Issued
2011
Decision
15 Aug 2011
Appeal Status
Pending

Court of Appeal finds in favour of the Commissioner with regard to application of casting votes at a watershed meeting

2011 case note - confirms CIR's interpretation of when a casting vote can be used in a watershed meeting - voluntary administration, Deeds of Company Arrangement.

Case
Damien Grant & Steven Khov v Commissioner of Inland Revenue
Legal terms
Voluntary administration, Deeds of Company Arrangement ("DOCAs"), casting vote, oppressive or unfairly prejudicial DOCAs

Summary

A casting vote can only be used to break a deadlock between a number of creditors for or against a Deed of Company Arrangement ("DOCA"). It cannot be used to overcome a shortfall in support from the creditors representing 75% of the company's total debt.

Furthermore any DOCA which does not take into account the Commissioner's preferential debt in liquidation may be terminated by the Courts.

Impact of decision

The ruling confirms the Commissioner's interpretation of when a casting vote can be used in a watershed meeting.

Facts

On 5 December 2008, the appellants were appointed voluntary administrators for three publishing companies. There was common ownership and directorship of the three companies (with a minor exception). The one of particular relevance to this matter is Jones Publishing Limited.

During a voluntary administration there must be a watershed meeting. At the watershed meeting a DOCA can be proposed. Under section 239AK(2) of the Companies Act 1993 ("the Act"), for a DOCA to be passed it has to be adopted by a majority in number (of the creditors) representing 75% in value (a "super-majority" of the total debt).

Jones Publishing Limited went into voluntary administration. At the watershed meeting a DOCA was proposed. The Commissioner voted against and the seven other creditors voted for the resolution. The Commissioner was owed roughly 30% of the total debt. Therefore, the seven other creditors did not get the required 75% supermajority. The appellants argued at the watershed meeting, and continued to argue in the Courts, that they were entitled to exercise a casting vote in this situation. The Commissioner argued that the casting vote can only be exercised when required to break a deadlock in number (for example, five creditors vote for and five against) but not to break a deadlock between the number of creditors and the required super-majority of 75% of the total debt.

It is also significant to note that, while New Zealand legislation was clearly influenced by the Australian equivalent Act, New Zealand has enacted a super-majority provision whereas Australia only requires a plain majority.

The High Court had confirmed the Commissioner's view, and this was an appeal of that decision.

Issues

There were two issues to be considered by the Court of Appeal:

  1. The meaning of the term "casting vote" in section 239AK(3) of the Act - specifically whether an administrator, acting as chair of the watershed meeting, can exercise a casting vote when the majority of a company's creditors vote in favour of a resolution but lack the statutorily prescribed super-majority in value.
  2. Whether a DOCA is oppressive or unfairly prejudicial under section 239ADD(2) of the Act if it fails to take into account the preferential position that a creditor would have had under the Act if liquidation had occurred and, if this happened in this case, whether the Court should use its discretion to terminate the DOCA.

Decision

Regarding the casting vote issue; the chair of a watershed meeting may only use a casting vote where (as per Stephens J):

  • the votes for and against the resolution are equal in number (Condition 1). But before the casting vote may be used, the votes in favour of the resolution must also represent at least 75 per cent of the value of the debt (Condition 2). In other words, a casting vote can only be used to break a numerical deadlock so as to comply with Condition 1. It cannot be used to make up any shortfall in relation to value under Condition 2.
    [Emphasis added]

Regarding the DOCA being oppressive or unfairly prejudicial by not taking into account the Commissioner's preference on liquidation; the Court of Appeal agreed with the High Court that termination of a DOCA is likely if consequent priorities in liquidation are not acknowledged by the DOCA. Stevens J said:

  • We have no doubt that it is completely artificial to consider only the position at the time of the voting process. To exclude from the assessment what will happen on liquidation is to view only half the story … It is now the norm in cases of voluntary administration for the Commissioner's preferential debts to be recognised in the DOCA.

Companies Act 1993