CARGILL INTERNATIONAL S.A. v SOLID ENERGY NEW ZEALAND LIMITED & ANOR

[2016] NZHC 1817 [5 August 2016]

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

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