.
Cargill’s s 239ADD challenges – Is a provision in the DOCA oppressive, unfairly prejudicial to, or unfairly discriminatory against Cargill?
Section 239ADD – The legal principles
[92] Section 239ADD provides that the Court may terminate a deed if it is satisfied, amongst other things, that a provision in the deed, or an act or omission done or made under it:
would be…oppressive or unfairly prejudicial to, or unfairly discriminatory against, 1 or more of the creditors; or…contrary to the interests of the company as a whole; or… the deed should be terminated for some other reason.
[93] Cargill did not allege that any specific acts or omissions under the DOCA have been oppressive, prejudicial or discriminatory. Rather, it submitted that various provisions of the DOCA have such an effect.
[94] Cargill bears the onus of satisfying the Court that the relevant provisions are oppressive, prejudicial or discriminatory.82 In University of Sydney v Australian Photonics Pty Ltd, the New South Wales Supreme Court observed:83
In determining whether a deed should be terminated under s 445D(1)(f) [the equivalent provision to s 239ADD], the Court does not make a judgment founded upon mere possibility or speculation; it makes a determination on the characteristics of the deed as they are seen to be at the date of hearing. If a deed is to be terminated under s 445D(1)(f), it has to be seen as having operated, or as presently operating, or as highly likely to operate in the future, in a way which is oppressive, unfairly prejudicial, unfairly discriminatory or contrary to the interests of the creditors as a whole. If the future operation of the deed is in question under s 445D(1)(f), the Court should be satisfied that its adverse effect is not a mere possibility or speculation but is, at least, highly likely.
[95] Whether a deed is operating (or is highly likely to operate) in a way that is oppressive or unfairly prejudicial requires examination of the whole of the effect of
82 Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (Subject to Deed of Company Arrangement) (No 2) [2011] FCA 178, (2011) 82 ASCR 300 at [179]. 83 University of Sydney v Australian Photonics Pty Ltd [2005] NSWSC 412, (2005) 53 ACSR 579 at [37].
the deed, bearing in mind the scheme of Part 15A, and the interests of other creditors, the company and the public generally.84 In Thomas v H W Thomas Ltd, the leading case on oppression under the precursor to s 174 of the Companies Act, the Court of Appeal confirmed that the touchstone of oppression is injustice and unfairness, and went on to note that:85
Fairness cannot be assessed in a vacuum or simply from one member’s point of view. It will often depend on weighing conflicting interests of different groups within the company. It is a matter of balancing all the interests involved in terms of the policies underlying the companies legislation in general and s 209 [now s 174] in particular ...[and requires the Court] to recognise that s 209 is a remedial provision designed to allow the Court to intervene where there is a visible departure from the standards of fair dealing….
[96] The relevant inquiry is what position the creditor would have been in, in liquidation, relative to their position under the deed of company arrangement.86 To determine whether or not a deed of company arrangement is oppressive, unfairly prejudicial or unfairly discriminatory to creditors, one must compare the result under the deed to the result which would have been obtained under liquidation; not to that which might have been obtainable under a hypothetical alternative deed of company arrangement.87
[97] In interpreting the analogous provision in Part 14, this Court in Bank of Tokyo noted that “[t]he substantive merits of a proposed compromise is an issue for the creditors” and that the “unfairly prejudicial limb was intended to provide a residual power to the Court, to prevent abuse of the procedure”.88 The court’s role:89
…does not involve substituting its views of the compromise for that of the required majority of creditors. Nor does it involve the Court in second guessing the wisdom or sense of fairness of creditors in voting by the required majorities in favour of the proposal.
84 Sydney Land Corp Pty Ltd v Kalon Pty Ltd (1998) 26 ACSR 427 (NSWSC) at 430, affirmed on appeal in Kalon Pty Ltd v Sydney Land Corp Pty Ltd (No 2) (1998) 26 ACSR 593 (NSWCA). 85 Thomas v H W Thomas Ltd [1984] 1 NZLR 686 (CA) at 693-695, recently cited in Draskovich v Goodfellow [2016] NZHC 496. 86 Commissioner of Inland Revenue v Grant HC Auckland CIV-2009-404-7388, 25 May 2010 at [80]; upheld in Grant v Commissioner of Inland Revenue, above n 3, at [65]-67]. 87 Khoury v Zambena Pty Ltd [1999] NSWCA 402, (1997) 15 ACLC 620 at [60]-[61]. 88 Bank of Tokyo-Mitsubishi UFJ Ltd v Solid Energy New Zealand Ltd [2013] NZHC 3458 at [182] (Bank of Tokyo). 89 At [182] (footnote omitted).
[98] Cargill advanced four key arguments in support of its s 239ADD challenge. I will consider each in turn.
Has Cargill been prejudiced due to a lack of independence on the part of the deed administrators?
[99] Deed administrators “must act objectively in a manner which gives due regard and balance to the interests of all creditors including different classes of creditors where different classes exist”.90 Deed administrators are expected to be free of actual or potential conflicts of interest.91 A person who would be disqualified under s 280(1) of the Act from acting as a liquidator of a company, for example due to an ongoing relationship with secured creditors, is precluded from being appointed as a deed administrator without leave of the Court.92 In addition, s 239AP includes a requirement to table an Interests Statement which must not only disclose relationships with the company but also its officers, shareholders and creditors.
[100] Cargill submitted that the deed administrators are not independent, because their firm, KordaMentha, was originally engaged in 2013 to advise the Crown and the Lenders in relation to Solid Energy, which by then was experiencing financial difficulties. Further, KordaMentha was involved in the development of the DOCA, although I note (and accept) Mr Gibson’s evidence that KordaMentha did not drive the process. Rather, their role was essentially a support one, as part of a wider group of people involved in developing the voluntary administration proposal.
[101] Cargill submitted that KordaMentha was “beholden” to their Lender clients, the Crown and the SENZ directors and employees that they had worked closely with. An independent administrator, Cargill submitted, would have negotiated and pushed back against the promoters of the DOCA, “rather than simply be their mouthpiece”. Had they done so, in Cargill’s view, this could have resulted in a DOCA that was more favourable to creditors (including Cargill) than the one that was ultimately approved by creditors.
90 Re Carey Builders Pty Ltd (subject to deed of company arrangement) (1997) 23 ACSR 754 (QSC) at 776. 91 Re Recycling Holdings, above n 53, at [94]. 92 Companies Act, ss 239ACD(2) and 280(1)(cb).
[102] There is no evidence, however, that the appointment of Messrs Gibson and Graham as deed administrators is (or is likely to be) unfairly prejudicial to, or unfairly discriminatory against Cargill. Pre-appointment work, including involvement in the drafting of a proposed deed of company arrangement, is not unusual in the corporate insolvency context and does not preclude subsequent appointment as a deed administrator. Indeed, it has been recognised that such prior knowledge and experience can sometimes provide an important efficiency advantage, to the benefit of all creditors.93 The Act envisages that the administrators will become the deed administrators unless the creditors decide otherwise.94 The deed administrators’ role is to then attempt to formulate a deed that is capable of achieving the necessary majority and that is not unfairly prejudicial to any creditor, whether by reaching unanimous agreement or establishing a consensus.95 They should not put forward a proposal unless they know there is a reasonable prospect of the proposal being adopted.96 Further, the deed administrators should not advocate the interests of one group of creditors over another.97
[103] I have not been persuaded that the involvement of Messrs Gibson and Graham, prior to their appointment as deed administrators, has given rise to any real risk of prejudice to Cargill in all the circumstances of this case. KordaMentha’s prior investigative accountant and monitoring work was for the Lenders and the Crown as unsecured creditors. They were not therefore involved in advising secured creditors on how to improve their claims relative to unsecured creditors.98 There is therefore no risk of bias arising from previous advice about how to maximise a secured creditor’s priority over unsecured creditors. The economic interests of Cargill and the Lenders in an insolvency distribution are aligned.
93 See Icon Digital Entertainment Ltd v Westpac New Zealand Ltd HC Auckland CIV-2007-404- 7124, 20 November 2007 at [19]; Re Madagascar (No 1) 2013 Ltd [2014] NZHC 385 at [27]; Lam Soon Australia Pty Ltd (admin apptd) v Molit (No 55) Pty Ltd (1996) 22 ACSR 169 (FCA) at 184; Pavlakis v Equmen Pty Ltd (No 2) [2014] FCA 951 at [21]; Commonwealth of Australia v Irving (1996) 65 FCR 291 (FCA) at 296; Re Rapson Holdings Ltd HC Auckland CIV 2010-404- 2319, 26 April 2010. 94 Companies Act, s 239ACC. 95 James O’Donovan Company Receivers and Administrators (looseleaf ed, Thomson Reuters) at [50.20]; citing SISU Capital Fund Ltd v Tucker [2005] EWHC 2170 (Ch) at [118]. 96 At [50.20]; citing SISU Capital Fund Ltd v Tucker, above n 95, at [119]. 97 At [50.20]. 98 Compare Re Joeleen Enterprises Ltd HC New Plymouth CIV 2008-443-485, 3 October 2008.
[104] Further, as I have outlined above, under the DOCA in this case the role of the deed administrators is largely administrative or mechanical. There would be major efficiency losses, to the detriment of all creditors, if new insolvency practitioners were required to be appointed purely for form’s sake.
[105] Cargill submitted that the full extent of KordaMentha’s prior involvement, including its involvement in the development of the DOCA, was not fully disclosed to this Court at the time that an application was made for leave under s 280 for Messrs Gibson and Graham to be appointed as administrators, and that the Court was materially misled as a result. I reject that submission.
[106] The requirement to seek court approval for their appointment as administrators arose due to their continuing business relationship with Solid Energy’s shareholder, the Crown, not their relationship with the Lenders (s 280 is not triggered by previous work for unsecured creditors). Messrs Gibson and Graham disclosed, however, their prior and ongoing involvement as investigative accountants for both the Crown and the Lenders. They provided the Court with a copy of their terms of engagement which outlined the nature of KordaMentha’s previous and ongoing advice relating to Solid Energy’s financial situation and business plans. Cargill submitted that the Court should have been expressly informed that a draft DOCA was being prepared. Such information, however, would hardly have been surprising or unexpected in all the circumstances. It would have been unlikely to have altered the Court’s assessment of whether leave should be granted. Obviously, if there was any evidence to suggest that Messrs Gibson and Graham (due to their previous involvement) had actively promoted a provision in the DOCA that would unfairly favour a particular class of creditor over others, that would be a matter of concern. There is no evidence of that type here, however.
[107] Messrs Gibson and Graham are highly experienced and well-respected insolvency practitioners. There is absolutely no evidence that, since their appointment as deed administrators, they have acted in a way that lacks independence or that improperly favours the interests of certain creditors (such as the Lenders) over others. The only specific failing alleged is that, when they were administrators (not deed administrators), they fell short by not pushing “back against
the promoters of the negotiated DOCA”. In essence, the allegation is that an even better deal for creditors (or at least the Participant Creditors) may have been secured in an alternative DOCA, or possibly some other form of insolvency arrangement.
[108] Such a submission leads the Court into highly speculative territory. That is why, as I have outlined at [96] above, in order to determine whether or not a deed of company arrangement is unfairly prejudicial to a creditor, the result under the deed should be compared to the result that would have been obtained under liquidation; not to the result that might have been obtainable under a hypothetical alternative deed.
[109] Cargill also submitted that, as a result of their lack of independence, Messrs Gibson and Graham, when they were administrators (not deed administrators) did not conduct a sufficient investigation of possible claims against the directors. This particular complaint appears to fall outside the proper scope of a claim under s 239ADD, which requires Cargill to establish that a provision in the DOCA, or an act or omission under it, is oppressive or unfairly prejudicial to, or unfairly discriminatory against Cargill. The Court has separate powers to supervise the conduct of administrators and deed administrators.99 I note, however, that the administrators did consider the issue of possible claims against directors, albeit within the constraints of the limited time available for such an exercise under Part 15A. They concluded that further investigation of claims against the directors was not warranted or required in order to advise creditors that, in their opinion, it was in the creditors’ interests to support the DOCA. It is relevant in this context that the anticipated DOCA outcome was double the liquidation outcome. Accordingly, unless there was a real prospect of claims against directors contributing more than $330 million to Solid Energy’s assets, creditors were still better off supporting the DOCA than putting the Group into liquidation to enable a more comprehensive investigation of any possible claims against the directors.100
99 See ss 239ADS and 239ACJ. 100 Compare Re Ansett Australia, above n 66.
Was Cargill unfairly classified as a Participant Creditor rather than as a Trade Creditor?
[110] Cargill submitted that it has been unfairly prejudiced and/or unfairly discriminated against by being classified as a Participant Creditor, rather than as a Trade Creditor.
[111] Trading Creditors are creditors whose claim has been admitted by the deed administrators and determined by them as being a Trading Claim. “Trading Claim” includes a claim arising in respect of any member of the Solid Energy Group in the course of its day to day ordinary business activities. The DOCA provides for Trading Creditors, together with post administration creditors, to be paid in full.
[112] Essentially all other pre-DOCA claims are Participant Creditor Claims, which will share pari passu in the proceeds of the managed sell down process. The claims of the Lenders, Cargill and the bondholders are all Participant Creditor Claims, as are a number of creditors with contingent damages claims.
[113] This distinction reflects that the fundamental commercial purpose of the DOCA is to improve the returns to creditors by enabling the Solid Energy Group to continue trading for a limited period, enabling a managed sell down of assets to occur. Such a process will result in a better return for all creditors than an immediate liquidation. To achieve this objective, however, the ongoing support of trading creditors is required.
[114] It is well-established that differential treatment of creditors under a deed, of itself, is not sufficient to justify termination, particularly where that differential treatment is necessary to preserve the going concern value of the underlying business.101 Rather, a claimant must also demonstrate some form of unfairness in the operation of the deed. In Mourant & Co Trustees Ltd, Henderson J said:102
101 See Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd, above n 93, at 183. See also Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139 (NSWSC); Re Bartlett Researched Securities Pty Ltd (admin apptd) (1994) 12 ACSR 707 (QSC) at 709-710; IRC v Wimbledon Football Club Ltd [2004] EWCA Civ 655, [2005] 1 BCLC 66 at [18]; and Commonwealth of Australia v Rocklea Spinning Mills Pty Ltd (recs and managers apptd) (subject to a deed of company arrangement) [2005] FCA 902, (2005) 145 FCR 220 at [30]. 102 Mourant & Co Trustees Ltd v Sixty UK Ltd (in admin) [2010] EWHC 1890 (Ch), [2010] BCC 882 at [67].
In considering the question of differential treatment, it is necessary to ask whether the imbalance in treatment is disproportionate, and also whether the differential treatment may be justified, for example by the need to secure the continuation of the company’s business by paying essential suppliers or service providers.
[115] As Mr Sare stated in his affidavit, it is not uncommon for ongoing trade creditors to receive preferential treatment, to ensure a company can continue to trade. In the United Kingdom context, Sir Roy Goode has observed that:103
Where a restructuring is being negotiated, it is quite common for minority creditors to hold out for better terms or repayment in full…. Majority creditors usually set their face against meeting such demands except as regards creditors whose claims are relatively small or upon whom the company is dependent for its ability to continue trading, such as key trade suppliers.
[116] It was initially proposed that all creditors above a certain threshold ($100,000) would have part of their debt compromised. Mr Sare’s evidence, however, was that it became apparent that, on that threshold, some day-to-day trading debt (about $8 million) would have become participant debt. Given the potential disruption to those ongoing trade creditors, and the corresponding risk that they would terminate contractual arrangements for non-payment, it was agreed that the monetary threshold be replaced with a definition of “Trading Creditor” that essentially distinguishes between ordinary course operating indebtedness and financial indebtedness.
[117] The primary rationale given for paying Trade Creditors in full was that doing so added value to the DOCA, either because the relevant creditors had an ongoing trading relationship with SENZ, or for some other reason. While Cargill accepted that this was a valid basis for differentiation, it noted that Mr Gibson acknowledged in his evidence that no specific analysis of possible future benefit to Solid Energy was undertaken in relation to creditors with debts of under $100,000, as opposed to larger creditors.
[118] Given the large number of creditors involved, however, it would be unrealistic, and inefficient, to expect a specific analysis of the benefit each creditor offered to the DOCA process to be undertaken, no matter how small their claim. The
103 Goode, above n 21, at [12-11].
approach taken was pragmatic, but reasonable. It no doubt involved significant savings in administration costs, while ensuring that available resources were used most efficiently in the broader interests of maximising returns to creditors.
[119] Cargill submitted that it was unfairly categorised as a Participant Creditor simply due to the large quantum of its debt. It is not, however, a financier or investor in Solid Energy, unlike most of the other Participant Creditors. Indeed, Cargill says that it continues to have a trading relationship with Solid Energy pursuant to the February 2012 settlement deed described at [6] above. Cargill’s argument in this respect was somewhat difficult to follow, but related primarily to an option payment required to be made by Spring Creek to Cargill pursuant to the settlement deed, in place of coal deliveries which cannot now be made, given that the Spring Creek mine (which previously supplied coal to Cargill) is no longer operational. I found this argument to be artificial. Cargill does not have an ongoing trading relationship with Solid Energy in any sense in which that concept is usually understood. Further, its ongoing support is not required in order for Solid Energy to continue trading. There is therefore no benefit to the company, or to creditors generally, in Cargill being classified as a Trading Creditor. Cargill’s claim is quite different in both nature and amount to the type of debts that would usually fall within the scope of a “trading creditor” claim.104
[120] I also note that Cargill is not the only Participant Creditor who is a non-Lender, or whose original debt arose in the context of a trading relationship. There are 29 other non-bank Participant Creditors. Many (possibly most) of their claims appear to have accrued, in a broad sense at least, in the course of trade with the Solid Energy Group. I accept the respondents’ submission that what differentiates them from a Trade Creditor is not how their debts originated, but that they are significant creditors who do not need to be paid in full in order for the Group to continue trading.
[121] Cargill has accordingly not been singled out for different or prejudicial treatment, but has been classified as a Participant Creditor in accordance with the
104 Although in a somewhat different context, the meaning of such terms is discussed, for example, in Fisk v Galvanising (HB) Ltd [2013] NZHC 3543 and Stockco Ltd v Gibson [2012] NZCA 330, (2012) 11 NZCLC 98-010.
same criteria that has been applied to all creditors. It will be treated the same as all other Participant Creditors, receiving a pro rata payment of its debt in accordance with the Payment Waterfall in the DOCA on final distribution.
Does the DOCA treat the Lenders preferentially, in a way that unfairly prejudices Cargill?
[122] Cargill submitted that the Lenders are treated preferentially under the DOCA, to its prejudice. In particular, Cargill submitted that the Lenders secured significant benefits for themselves, including the control of the DOCA (through the Participants Committee) and in their capacity as lessors and bondholders, or in respect of post- administration expenses they may incur.
[123] I have already addressed Cargill’s various concerns regarding the composition and role of the Participants Committee in some detail at [29] to [52] above. I will therefore focus here on whether the DOCA treats the Lenders preferentially in other respects.
[124] First, Solid Energy is party to certain lease agreements with ANZ and CBA Asset Holdings (NZ) Ltd relating to certain operating equipment. Solid Energy requires those lease agreements to remain in place in order to continue trading. Accordingly, under the DOCA, certain amounts relating to the lease agreements, including in particular rent, are treated as Trading Claims. All other amounts are treated as Participant Debt (for example “shortfall” amounts payable on returned equipment). I am satisfied that this approach is commercially rational and in accordance with the overall classification of Trading Creditors and Participant Creditors under the DOCA. It does not unfairly prejudice Cargill.
[125] Second, Solid Energy is required to hold bonds in respect of its mining rehabilitation requirements. Under the RDD a standard 0.5 per cent line fee is payable to Bond Issuers on Cash Collateralised Bonds until they expire or are otherwise terminated.105 Again, such payments are commercially rational in terms of the continued operation of the business as a going concern and do not involve an unfair preference to any of the Lenders who are bond issuers.
105 RDD, cl 9.5.
[126] Finally, the Lenders perform various functions associated with implementing the DOCA and the Restructuring Documents (including, but not limited to, their role as Members of the Participants Committee). The Lenders do not charge for their time on the Participants Committee, but are entitled under the RDD to recover certain costs and expenses incurred post-administration. Lenders can also recover certain indemnity amounts (including in their capacity as Participants Committee Members, Bond Issuers, and in respect of Hedging Arrangements). I accept the Lenders’ submission that their cost recovery and indemnity rights are proportionate to the significant role they perform in implementing the DOCA and other restructuring documents. Such payments do not give rise to any unfairness to Cargill. Given that Cargill is not on the Participants Committee, it is simply not exposed to costs associated with the implementation of the DOCA in the way that the Lenders are.
Has Cargill been unfairly prejudiced by the limitation of liability clauses in the DOCA?
[127] I have addressed the liability clauses in the DOCA in some detail at [60] to [82] above, in the context of whether those clauses contravene Part 15A of the Act. I concluded that they do not, although it was neither appropriate nor necessary to determine the precise scope of the limitation of liability clauses in the abstract.
[128] Cargill also submitted that the liability clauses (even if they do not contravene Part 15A per se) unfairly prejudice Cargill in that they inhibit a full investigation of the failure of Solid Energy, and the potential liability of the directors for such failure. This is said to have deprived creditors of a potential avenue of recovery. In this context, I note that Cargill appeared to assume the liability clause relating to the directors encompassed all Solid Energy Group directors, present or past. That is not the case, however. It covers only “Solid directors”, who are the five current directors who signed the DOCA. As I have already noted, they were all appointed after Solid Energy was already in financial difficulties.
[129] I am not satisfied that Cargill, or any other creditor, has been unfairly prejudiced by the liability clauses. First, the relevant clauses impact on all Participant Creditors equally. Cargill has not been singled out for special treatment.
Further, it is difficult to see any realistic prospect of improved recoveries for creditors from third party claims.
[130] The evidence of both Mr Sare and Mr Coupe is that the outcome of early termination of the DOCA, prior to the final distribution date, will be liquidation of the Solid Energy Group. If the DOCA were terminated, all of the side agreements upon which the DOCA is premised – environmental rehabilitation indemnities from the Crown, separate compromise agreements with local authorities, a Crown tax indemnity, and essential supplier agreements – would come to an end.
[131] Accordingly, even if a liquidator were to identify any potential claims against third parties, such as directors, it is difficult to see how pursuing legal action could result in any increased recoveries relative to the position under the DOCA. That is because the forecast liquidation outcome is less than half of the anticipated DOCA outcome. Creditor claims would be approximately $330 million greater in a liquidation than under the DOCA.106 Recoveries would also be significantly lower in a liquidation because insufficient funds would be available to continue to trade (and sell) the business as a going concern. The current environmental rehabilitation indemnities are not transferable.107 Any recoveries against directors or other third parties would therefore have to exceed $330 million, and possibly significantly more, in order for creditors to be better off under a liquidation than they are under the DOCA.
[132] Cargill has failed to discharge the onus on it of establishing that it has been unfairly prejudiced by the limitation of liability provisions in the DOCA.
106 The DOCA limits, extinguishes or transfers significant creditor claims (that would otherwise claim in a liquidation), including local council contingent claims for current and future environmental rehabilitation liabilities, which could amount to $189.4 million, and creditors’ contingent claims for loss or damage incurred as a consequence of Solid Energy’s insolvency, in the region of $145 million. 107 The DOCA (along with a Deed of Indemnity and Direct Agreement) provides for the transfer of the benefit of certain Crown rehabilitation indemnities to any purchasers of the relevant Solid assets. The Deed of Indemnity replaces environmental indemnities provided by the Crown in 1987 (the 1987 Indemnity) and 2014 (the 2014 Indemnity). The benefits of the 1987 Indemnity and the 2014 Indemnity were not transferable. The new indemnities protect Local Councils by ensuring that funds are available to complete environmental rehabilitation, once Solid Energy’s assets are sold to a third party. They also make Solid Energy’s business more attractive to a potential purchaser because it can undertake future mining with the knowledge that it will not have to bear the cost of rehabilitating land from the effects of previous mining. If the DOCA is terminated prematurely, then the new Local Council indemnities terminate, and the 1987 Indemnity and 2014 Indemnity are restored.
Cargill’s solvent liquidation complaint
[133] Cargill raised a new issue in its submissions, namely that the DOCA process culminates in a solvent liquidation following the managed sell down of assets. This is said to be unfairly prejudicial because it will have the effect of barring potential claims against directors and other third parties for breaches of duty and other misconduct, which could otherwise have been investigated by a liquidator.
[134] This ground of challenge was not pleaded in either Cargill’s original application, or its amended application. Mr Weston QC, on behalf of Solid Energy, formally objected to Cargill belatedly raising this issue. He submitted that the respondents are prejudiced by the issue being raised at such a late stage. In particular, the respondents could have adduced detailed evidence explaining the rationale for the DOCA process concluding in a solvent liquidation, if the issue had been raised in a timely fashion. It was submitted that evidence of insolvency practice in both Australia and New Zealand would have demonstrated that insolvency regimes implemented by deeds of company arrangement culminate in solvent liquidations in the vast majority of cases where the deed of company arrangement process culminates in liquidation. The reason why deeds of company arrangement generally culminate in solvent liquidations appears to be that a primary purpose of a deed of company arrangement is to release creditor claims and debts. To the extent it does so, creditors will lose their creditor status. A solvent liquidation is therefore a natural (albeit not inevitable) consequence of a deed that is anticipated to end in a subsequent liquidation following a period of trading under the control of existing directors.
[135] My preliminary view is that there appears to be nothing inherently objectionable in the DOCA process in this case culminating in a solvent liquidation. Further, there appears to be no unfairness to Cargill, because solvent liquidation will affect all Participant Creditors equally. In any event, Solid Energy’s assets will be distributed to creditors in accordance with the Payment Waterfall on the Final Distribution Date and there will be nothing remaining for creditors to claim against, even if they were permitted to do so.
[136] Ultimately, however, I have concluded that it is not appropriate to embark on a full consideration and determination of this issue. I accept Mr Weston’s submission that this ground of challenge is not pleaded and that the respondents are prejudiced by it being raised at a late stage. I am accordingly not prepared to grant leave for it to be raised as an additional, unpleaded, ground of challenge to the DOCA.
Summary and conclusion
[137] Cargill submitted, under s 239ACX, that the DOCA is invalid because it contravenes Part 15A in a number of respects. Cargill also submitted, under s 239ADD, that the DOCA is oppressive, unfairly prejudicial to, or unfairly discriminatory towards Cargill.
[138] In relation to Cargill’s various s 239ACX challenges I have concluded that:
(a) The role and functions of the Participants Committee under the DOCA do not contravene Part 15A for the reasons I have set out at [29] to [52] above.
(b) The composition of the Participants Committee does not contravene Part 15A. There is no requirement for a creditors’ committee to be perfectly representative. The creditors were entitled to decide who is best placed to perform the tasks required of the Participants Committee.
(c) The DOCA does not unlawfully restrict creditors’ statutory entitlement to vary the DOCA and ancillary restructuring documents for the reasons I have set out at [53] to [59] above. It was open to creditors to agree on the circumstances in which the DOCA terminates, including in circumstances where the DOCA is varied.
(d) The release and limitation of liability clauses do not contravene ss 239ACN(2), 239ACS and 239ACT of the Act for the reasons outlined at [60] to [83] above. The clauses are expressed to apply only
“to the maximum extent permitted by law”. They do not have effect to the extent that a Court deems impermissible. The precise scope of the clauses can only be determined, however, in the context of a live dispute.
(e) For the reasons outlined at [84] to [88] above, the “non-challenge” clauses do not contravene Part 15A by ousting the Court’s jurisdiction under s 239ACX, or purporting to do so. The clauses’ wording in itself anticipates the possibility of Court intervention. The clauses do not, and cannot, oust the Court’s jurisdiction to rule on the validity, correct interpretation and scope of the liability clauses.
(f) The “no set off” clause does not contravene s 239AEG for the reasons outlined at [89] to [91] above.
[139] In relation to the claims under s 239ADD that Cargill has been unfairly prejudiced or unfairly discriminated against, I have concluded that:
(a) Cargill has not been prejudiced by any lack of independence on the part of the deed administrators for the reasons outlined at [99] to [109] above. Further, there is no evidence that the deed administrators have acted in a way that lacks independence, or that unfairly prejudices Cargill.
(b) Cargill was not unfairly or inappropriately classified as a Participant Creditor for the reasons outlined at [110] to [121] above. It does not have an ongoing trading relationship with Solid Energy and its co-operation was not necessary to enable Solid Energy to continue trading.
(c) As set out at [122] to [126] above, the DOCA does not treat the Lenders preferentially, in a way that unfairly prejudices Cargill.
(d) Cargill is not unfairly prejudiced by the release and limitation of liability clauses for the reasons outlined at [127] to [132] above.
(e) As set out at [133] to [136] above, I have upheld the respondents’ objection to the Court formally determining the issue of whether the fact that the DOCA culminates in a solvent liquidation is unfairly prejudicial to Cargill, given that the issue was not pleaded. Nevertheless, my preliminary view is that there is nothing inherently objectionable in a DOCA process culminating in a solvent liquidation, and there is no unfairness to Cargill in that course.
Result
[140] The application is dismissed.
[141] If costs cannot be agreed between the parties, leave is reserved to file memoranda. Such memoranda are not to exceed 10 pages in length (excluding any annexures). Any memoranda from the respondents are to be filed and served by 26 August 2016. Any memorandum in response from Cargill is to be filed and served by 9 September 2016.
______Katz J