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Court of Appeal of New Zealand |
Last Updated: 25 January 2018
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IN THE COURT OF APPEAL OF NEW ZEALAND
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CA357/2010
[2011] NZCA 390 |
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BETWEEN DAMIEN GRANT AND STEVEN KHOV
Appellants |
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AND COMMISSIONER OF INLAND REVENUE
Respondent |
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Hearing: 13 July 2011
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Court: Arnold, Stevens and Wild JJ
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Counsel: M J Whale for Appellants
P W O'Regan and J D Kerr for Respondent |
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Judgment: 15 August 2011 at 3.00 pm
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JUDGMENT OF THE COURT
____________________________________________________________________
REASONS OF THE COURT
(Given by Stevens J)
Table of Contents
Para No
Should a DOCA be declared void or terminated? [1]
Factual background [4]
Prior to 21 January 2009 [5]
The watershed meeting [13]
23 January to 7 March 2009 [16]
Statutory scheme [20]
High Court decision [23]
Meaning of a “casting
vote” [26]
Appellants’ submissions [28]
Respondent’s submissions [36]
Discussion [45]
Was
the DOCA oppressive or unfairly prejudicial? [55]
Appellants’ submissions [56]
Respondent’s submissions [60]
Our evaluation [65]
Result [69]
Should a DOCA be declared void or terminated?
[1] The appellants, Messrs Grant and Khov, are the administrators of three companies including Jones Publishing Ltd (Jones). The respondent, the Commissioner of Inland Revenue (the Commissioner), is a creditor of each of the three companies. In February 2009 a deed of company arrangement (DOCA) under Part 15A of the Companies Act 1993 (the Act) was executed for all three companies. The Commissioner applied to the High Court to have the DOCA declared void, or terminated. Williams J granted a declaration that the DOCA was void on the basis that it was not entered into in accordance with the provisions of s 239AK of the Act.[1] Alternatively, an order would have been made terminating the DOCA on the basis that it was oppressive or unfairly prejudicial to the respondent.[2] The appellants appeal both of these findings.
[2] There are two issues to be determined. The first concerns the meaning of the term “casting vote” in s 239AK(3) of the Act. In order for a resolution to be adopted at a creditors’ meeting, there must be “a majority in number representing 75% in value of the creditors” who are voting.[3] The question is whether an administrator, acting as the chair of the meeting, is permitted to exercise a casting vote when the majority of a company’s creditors vote in favour of the resolution but lack the statutorily prescribed super-majority in value. This is, essentially, a matter of statutory interpretation.
[3] The second issue is whether a DOCA is oppressive or unfairly prejudicial under s 239ADD(2) of the Act if it fails to take into account the preferential position that a creditor would have had under the Act if liquidation had occurred. If the Court finds that the DOCA in the current case was oppressive on this basis, a subsidiary issue is whether the Court should in fact use its discretion to terminate the DOCA.
Factual background
[4] There is no real dispute between the parties as to the relevant factual background. Mr Whale, counsel for the appellants, accepts that the facts are, for the most part, fairly summarised in the judgment of Hugh Williams J.[4] It is convenient to describe the background in three parts: prior to 21 January 2009; the meeting of creditors on 21 January 2009; and events between 23 January and 7 March 2009.
Prior to 21 January 2009
[5] On 5 December 2008 the appellants were appointed the joint administrators of Jones, Dish Publishing (Dish) and Top Gear NZ Limited (Top Gear) (together the Jones Group) under Part 15A of the Act.[5] Top Gear and Dish were subsidiaries of Jones, incorporated to publish magazines of the same name, which Jones printed alongside other titles. Both magazines were making losses, although Dish was near break even. With one exception there was a common ownership and directorship of the companies. Two days prior to the appointment of the administrators, all three companies licensed the use of their intellectual property and sold their book debts and physical assets to Tangible Media Limited (TML) for $1.00. The licences gave TML the right to publish on payment of a fee. TML is owned by Image Centre Holdings Ltd, the holding company for the Image Centre Group. One of its subsidiaries, Image Centre Ltd, was a major creditor of the Jones Group.
[6] The Commissioner was a creditor of Jones, Dish and Top Gear respectively. As at the date of the watershed meeting[6] on 21 January 2009, the companies owed the Commissioner the following sums:
- Top Gear: $4,886.83, of which $3,980.27 was claimed to be preferential debt;
- Dish: $7,941.77, of which $4,730.96 was claimed to be preferential debt;
- Jones: $349,315.90, of which $290,249.18 was claimed to be preferential debt.
[7] By the time of the watershed meeting, the amount owed to the creditors of the companies totalled $1,173,215.27 for Jones, $525,504.86 for Dish and $440,284.33 for Top Gear. The purpose of the watershed meeting was for the creditors of the Jones Group, then under administration, to decide the future of the companies and in particular whether to execute a DOCA, end the administration or appoint a liquidator.[7]
[8] The DOCA presented by the appellants to the creditors of Jones, Dish and Top Gear in anticipation of the watershed meeting provided for the acceptance of the sales of the businesses and for an initial distribution to creditors on a pro rata basis. A further distribution, consisting of 50 per cent of the funds due from TML under the licensing agreement, would also be paid pro rata under the DOCA. Image Centre Holdings Limited, TML’s owner (and, after the Commissioner, the largest creditor of the companies), was to be excluded from the initial distribution, but would receive the remaining 50 per cent of the licence fees.
[9] Clause 18 of the DOCA provided that it covered all three companies and was conditional on all three executing the DOCA. Clause 18.5 provided:
This Deed cannot come into operation for one company unless it comes into operation by all three companies. If the creditors or board of one company vote against this Deed then this Deed shall not come into force.
[10] The administrators presented a written report with the DOCA. The report discussed voidable and other transactions and powers available to a liquidator, as well as the administrator’s powers. It stated that the administrators had discovered some payments to creditors that the administrators considered to be voidable transactions, but even if recovery action was successful it would not provide a better outcome for creditors than the proposed DOCA. The administrators also reported that, in the months before the administration, the directors had waived the debt they owed to the Jones group and in return waived the debt owed by the companies to their family trusts. But, unwinding that transaction would simply substitute one debt for another, with the debts to the family trusts being secured by general security agreements. Liquidation of the Jones Group was discussed as an option, including possible recovery from the directors, as were the other alternatives open to the creditors.
[11] Although the DOCA referred to a proposed “trading distribution” the opinion of the administrators was that “the magazines are worthless”.[8] In correspondence with the Commissioner prior to the watershed meeting, the administrators confirmed that “the business will not be trading” under the DOCA. The written report to creditors also confirmed that “[e]ach business was ... unsustainable in its current state” and that the companies would “cease to actively trade” under the DOCA.
[12] The administrators recommended that all creditors vote for the DOCA, with the exception of the Commissioner. In correspondence with the Commissioner on 19 January 2008, Mr Grant stated: “It is clear that the position of the IRD would be better under a liquidation than a DOCA. On this basis I expect the IRD will vote against the DOCA, as perhaps they should.”
The watershed meeting
[13] The watershed meeting occurred on 21 January 2009. Mr Grant chaired the meeting, during which the proposed DOCA and the written report prepared by the administrators were presented and discussed. In evaluating liquidation as an alternative to executing the DOCA, the administrators agreed that under a liquidation the “net position is a substantial improvement to the recovery of the IRD, who would probably get paid in full, and a reduction in the position for unsecured creditors, who optimistically would get three and a half percent, and would more likely get nothing”. The administrators recommended that the unsecured creditors support the DOCA but, because the Commissioner’s debt would probably be payable in full on liquidation, recommended that the IRD should vote for liquidation.
[14] After the discussion there was a vote on whether to approve the DOCA. A separate vote was conducted for each of the three companies. The outcome of the voting was as follows:
- Top Gear: the Commissioner voted against, five other creditors voted for the resolution;
- Dish: the Commissioner voted against, seven other creditors voted for the resolution;
- Jones: the Commissioner voted against, 10 other creditors voted for the resolution.
[15] The aftermath of the voting is conveniently summarised in an affidavit filed on behalf of the Commissioner in the High Court by Ms To, an IRD officer.[9] Ms To deposed:
The Commissioner took no issue with the first two votes. The resolutions passed both in terms of number and value. However, the Commissioner noted that in relation to Jones Publishing, the total debt it owed to creditors was $1,173,215. This was made up of $349,316 owed to the Commissioner and $823,899 to other creditors. Thus, the Commissioner was owed around 30% of the total debt and the other creditors owed around 70%. Accordingly, the votes of the other creditors in favour of resolution did not amount to 75% of the value of Jones Publishing’s total debt. I understand from s239AK(2) of the Companies Act that for a resolution to pass it has to be adopted by a majority in number representing 75% in value is required and thus it was the Commissioner’s view that the resolution did not pass. The Commissioner’s representatives raised this issue with the Administrators and the other creditors present at the meeting. The Administrators took a brief break to confer with their legal advisers and, upon resumption of the meeting, purported to use a casting vote in favour of the resolution and held that the resolution had passed.
23 January to 7 March 2009
[16] After the administrators had determined that the resolution favoured the execution of a DOCA for Jones, the Commissioner queried the use of the casting vote. The Commissioner was concerned that the total debt owed by Jones to creditors was $1,173,215.27. Of this, the Commissioner was owed $349,315.90. As this represented 29.77 per cent of the total debt, the votes of the creditors in favour of the resolution did not represent 75 per cent of the value of Jones’ creditors as required by s 239AK of the Act. Mr Grant responded that he had considered the statutory provisions and the commentary in Brooker’s Companies and Securities Law. He had also consulted the relevant Australian law and decided:
After reviewing the legislation, we were confident that, in the event that a majority of creditors by number, but not 75% by value, were to support the Doca, we had a casting vote that we could support, or not, the Doca. It was our opinion that, with our support, the Doca would [pass] the creditors meeting on our casting vote.
[17] Mr Grant also explained that, because the administrators were treating all three companies as one business (despite the fact that there was no single administration order under Subpart 21 of Part 15A of the Act in force), the percentage of total debt owing to the Commissioner was under 25 per cent.
[18] The DOCA was executed on 2 February 2009. On 20 February 2009 the DOCA was filed with the Registrar of Companies. The background section of the executed DOCA stated that the creditors of Dish and Top Gear supported the DOCA “with over 50% in the number of creditors and 75% in value” while, in relation to Jones, “over 50% in the number of creditors but not over 75% in value” supported the DOCA. This meant that the administrators had “elected to use their casting vote to support the Doca and confirm the Doca as passed”.
[19] On 7 March 2009 the Commissioner received the first of two distributions forecast by the DOCA: $38,270.79 for Jones, $535.40 for Top Gear and $870.09 for Dish. As at the date of the High Court decision the second distribution had yet to be paid.
Statutory scheme
[20] Part 15A of the Act deals with “Voluntary administration” of companies.[10] It provides for the business, property and affairs of an insolvent company, or company that may become insolvent, to be administered in a way that maximises the chances of the company continuing in business or, if it is not possible for the company to continue in business, in a way that results in a better return for the company’s creditors and shareholders than would result from an immediate liquidation of the company.[11] A DOCA is a deed that is executed by the company and its creditors providing for payments towards the creditors’ debts.[12] Whether the company should execute a DOCA is a matter for determination at the watershed meeting.[13]
[21] A court may rule on the validity of a DOCA if there is doubt whether the DOCA was entered into in accordance with Part 15A and has power to declare the deed void.[14] The DOCA may be void if the administrators fail to comply with prescribed mode of conduct at a creditors’ meeting. Section 239AK, which appears in Part 15A, states:
239AK Conduct of creditors’ meetings
(1) The following clauses of Schedule 5 apply to creditors’ meetings called under this Part as if references to the liquidator were references to the administrator:
(a) subject to section 239AZ, clause 4; and
(b) clauses 6 to 11.
(2) At any meeting of creditors or class of creditors held under this Part, a resolution is adopted if a majority in number representing 75% in value of the creditors or class of creditors voting in person, or by proxy vote or by postal vote, vote in favour of the resolution.
(3) The administrator or the administrator’s nominee must chair a creditors’ meeting, and has a casting vote.
(4) For the purposes of voting at a creditors’ meeting, the administrator may estimate the amount of a creditor's claim that is for any reason uncertain.
(5) On the application of the administrator, or of a creditor who is aggrieved by an estimate made by the administrator, the Court must determine the amount of the claim as it sees fit.
[22] A court also has further powers to terminate a DOCA. Section 239ADD provides:
239ADD Termination by Court
(1) The Court may terminate a deed of company arrangement on the application of—
(a) the company; or
(b) a creditor; or
(c) the deed administrator; or
(d) any other interested person.
(2) The Court may terminate a deed of company arrangement if it is satisfied that—
(a) an information breach has occurred; or
(b) there has been a material contravention of the deed by a person bound by it; or
(c) effect cannot be given to the deed without injustice or undue delay; or
(d) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be done or made under the deed would be,—
(i) oppressive or unfairly prejudicial to, or unfairly discriminatory against, 1 or more of the creditors; or
(ii) contrary to the interests of the company as a whole; or
(e) the deed should be terminated for some other reason.
(3) The Court must not terminate the deed without first taking into account the rights of third parties.
...
High Court decision
[23] First the Judge considered whether, when the resolution was put at the watershed meeting that Jones’ creditors confirm the DOCA, Mr Grant validly exercised a “casting vote” under s 239AK(3) of the Act. The Judge determined that “casting vote” means a vote that is utilised where, following a first round of voting, there are votes for and against the resolution in equal numbers.[15] In order for a resolution to be adopted under s 239AK(2), the majority of creditors must vote in favour of the resolution (Condition 1) and this majority must represent 75 per cent in value of the creditors voting (Condition 2).[16] The Judge concluded that the chair can only operate a casting vote where Condition 1 is unsatisfied.[17] This is the situation where, while those in favour of the resolution hold at least 75 per cent of the value of the company’s debt, there are equal numbers of creditors voting for and against the resolution.[18]
[24] The Judge did not accept that the chair could operate a casting vote where Condition 2 remained unsatisfied. This was because the chair may be a creditor and so have a deliberative vote itself. If he or she purported to operate a casting vote in order to satisfy the lack of value, then a double-counting of the debt held by the chair would occur.[19] Thus, in the current case, while a majority of Jones creditors had voted in favour of the resolution, satisfying Condition 1, it was clear that that majority did not represent “75% in value” of the Jones debt, as the IRD held 29.77 per cent of that debt. Mr Grant was consequently not entitled to a casting vote, meaning that the DOCA was void under s 239ACX(3) of the Act.
[25] Second, while it was not strictly necessary to do so,[20] the Judge went on to consider whether the Jones DOCA was oppressive or unfairly prejudicial against the Commissioner under s 239ADD(2). The Commissioner submitted that the DOCA made no allowance for the fact that over 83 per cent of the IRD’s debt was preferential under sch 7 of the Act. The Judge agreed that, when a DOCA is contemplated, some “separate treatment” should be allowed that acknowledges the special position of debts that would be preferential in a liquidation.[21] Hence the DOCA in the current case was oppressive and unfairly prejudicial against the Commissioner,[22] which formed an alternative basis for termination.
Meaning of a “casting vote”
[26] The first issue on appeal is whether Mr Grant validly used a “casting vote” at the watershed meeting. Both parties agree that a casting vote is one to be used when a “deadlock” of some sort has been reached during voting upon a resolution. It is the nature of that deadlock, however, that is in issue.
[27] Counsel for the appellants submits that Mr Grant complied with provisions of s 239AK of the Act as a casting vote may be used when one of the conditions under subs (2), including the requirement of a super-majority, remains unsatisfied. Here, Condition 1 was satisfied but Condition 2 was not, meaning the vote was validly cast. The appellants contend that there was a tie or “deadlock” because a majority in number voted in favour of the resolution but the required number (75 per cent) by value did not. The appellants say that in such circumstances the “casting vote” allows the chair to choose between the interests of the majority in number and the interests of the majority in value, as is the position in Australia. The Commissioner submits there was no tie or deadlock in this case, merely a resolution that did not achieve the statutorily stipulated majorities and so did not pass.
Appellants’ submissions
[28] The appellants base their interpretation of s 239AK largely on its legislative history. Discussion in Hansard of what was to become Part 15A of the Act dealing with voluntary administration occurred in the context of the introduction of the Insolvency Law Reform Bill. At the time of the first reading of the Bill the Acting Minister of Commerce stated:[23]
The bill adopts the Australian voluntary administration regime for companies in financial distress, as an alternative to liquidation, that allows for a moratorium period so that administrators can assess the viability of the company to continue trading before a decision is made either to rehabilitate it by placing it in voluntary administration or to enter into liquidation.
[29] Mr Whale submits that, when the legislature specifically made provision for a casting vote in s 239AK, the intention was to reflect and give effect to the concept of a casting vote as used in the Australian voluntary administration regime. This is supported by the fact that provision for a casting vote at creditors’ meetings in s 239AK is unique to that section in New Zealand’s insolvency legislation. Clause 5 of sch 5 to the Act, which regulates proceedings at meetings of creditors under Part 14 (compromises with creditors) and Part 16 (liquidations) of the Act, expressly states that a creditor chairing the meeting does not have a casting vote. Moreover, there is no reference to a casting vote in the provisions dealing with meetings of creditors to vote on a proposal made to them by an insolvent under Part 5 of the Insolvency Act 2006.[24]
[30] Counsel cites an extract from Heath & Whale on Insolvency dealing with the administrator’s casting vote as follows:[25]
In Australia, the threshold for voting at a creditors’ meeting is a majority in number and in value, but in New Zealand, there is no reference to how the casting vote is to operate in a situation where a majority in number, but 75 per cent in value, of creditors voting by person or proxy, must vote in favour of a resolution for it to pass. The adoption of the casting vote procedure was no doubt intended to reflect its operation in Australia where the administrator can use it to deal with the situation where the majority of creditors in number reach a different result from the majority in value. In respect of Part 14 Companies Act, the Fifth Schedule expressly states that the chair of the meeting does not have a casting vote. The answer must be that the casting vote under Part 15A, as in Australia, is broadly defined, and is not a true casting vote in a situation of deadlock, since the requirement for a majority in number is additional to the requirement for at least 75 per cent in value if the resolution is to be passed; in that situation there will never be a “deadlock” as such.
(Footnotes omitted.)
[31] Counsel also refers to an observation by the same authors that the reason why the voting threshold of 75 per cent in value differs from Australia, where it is 50 per cent of value and a majority in number, is that:[26]
... New Zealand has adopted the same threshold as applies in Part 14 compromises, since otherwise, there would be a distinction between the two rescue procedures which may carry incentives to use one rather than the other. Australia does not have a procedure equivalent to Part 14, though it does retain Part 5.1 of the Corporations Act 2001, a Court-sanctioned scheme of arrangement procedure, for which the crucial majority is 75 per cent in value. The New Zealand Government chose in those circumstances to have the same voting threshold as in the retained New Zealand Part 14 procedure, rather than amend the latter to bring it into line with the Australian voluntary administration threshold.
(Footnotes omitted.)
[32] In this context, counsel refers to the regulatory provisions that govern the voting process and thresholds under the Australian voluntary administrative regime. They are set out in reg 5.6.21 of the Corporations Regulations 2001 (Cth) as follows:
Carrying of resolutions after a poll has been demanded at a meeting of creditors
(1) This regulation applies to a poll taken at a meeting of creditors.
(2) A resolution is carried if:
(a) a majority of the creditors voting (whether in person, by attorney or by proxy) vote in favour of the resolution; and
(b) the value of the debts owed by the corporation to those voting in favour of the resolution is more than half the total debts owed to all the creditors voting (whether in person, by proxy or by attorney).
(3) A resolution is not carried if:
(a) a majority of creditors voting (whether in person, by proxy or by attorney) vote against the resolution; and
(b) the value of the debts owed by the corporation to those voting against the resolution is more than half the total debts owed to all creditors voting (whether in person, by proxy or by attorney).
(4) Subject to subregulation (4B), if no result is reached under subregulation (2) or (3), then:
(a) the person presiding at the meeting may exercise a casting vote in favour of the resolution, in which case the resolution is carried; or
(b) the person presiding at the meeting may exercise a casting vote against the resolution, in which case the resolution is not carried; or
(c) if the person presiding at the meeting does not exercise a casting vote, the resolution is not carried.
...
[33] Counsel accepts that the Australian provision is rather more prescriptive in setting out the voting process and explaining how the casting vote process works. But counsel submits that, apart from the voting value threshold, there is no substantive difference between reg 5.6.21 and s 239AK(3) of the Act. Accordingly he argues that the Australian case law and legislation is more relevant to interpreting the New Zealand statutory provision than the New Zealand cases relied upon by the Judge, which consider the concept of casting votes in a historical and different context.
[34] Counsel also refers to the statutory objects relevant to Part 15A of the Act,[27] including those that would see an insolvent company administered in a way that: (a) maximises the chances of the company continuing in existence or (b) if it is not possible for the company 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. Thus counsel submits that the ability of a chairperson of a watershed meeting to effectively decide between the interests of the creditors with the preponderance in numbers and the interests of the creditors with preponderance of value is a significant process which facilitates the achievement of the objectives of the regime. Hence the narrow interpretation of casting vote adopted by the Judge does not assist to further the objects of the New Zealand regime.[28]
[35] Counsel further submits that, if the words “casting vote” in s 239AK were to be interpreted broadly and in line with the interpretation of that expression as used in the Australian voluntary administration regime, there are various ways in which the exercise of the casting vote can be challenged on the basis that it was exercised improperly. Counsel relies particularly on the powers of the Court under ss 239ACX and 239ADO to review the propriety of the exercise by an administrator of a casting vote, for example, where it is not exercised honestly or not in accordance with what the administrator believes to be in the best interests of those affected by the vote. The Australian courts have interpreted their supervisory jurisdiction widely to achieve a wide range of outcomes.
Respondent’s submissions
[36] The Commissioner endorses the reasoning of the Judge and submits that s 239AK does not allow a chair to exercise a “casting vote” when the super-majority by value prescribed by Parliament has not been achieved. The Australian meaning of “casting vote” has not been used in s 239AK and ought not be imported into New Zealand law. There are three main reasons for this. First, the bare use of the word “casting vote” in s 239AK is insufficient to import the highly prescriptive meaning from the Australian voluntary administration regime. Secondly, the change to a super-majority voting threshold during the provision’s passage through the House of Representatives signals an intention to depart from the Australian position. Importing the Australian form of “casting vote” would be unworkable in the New Zealand statutory context. Thirdly, the reading contended by the appellants would result in “casting vote” bearing differing meanings within the Act in the absence of any indication from the legislature that such inconsistency was intended. Thus the Commissioner submits that s 239AK can sensibly be read as conferring a casting vote only where the stipulated 75 per cent majority has been achieved but the numbers of creditors voting for and against are tied.
[37] Mr O’Regan for the Commissioner acknowledges that the common law did not recognise the concept of a casting vote and that is not something that is inherent in a chairperson.[29] The term emanates from an archaic use of the word “cast”, meaning to tilt the balance,[30] and is a creation of statute introduced for the purpose of avoiding a deadlock which would otherwise ensue where votes for and against a motion are evenly split.[31]
[38] The Commissioner accepts that Parliament may have initially assumed that the Australian conception of the “casting vote” would be carried across when introducing the Australian voluntary administration regime into New Zealand. However, the Commissioner submits that this intention was not realised by the wording chosen even in early drafts, and was in any event overtaken by amendments to the voting requirements in s 239AK later in the legislative process, as Parliament eventually settled on a super-majority of 75 per cent in value. Counsel therefore submits that, rather than adopting wholesale the Australian provision, Parliament considered appropriate voting majorities for the adoption of a deed of company arrangement and decided that a resolution to adopt a DOCA would be carried only if a majority in number representing 75 per cent in value of the creditors voted in favour of the resolution. To read s 239AK(3) of the Act as empowering an administrator to declare the vote passed, regardless of whether the super-majority by value decreed necessary by Parliament has been achieved, would be to frustrate Parliament’s object.
[39] Counsel observes that, in contrast to s 239AK, the Australian provisions choose to place the interests of the majority of creditors by number and the majority by value on an equal footing. This was done by expressly providing that where the majorities vote differently, the result is a deadlocked vote. The administrator is given a tool to break that deadlock through the “casting vote”. But, under s 239AK of the Act, a vote in favour by the majority in number which is not supported by the super-majority in value (or vice versa) does not result in a deadlock. The resolution to execute the DOCA simply fails.
[40] Counsel submits that, in contrast to the Australian provision (quoted in full at [32] above), the New Zealand provisions give no explanation as to what is meant by “casting vote”. To read s 239AK as adopting the Australian use of the term would require the Court to read the detailed provisions of reg 5.6.21 of the Australian regulations into s 239AK of the Act. The Commissioner submits this would require the Court to rewrite the statute in an unacceptable fashion. Counsel submits that the appellants are asking the Court to find that Parliament inadvertently omitted to enact the voluminous detail contained in the Australian Regulations as part of s 239AK and to correct that alleged oversight. Counsel relies on the observation of Lord Mersey in Thompson v Goo[32] & Co:32
It is a strong thing to read into an Act of Parliament words which are not there, and in the absence of clear necessity it is a wrong thing to do.
[41] Counsel further submits that, if the intention behind the changes to voting majorities in s 239AK was to align the voluntary administration regime with the creditor compromise regime in Part 14, this intention would be fatally undermined by the inclusion of a casting vote allowing the administrator to choose between the interests of a bare numerical majority and a 75 per cent majority in value. Under Part 14, the chair of the meeting does not have a vote that allows a choice between the preferences of these two groups.[33]
[42] The Commissioner also draws support from the way in which Parliament provided for a super-majority in value in the case of voting by certain types of creditors on DOCA proposals. This is dealt with in s 239AY of the Act. The voting majorities are identical to those in s 239AK, but casting votes are not mentioned. The Commissioner submits that the intention of the two sections with respect to voting is substantially the same. Section 239AY was drafted from scratch and was not amended during the legislative process. Counsel submits it cannot be the case that the super-majority requirement by value is meaningfully protective under s 239AY but, as the appellants argument requires, effectively optional under s 239AK.
[43] In response to the views expressed in Brookers and Heath & Whale on Insolvency, relied on by the appellants, the Commissioner submits that those passages assume, without analysis, that the Australian and New Zealand legislative provisions are not materially different. Yet even before the relevant New Zealand provisions had come into effect, one commentator had identified the failure in s 239AK of the Act to provide for the same deadlock-breaking mechanism as in the Australian legislation.[34] Moreover, one of the authorities cited by the appellants itself emphasised the unique nature of the “casting vote” created by the Australian legislation.[35]
[44] Finally, counsel submits that the interpretation contended for by the appellants would result in the term “casting vote” having inconsistent meanings within the Act for no apparent contextual reason. Various examples are offered including ss 239AM and 245A (power of Court where outcome of voting at creditors’ meeting determined by related entity), cl 5(7) of sch 1 (proceedings at meetings of shareholders), cl 5(2) of sch 3 (proceedings of the board of a company) and cl 5(3) of sch 5 (proceedings at meetings of creditors).
Discussion
[45] We are satisfied that the meaning of the term “casting vote” in s 239AK of the Act is limited to the narrow circumstances as held by the Judge. The chair may use a casting vote only where, following the first round of voting, the votes for and against the resolution are equal in number (Condition 1). But before the casting vote may be used, the votes in favour of the resolution must also represent at least 75 per cent of the value of the debt (Condition 2). In other words, a casting vote can only be used to break a numerical deadlock so as to comply with Condition 1. It cannot be used to make up any shortfall in relation to value under Condition 2. We have so concluded for the following reasons.
[46] First, we consider that the use of the words “casting vote” in s 239AK without more is insufficient to import into the scheme of that section the entirely different concept of a deadlock breaking mechanism where there is a different result between the interested creditors by number, as opposed to the value of debt held by such creditors. That is the very essence of the Australian regime introduced by reg 5.6.21 of the Corporations Regulations. The concept required somewhat prescriptive drafting, given the twin requirements of a majority in number and value, to differentiate it from the more usual concept of a casting vote that may be used to resolve an equality of votes.[36] Such drafting is absent from s 239AK of the Act.
[47] Secondly, we note that not only was the Australian concept of deadlock breaking mechanism not used, but also the New Zealand provision involved a different requirement for the value component of the creditors’ debt. A super-majority of 75 per cent by value was chosen, compared with a plain majority in Australia. That course had the result of aligning the value component with that used in s 239AY of the Act dealing with the voting of certain types of creditors on DOCA proposals.[37] We agree with Mr O’Regan that the Legislature cannot have intended the super-majority component by value to be meaningfully protected while, on the appellants’ argument, being effectively optional under s 239AK.
[48] These factors suggest that, while the sponsoring government department may have initially contemplated the introduction of the Australian voluntary administration regime, Parliament moved away from that as the legislation was developed and debated. We stress that it is for this Court to interpret the law as enacted as opposed to that which may have been envisaged earlier in the legislative drafting process.
[49] Thirdly, the interpretation of casting vote that we have adopted not only gives meaning to the words as used in s 239AK (albeit in the restricted circumstances described at [45] above) but also preserves the integrity of Parliament’s choice of requiring a super-majority by value of debt, as well as a majority by number of creditors.
[50] Fourthly, we are satisfied that the use of the term “casting vote” in s 239AK in the absence of detailed language importing the Australian deadlock breaking mechanism is not merely a drafting error. As the Supreme Court has made clear, the powers of the Court to intervene in such circumstances are limited. As Tipping J said in Air New Zealand Ltd v McAlister:[38]
The Court can correct a drafting error by addition, omission or substitution of words if three conditions are satisfied: (i) the Court must be sure that there is a drafting error; (ii) the Court must also be sure what Parliament was trying to say; and (iii) the necessary correction must not involve too great a re-writing of the defective language. This last consideration is obviously a matter of degree and will often depend on the Court’s assessment of whether, in the light of the overall interests of justice, when balanced against the proper role of the courts, the redrafting exercise should be left to Parliament. Indeed, the more elaborate the necessary redrafting, the less likely it is that the first two conditions will have been fulfilled.
[51] In the present case, even if the first two conditions had been met, the rewriting required to invoke the meaning contended for by the appellants in the form of the deadlock breaking mechanism in reg 5.6.21 would have been a bridge too far.
[52] We mention two further aspects. We agree with Mr O’Regan’s submission that the passage in Heath & Whale on Insolvency relied upon by the appellants assumes, without detailed analysis, that the Australian and New Zealand legislative provisions are not materially different. They are. Significant legislative drafting would have been required to import the Australian deadlock breaking mechanism, once Parliament chose to adopt the requirement of a super-majority by value.
[53] A related point is that the interpretation contended for by the appellants would result in perverse outcomes. For example, allowing the chairing administrator to declare a vote passed regardless of whether the mandated super-majority by value has been achieved would mean a resolution rejected by the vast majority in value of creditors, but approved by a bare majority in number, could be declared passed by the administrator on a casting vote. We agree with Mr O’Regan that this cannot have been Parliament’s intention when it lifted the voting approval threshold from a bare majority in value to a super-majority of 75 per cent and thereby prevented any straightforward choice between opposing bare majorities.
[54] For all the above reasons, the appellants cannot succeed in the first ground of the appeal.
Was the DOCA oppressive or unfairly prejudicial?
[55] Although it is not strictly necessary to deal with this second ground, we briefly address the competing arguments.
Appellants’ submissions
[56] The appellants submit that it is fundamentally unjust for the Commissioner to be preferred over other unsecured creditors, when at the time of voting, it has the same interests and rights as those unsecured creditors. Accordingly, at the time of the watershed meeting, the DOCA was not oppressive, unfairly prejudicial or unfairly discriminatory – it was fair and equal in its treatment of all persons who were unsecured creditors at the time. Moreover, at the time the resolutions approving the entering into of the DOCA were passed, the Commissioner had no existing preference – merely the prospect of a preference if: (a) the company was subsequently placed into liquidation; and (b) those persons with preferences rating above those of the Commissioner did not exhaust the available assets.
[57] As an alternative argument, the appellants challenge the factual finding that the DOCA was oppressive and unfairly prejudicial. On the facts, the other unsecured creditors had been prejudiced by the inadequate action taken by the Commissioner in relation to recovery of its debts over an extended period before the Jones Group went into administration. Further, a payment had already been made under the DOCA by the administrators to unsecured creditors, in reliance on an email from an officer of the Commissioner. On this basis the Court should have exercised its discretion under s 239ADD of the Act against terminating the DOCA.
[58] Counsel notes the Judge’s view[39] that because the preferential rights of the Commissioner were not reflected in the terms of the DOCA, it was oppressive and unfairly prejudicial. But the appellants rely on the observation of the Judge that circumstances might arise in other cases where lack of priority for debts which would be preferential in a liquidation would not result in an adverse finding under s 239ADD(2)(d)[40] and cite Commonwealth v Rocklea Spinning Mills Pty Ltd.[41] In particular, counsel cited the following passage:[42]
There can be no objection to the application of these principles in an appropriate case. The danger is to suppose that they are applicable to all, or almost all, deeds of company arrangement that establish a regime for the distribution of a company’s assets. In fact, one size does not fit all. There will be circumstances when ordinary commercial common sense will demand, in the case of priority creditors, a loss of priority and, in the case of unsecured creditors, some degree of discrimination. This much is evident from the structure of Part 5.3A.
[59] Examples Mr Whale gives where such an approach might be applied include where a third party is providing funds or where the object of the deed is to save the business of the company. Mr Whale submits that, as one purpose of the DOCA is to preserve the assets of the Jones Group, a similar approach ought to have been applied here in the exercise of the Judge’s discretion.
Respondent’s submissions
[60] The Commissioner submits that there is no doubt that the Court has power to terminate a DOCA under s 239ADD of the Act. The Commissioner also submits that the Judge was correct to find that the DOCA is oppressive and unfairly prejudicial to the Commissioner because, without justification, the DOCA makes no allowance for the fact that the majority of the IRD’s debt is preferential under sch 7 of the Act. Rather, the DOCA provides that creditors will be paid out pari passu.
[61] The Commissioner challenges the appellants’ submission that the evaluation of whether a DOCA is oppressive should solely reflect the position at the time of the watershed meeting and that because Jones was not then in liquidation, the Commissioner had no relevant priority. The Commissioner says the consideration of whether the DOCA is oppressive must, by definition, look to what the creditor’s position would be in the absence of a DOCA. In this case, in the absence of a DOCA, Jones would be in liquidation and the Commissioner would have a preference.
[62] Counsel refers to s 239ACN(3) of the Act and the Companies (Voluntary Administration) Regulations 2007, whereby certain provisions are deemed to be included in any DOCA, unless the DOCA expressly excludes them. One of the provisions contained in cl 4 of sch 1 of the Regulations is that the “deed administrator must apply the assets of the company coming under his or her control under the deed in accordance with the priorities specified in sch 7 of the Companies Act as if the company were in liquidation and the deed administrator were the liquidator”. Irrespective of whether the wording of the DOCA is sufficient to meet the requirements for an express exclusion of the prescribed provision relating to priority debts, the Commissioner submits that the failure of this DOCA to take account of the Commissioner’s priority was sufficient basis for the High Court’s conclusion that it was oppressive.
[63] The Commissioner further submits that where a DOCA operates as a de facto winding up of a company, failure to recognise and provide priority for preferential debts will generally result in the DOCA being terminated for oppression. This approach is clearly established by the Australian authorities[43] and there is nothing in the New Zealand legislation to warrant departure from the Australian position. Counsel endorses the observation of the Judge that voluntary administration is intended to enable the affairs of companies in straitened financial circumstances to be appropriately dealt with.[44] Thus liquidation is the default position and the fact that voluntary administration arrangements are just short of, or a substitute for, liquidation should be acknowledged.
[64] The Commissioner submits that there was no realistic suggestion that the aim of the DOCA was to keep Jones, Dish and Top Gear afloat. Despite the appellants’ suggestion (for the first time in the submissions on appeal) that the companies continued to trade by reason of the fact that the intellectual property of the group stayed with it, the reality is that the only purpose of the DOCA was to provide for the orderly distribution of the companies’ assets. Accordingly, there is no basis for the priorities that would apply on a winding up not to be recognised under the DOCA. In their absence the Judge was entitled to find that the DOCA is oppressive, unfairly prejudicial, or unfairly discriminatory towards creditors who lose the priority they would otherwise enjoy and to exercise his discretion to terminate the DOCA.
Our evaluation
[65] We are satisfied that it was open for the Judge to conclude that the DOCA was oppressive and unfairly prejudicial to the interests of the Commissioner and essentially for the reasons he gave.[45] As the Judge held:[46]
... the Commissioner’s preference in liquidation was noted and the fact the Commissioner would do better in liquidation than under the DOCA was expressly referred to – to the point where administrators recommended the Commissioner vote against the DOCA. That said, there was no special treatment accorded the Commissioner’s debts in the DOCA. In those circumstances, when the debts owing to the Commissioner were only to be dealt with pari passu under the DOCA, the debtor companies and their administrators should arguably have recognised that altered priorities would apply in liquidation so that, should default occur and were the DOCA to come under judicial scrutiny, termination would be likely unless some recognition of those consequent priorities was acknowledged.
[66] We have no doubt that it is completely artificial to consider only the position at the time of the voting process. To exclude from the assessment what will happen on a liquidation is to view only half the story. Moreover, the alternative argument by the appellants that the other creditors were prejudiced by alleged inadequate action by the Commissioner is not supported on the facts. Mr Whale candidly acknowledges the High Court decision has brought about a change in practice in similar situations. It is now the norm in cases of voluntary administration for the Commissioner’s preferential debts to be recognised in the DOCA. This is consistent with the practice in Australia as described by Palmer J in the Expile case as follows:[47]
The authorities ... establish, in my opinion, that where a creditor would have a particular priority under the Corporations Act or other legislation if a company were to be wound up in insolvency, the Court, as a general rule, does not approve or permit any other regime of distribution of the company’s assets which would disturb that priority. Essentially, this is so because the legislature has indicated, in the statutory priorities for distribution in a winding up, which claims should be preferred where there is insufficient for all creditors to be satisfied.
[67] As to the factors that might influence the question of priorities in a voluntary administration, the observations of Finkelstein J in the Rocklea case are pertinent:[48]
- ... The danger is to suppose that they are applicable to all, or almost all, deeds of company arrangement that establish a regime for the distribution of a company’s assets. In fact, one size does not fit all. There will be circumstances when ordinary commercial commonsense will demand, in the case of priority creditors, a loss of priority and, in the case of unsecured creditors, some degree of discrimination. This much is evident from the structure of Pt 5.3A.
- Part 5.3A has two distinct (but not inconsistent) objects. They are set out in s 435A. The first object is to provide a mechanism that will enable an ailing business to be resuscitated. The second object if the first is not achievable is to provide a means by which the assets of a company will be realised more efficiently than in a winding up. The mechanism for the attainment of each object is a deed of company arrangement.
- When the purpose of a deed is to provide for the orderly realisation of a company’s assets followed by the distribution of the proceeds between creditors, the deed puts in place what can fairly be described as a de facto winding up. In such a case there is usually no reason to depart from the manner of distribution that would apply in an actual winding up. A departure from the winding up model is likely to be unjust or unfair.
...
[68] Given that this second ground is not essential to the disposition of the appeal we need not elaborate further. We would only add that, on the subsidiary point as to whether the Judge ought to have in fact exercised his discretion under s 239ADD, the appellants have not shown that the Judge was wrong. The test for challenging the exercise of a discretion[49] has not been met.
Result
[69] The appellants have failed to make out either ground of appeal. The appeal must therefore be dismissed.
[70] As to costs, the usual rule applies. The appellants must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Lowndes & Associates, Auckland for
Appellants
Crown Law Office, Wellington for Respondent
[1] Commissioner of Inland
Revenue v Grant HC Auckland CIV-2009-404-7388, 25 May
2010.
[2] At [82].
[3] Companies Act 1993 [the Act],
s 239AK(2).
[4] At
[1]–[24].
[5] Appointed by
the companies under s 239I of the Act.
[6] A term used by Parliament in
the Act and defined in s 239B as the creditors’ meeting called by the
administrator to decide
the future of a company and, in particular, whether the
company and the deed administrator should execute a deed of company
arrangement.
[7] See ss 239AS
and 239ABA of the Act.
[8] Commissioner of Inland
Revenue v Grant HC Auckland CIV-2009-404-7388, 25 May 2010 at
[16].
[9] Ms To’s evidence
was accepted by the Judge at [22].
[10] Part 15A was inserted into the Act by s 6 of the Companies Amendment Act 2006.
[11] Section 239A of the Act.
[12] A definition of “deed of company arrangement” in s 239B.
[13] Section 239AS.
[14] Section 239ACX(1)(a) and (3).
[15] At [43].
[16] At [47].
[17] At [48].
[18] At [51](d).
[19] At [55].
[20] The Judge noted at [75] that this was the first time this point had arisen for judicial consideration, so was worthy of discussion.
[21] At [80].
[22] At [82].
[23] (21 February 2006) 629 NZPD 1319. Later, when the Insolvency Law Reform Bill was split into three Bills, including the one dealing with Part 15A (the Companies Amendment Bill), the statement regarding the adoption of the Australian voluntary administration regime was repeated by the Minister sponsoring the Bill.
[24] Under the common law, a chairperson has no casting vote: Nell v Longbottom (1894) 1 QB 767 at 771.
[25] Paul Heath and Michael
Whale (eds) Heath & Whale on Insolvency (online looseleaf ed,
LexisNexis) at [17.12].
[26]
Ibid at [17.11].
[27] Set out
in s 239A of the Act.
[28] Various cases in Australia
provide examples of administrators breaking a tie between a majority in number
voting for a resolution
and a majority in value voting against and vice versa:
Plumbers Supplies Co-operative Ltd v Firedam Civil Engineering Pty Ltd
[2011] NSWSC 325; Blue Ring Pty Ltd v Landshore Pty Ltd (Subject to a Deed
of Company Arrangement) [2001] WASC 245; Kirwan v Cresvale Far East
Limited (in liq) [2002] NSWCA 395; and Young (as representative for the
Australian partnership known as Accenture) v Sherman [2002] NSWCA 281,
(2002) 20 ACLC 1,559.
[29]
Nell v Longbottom [1894] 1 QB 767 at
771.
[30] R v Bradford City
Metropolitan Council, ex parte Corris [1990] 2 QB 363 (CA) at
369.
[31] Nell v
Longbottom [1894] 1 QB 767 at
771.
[32] Thompson v Goold
& Co [1910] AC 409 at
420.
[33] Schedule 5, cl
5(3).
[34] Lynne Taylor “Report from New Zealand” (2007) 15 Insolv LJ 136 at 137; see also Michael Josling “The casting vote” (2010) NZLJ 276.
[35] See Plumbers Supplies
Co-operative Ltd v Firedam Civil Engineering Pty Ltd [2011] NSWSC 325 at
[56].
[36] For example, in
ss 239AM and 245A of the Act and sch 1,
cl 5(7).
[37] In which
there is no provision for a casting
vote.
[38] Air New Zealand
Ltd v McAlister [2009] NZSC 78, [2010] 1 NZLR 153 at [96].
[39] Relying on Expile Pty
Ltd v Jabb’s Excavations Pty Ltd [2004] NSWSC 284, (2004) 22 ACLC
667.
[40] At [80].
[41] Commonwealth v Rocklea
Spinning Mills Pty Ltd [2005] FCA 902, (2005) 145 FCR
220.
[42] At [25].
[43] Re V & M Diagnostic
Services Pty Ltd (1985) 9 ACLR 663 (NSWSC); Expile Pty Ltd v
Jabb’s Excavations Pty Ltd [2004] NSWSC 284, (2004) 22 ACLC 667 and
Commonwealth v Rocklea Spinning Mills Pty Ltd [2005] FCA 902, (2005) 145
FCR 220.
[44] At
[80].
[45] At
[80]–[82].
[46] At
[81].
[47] Expile Pty Ltd v Jabb’s Excavations Pty Ltd [2004] NSWSC 284, (2004) 22 ACLC 667at [45].
[48] Commonwealth v Rocklea Spinning Mills Pty Ltd [2005] FCA 902, (2005) 145 FCR 220.
[49] See May v May (1982) 1 NZFLR 165 (CA) at 170; adopted by the Supreme Court in Kacem v Bashir [2010] NZSC 112, [2011] 2 NZLR 1 at [32].
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