“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. … the involvement of Gibson and Graham of Korda Mentha, prior to their appointment as deed administrators, gave rise no real risk to their independence …”
New Zealand insolvency law has much to offer us in law reform even though our regimes are very similar. An inter-government agreement in 2007 to try to harmonise our laws where possible did not get very far. Nevertheless, Australia has regard to NZ law in our law reform considerations, and in our case law.
New Zealand also looks to our laws. NZ in fact ‘borrowed’ and refined our voluntary administration regime in its Part 15A of the NZ Companies Act 1993. As with Australia, Part 15A filled a gap that previously existed in New Zealand’s corporate insolvency framework. It provides broader protection and greater flexibility to companies wishing to consider corporate rescue as an alternative to immediate liquidation.
However, as is often the case with borrowed laws, voluntary administration has not been applied in NZ as much as in Australia, partly due to the smaller market.
In the NZ law reports, there have been only a small number of Part 15A cases decided, and only one significant challenge to a deed of company arrangement (DOCA), which was ultimately decided on a procedural point relating to the use of a deed administrator’s casting vote: Grant v Commissioner of Inland Revenue  NZCA 330,  1 NZLR 235.
However a significant decision arising from a challenge to a DOCA was given on 5 August 2016, in Cargill International S A v Solid Energy New Zealand Limited  NZHC 1817 which raises many useful issues applicable in Australia.
The full decision is not covered here, only those parts dealing with a challenge to the independence of the administrators, from Korda Mentha, based on their prior work before the company entered administration. The challenge failed and the reasons of the Judge are very useful in explaining why.
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. SENZ and Spring Creek Mining Company, are referred to collectively as “Solid Energy”.
On 13 August 2015 the Solid Energy Group was placed into voluntary administration. Brendon Gibson and Grant Graham of Korda Mentha were appointed administrators and a draft DOCA under Part 15A was circulated to creditors. The applicant in the NZ High Court, Cargill International SA held approximately 6% of the Solid Energy Group’s total outstanding debt.
Despite Cargill’s opposition to the DOCA, it was approved at what is referred to in NZ law as “the watershed meeting” (s 239AS) called by the administrators on 17 September 2015 by 94% of creditors in value and 99% in number. This meeting is equivalent to our second meeting of creditors.
The DOCA was then executed by the various companies in the Solid Energy Group. Gibson and Graham were appointed deed administrators.
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”) would receive. Cargill’s challenges to the DOCA became significantly more wide ranging.
Under Part 15A the Court has power to intervene where a DOCA is invalid for contravention of Part 15A (s 239ACX); or a DOCA is oppressive, unfairly prejudicial to, or unfairly discriminatory towards one or more creditors (s 239ADD).
Cargill challenged the DOCA on both of these grounds and sought orders that the DOCA be declared void and unenforceable, or be terminated or varied.
Cargill’s debt related 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. Pursuant to the settlement deed Spring Creek Mining Company agreed to pay Cargill US$18 million on 1 December 2017. Payment could be accelerated by Cargill if an event occurred which affected SENZ’s creditworthiness.
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.
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, Korda Mentha (for the fourth respondent banks (“Lenders”)) and Deloitte (for Treasury).
In October 2013, following a report by Korda Mentha on various insolvency options, a creditors’ compromise was undertaken, pursuant to Part 14 of the Companies Act, to enable Solid Energy to keep trading. However Solid Energy’s financial position continued to deteriorate during 2014.
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, with Gibson and Graham appointed.
The DOCA was highly complex, with total creditor debt of approximately $600 million. The Solid Energy Group would 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 were anticipated to receive 35 to 40 cents in the dollar, with 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.
Cargill’s view was that, if the DOCA were set aside, it would be able to negotiate a commercial resolution with the Lenders that would see it achieve a better return on its debt than under the DOCA. As the Judge said
“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”.
If Cargill were wrong in this view, and the DOCA were set aside, the consequences for Solid Energy, its creditors (including Cargill), and third parties (including post administration creditors and Solid Energy’s employees) would be serious.
The Judge said that Cargill was entitled to bring its proceedings, regardless of its wider commercial motives. But, this commercial context was relevant in at least two respects, however. First, the bona fides of some of Cargill’s more abstract and highly “technical” claims needed 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 were potentially relevant.
[Independence extracts, paraphrased, with Cargill’s submissions in red]
Has Cargill been prejudiced due to a lack of independence on the part of the deed administrators?
The Judge, Katz J, set out the obligations of practitioners .
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”. Deed administrators are expected to be free of actual or potential conflicts of interest. A person who would be disqualified under s 280(1) of the (NZ Companies) 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. 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. [This is the equivalent of our DIRRI]
- Cargill submitted that the deed administrators are not independent, because their firm, Korda Mentha, 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, Korda Mentha was involved in the development of the DOCA, although Korda Mentha 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. 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.
The Judge found there was no evidence, however, that the appointment of 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. The Act envisages that the administrators will become the deed administrators unless the creditors decide otherwise. 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. They should not put forward a proposal unless they know there is a reasonable prospect of the proposal being adopted. Further, the deed administrators should not advocate the interests of one group of creditors over another.
The Judge was not persuaded that the involvement of Gibson and Graham, prior to their appointment as deed administrators, gave rise to any real risk of prejudice to Cargill.
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. There is therefore no risk of bias arising from previous advice about how to maximise a secured creditor’s priority over unsecured creditors.
Further, under the DOCA the role of the deed administrators was 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.
- 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 Gibson and Graham to be appointed as administrators, and that the Court was materially misled as a result. The judge rejected that submission.
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).
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 Korda Mentha’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 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.
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.
Such a submission leads the Court into highly speculative territory. That is why, as I have outlined 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.
- Cargill also submitted that, as a result of their lack of independence, 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.
However 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 them 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.
NZ is presently considering some law reforms of its VA regime, along with a licensing regime of its insolvency practitioners. Two particular ideas are mentioned here.
- that directors should not be able to appoint a voluntary liquidator or voluntary administrator after the date of service of a liquidation application by a creditor, other than with the applicant creditor’s consent;
- that there be “a publicly searchable unique identification number for existing and future directors, allocated after a proof of identity process and in addition to existing requirements”, in other words, a DIN.
Any comment is welcome.