Hold-out creditor fails to block Solid Energy company arrangement

In a significant decision under legislation similar to (though with important differences from) Chapter 11 of the US Bankruptcy Code and equivalent UK and Australian legislation, the New Zealand High Court in Cargill International S.A. v Solid Energy New Zealand Ltd has rejected a minority hold-out creditor’s attempts to invalidate a voluntary deed of company arrangement (DOCA) for coal mining company Solid Energy New Zealand Limited (Solid Energy) pursuant to Part 15A of the New Zealand Companies Act 1993 (Act).[1] The DOCA, to restructure $600m of total credit debt, was approved at the watershed meeting by 94% of creditors by value and 99 per cent in number.

The decision affirms the broader protection and greater flexibility that Part 15A of the Act provides to companies and their creditors wishing to consider corporate rescue as an alternative to immediate liquidation, but equally highlights some obstacles that Part 15A—which provides automatic moratoria on creditor enforcement action—may present to minority or hold-out creditors that do not favour the proposed scheme of arrangement. Katz J’s ruling also highlights the tight time frames facing resistant creditors in the event they wish to influence majority creditors’ views on a proposed work-out.

Solid Energy—$600m voluntary scheme of arrangement

Cargill International S.A. (Cargill) became a creditor of Solid Energy through its involvement in an unsuccessful joint venture in the now defunct Spring Creek mine. By early 2013 the financial position of Solid Energy was in decline. In 2015 it was placed in voluntary administration and a DOCA was approved by an overwhelming majority of creditors. The highly complex DOCA allowed Solid Energy to continue operations for up to two and half years, under its own management, to allow an orderly sell down of assets. In return the Participant Creditors (including Cargill) compromised their debts.

Cargill was the only creditor to object to the DOCA at the watershed meeting, their debt amounting to only 6% of the total outstanding. Under the DOCA it was anticipated that so-called ‘Participant Creditors’ would receive 35 to 40 cents in the dollar, whereas ‘Trading Creditors’ were to be paid in full. The projected liquidation outcome was 15 to 20 cents in the dollar. Cargill’s view was that, should the DOCA be declared void, it will be possible for Cargill to negotiate a better commercial result rather than liquidation being inevitable.

Part 15A Schemes of Arrangement—key features

Part 15A of the Act governs voluntary administration of a company that is insolvent or that may in the future become insolvent. The objects of voluntary administration under s 239A are to administer the company in a way that:

  1. maximises the chances of the company, or as much as possible of its business, continuing in existence; or
  2. results in a better return for the company’s creditors and shareholders than would result from an immediate liquidation of the company.

Administration begins with the appointment of the Administrator under s293D. At this point the company’s financial position freezes. Once appointed the Administrator takes control of the company’s affairs and following investigation must report to the creditors on the business and financial affairs of the company and set out the options available to creditors which include: executing a DOCA, ending administration or appointing a liquidator.[2]

Underlying the role of the administrator is a tight time frame: the first creditors meeting must be called within 8 working days after administration began and the watershed meeting must be held within 20 working days of administration beginning, unless an extension granted by the court.[3] It is at the watershed meeting that the creditors may pass a resolution, by a majority of creditors, containing the DOCA.[4]

Under s 239ACX the court may rule on the validity of a deed if there is doubt, on a specific ground, whether the deed was entered into in accordance with Part 15A or complies with Part 15A. Additionally the court may terminate a deed under s 239ADD where the deed or a provision of it is 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.

Although based in large part on equivalent Australian legislation (Part 5.3A Corporations Act 2001), and similar UK and US schemes, New Zealand’s Part 15A has some important differences. For example:

  • Part 15A applies to companies “that may in the future become insolvent”: By contrast to the Australian regime, which applies to insolvent companies only, Part 15A applies to both insolvent companies and companies “that may in the future become insolvent”. There is therefore scope for earlier use of a voluntary administration in New Zealand.
  • Blocking stakes—lower threshold in New Zealand: In Australia, a resolution at a meeting of creditors is carried if a majority of creditors vote in favour of it and the value of debts owed to those creditors exceeds half the total debts owed to all the creditors voting. There is arguably greater scope in New Zealand for a creditor owed more than 25 per cent of total debts to veto entry into a deed of company administration.
  • Administrator veto—no veto right in New Zealand: By contrast to Australia, under Part 15A an administrator cannot overturn a creditor veto.

Judgment – key findings

Did the DOCA breach Part 15A?

No. Katz J rejected Cargill’s wide ranging complaints under s 239ACX that the DOCA breached Part 15A, including Cargill’s key challenge that the wide ranging powers and discretions vested by the DOCA on the Participants Committee amounted to an unauthorised delegation of the deed administrators’ statutory powers.

Cargill submitted that the Participants Committee controlled the administration of the DOCA, but acted without accountability or supervision, owed no duties, had unfettered discretion and had little or no liability. Her Honour, rejecting this challenge, accepted that creditors’ committees are proper and may perform decision-making functions—as they commonly do in other jurisdictions. Thus, Katz J observed that:
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.”[5] Thus, “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.”[6]
Cargill’s other complaints, which Her Honour broadly described at one point in her judgment as “abstract and highly ‘technical’”[7] were all rejected. Among others, Katz J rejected Cargill’s argument that a creditors’ committee appointed under a DOCA must be perfectly representative (the committee in this case comprised the five major lenders and the Crown, as shareholder).

Was the DOCA oppressive and/or unfairly prejudicial to Cargill?

No. Relevantly, the High Court held that the “relevant inquiry” to determine whether a scheme of arrangement was “oppressive, unfairly prejudicial or unfairly discriminatory to creditors” was, reflecting the approach of the Australian courts, to assess the “position the creditor would have been in, in liquidation, relation to the position under the deed of company arrangement.”[8] That is, the counter-factual is liquidation, not a hypothetical alternative scheme.

Cargill’s four arguments in support of its “oppression” challenge all failed: (a) Cargill was not prejudiced due to any lack of independence on the part of the deed administrators; (b) Cargill was not unfairly classified as a ‘Participant Creditor’ rather than ‘Trade Creditor’; (c) the DOCA did not treat the secured Lenders preferentially in a way that was unfairly prejudicial to Cargill; and (d) nor was Cargill (or any other creditor) unfairly prejudiced by limitation of liability clauses in the DOCA.

Comment: minority creditors in particular should be wary of the overall object and tight time frames of voluntary procedures

For minority creditors, three key points emerge from Solid Energy.

First, one of the key purposes of Part 15A is to preserve the overall value of a company for all stakeholders. The court will take a broad approach to assessing any challenge and, as Katz J’s judgment would seem to demonstrate, may take a dim view of “abstract and highly ‘technical’” complaints that do not demonstrate any genuine concern that creditors and stakeholders as a whole would be better off in liquidation.

Second, minority veto rights might be achieved at a lower threshold than in some other jurisdictions. If a minority or minorities aim to block a DOCA, this can be achieved as soon as dissenting creditors hold more than 25% of total outstanding debt.

Third, as Katz J noted, the Part 15A “time frames are tight”[9]. In particular, the watershed meeting, where the company’s creditors will decide the future of the company including whether or not a particular deed of company arrangement should be executed, must be convened within 20 working days after the commencement of the administration.[10] This puts significant pressure on creditors generally to assess the merits or otherwise of a proposed voluntary administration, but minority creditors in particular—it to be assumed that the company will already have been in discussion with substantial creditors.

[1] Cargill International S.A. v Solid Energy New Zealand Ltd [2016] NZHC 1817.

[2] Section 239AE.

[3] Sections 239AN and 239AT.

[4] Once the DOCA is executed it binds the company, the deeds administrator and the companies’ creditors in respect of claims as specified in the DOCA. Additionally a moratorium applies to anyone bound by the DOCA and the company is released from its debts except as provided for in the deed.

[5] Cargill International S.A. v Solid Energy New Zealand Ltd [2016] NZHC 1817 at [44].

[6] At [41].

[7] At [12].

[8] At [96].

[9] At [15].

[10] Section 239AT (unless that period is extended by the Court).

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