Restructuring And Insolvency 2

The much anticipated Mainzeal judgment is released

On 26 February 2019 the High Court issued its judgment in Mainzeal Property Construction Limited (in liq) & Ors v Yan & Ors [2019] NZHC 255 (Mainzeal).[1]  The Court found the directors of Mainzeal liable for reckless trading under section 135 of the Companies Act 1993, by agreeing, causing or allowing the company to be carried on in a manner likely to create a substantial risk or serious loss to the company's creditors, which ultimately resulted in creditors of Mainzeal suffering $110m worth of loss.  Three important factors led to the Court's conclusion:

  • Mainzeal was trading while balance sheet insolvent, because its intercompany debt was not in reality recoverable
  • There was no assurance of group support on which the directors could reasonably rely if adverse circumstances arose
  • Mainzeal's financial trading performance was generally poor and prone to significant one-off losses, which meant it needed a strong capital base or equivalent backing to avoid collapse. 

The trading structure operated by Mainzeal and the parent group, Richina Pacific involved a large scale extraction of funds from Mainzeal to subsidiary companies of the Richina Pacific group, for investment by Richina Pacific in China.  Mainzeal relied on assurances from one of Mainzeal's directors, Mr Yan, that Richina Pacific would financially support Mainzeal at all times.  The Court found that the directors, Dame Jenny Shipley, Clive Tilby, and Peter Gomm, were not as culpable as Mr Yan, and "acted in good faith, and with honesty, and that they did so throughout" but nevertheless, that they breached s 135 by:

  • Relying on assurances from Mr Yan when such assurances were not legally binding, and when the reliance on such assurances was not reasonable for reasons including that the applicable Chinese foreign exchange laws would not allow the Richina Pacific group to send the funds out of China to make the payments required
  • failing to obtain independent legal advice, which would have led to the discovery that the assurances from Mr Yan were not legally enforceable and that Mainzeal was trading while insolvent
  • Presiding over poor corporate governance standards, such as record keeping and the failure to ensure that any assurances of financial support which were relied on by the directors were in writing.

A claim against a fifth defendant, Sir Paul Collins, was dismissed. 

The Court describes Mr Yan as having "induced the [other] directors to breach their duties", and found the Richina Pacific group "initiated" the infringing manner in which Mainzeal traded.  The damages awarded by the Court reflected the Judge's opinion of the directors' culpability.

The Court rejected the usual approach to damages in such cases.  The approach in Mason v Lewis typically sees the Court consider the difference in the Company's financial position between the initial breach and the date of liquidation.

In Mainzeal, the Court considered that the starting point for the calculation of loss should be the total debts to creditors in the liquidation.  Adjustments were then made based on factors such as culpability and the length of time the breaches continued.

The decision has been appealed by the four directors.

Click here to read the judgment in full.


[1] Mainzeal Property Construction Limited (in liq) & Ors v Yan & Ors [2019] NZHC 255.

Directors' duties in the spotlight again

Cooper v Debut Homes Limited (in liquidation) [2019] NZCA 39

A largely successful appeal was made by the sole director of Debut Homes Limited (DHL) in the Court of Appeal against the decision of the High Court regarding a breach of director’s duties.

Hinton J in the High Court had found that Mr Cooper, being the sole director of DHL, had breached his duties under ss 131(1), 135(b), and 136 of the Companies Act 1991 by continuing to trade in favour of his secured creditors at the expense of the IRD as a preferential creditor.

DHL was a property development company that was incorporated in 2005.  By the end of October 2012 DHL was in a state of notional balance sheet insolvency, but Mr Cooper elected to continue trading in order to complete four remaining projects and obtain a higher return for DHL at the expense of an increased GST debt to the IRD.  Agreements for the sale of the four properties were entered into between 2012 and 2014, and DHL was put into liquidation on 7 March 2014.

The Court of Appeal determined that Mr Cooper's choice to continue trading was for the benefit of all the creditors.  Though Mr Cooper's decision did incur a greater GST debt obligation it also meant greater returns for DHL, meaning that the creditors, as a whole, were better off.  The factors that contributed to the Court of Appeal's decision included:

  • Mr Cooper proceeded upon a reasonable belief that there would be surplus funds after the sale of the unfinished properties, it was only unexpected extra costs that meant that surplus was far smaller than expected
  • Mr Cooper reasonably believed, upon his own experience and reassurance from DHL's accountant, that he would be able to settle the GST debt to the IRD after the sale of the properties
  • The IRD did not become preferential creditors until the agreement for sale and purchase of the properties was entered into rather than at the date of Mr Cooper's decision to continue to the completion of the properties, and even then the GST debt did not have priority.

Subsequently, the High Court's findings of a breach of duty against Mr Cooper were dismissed.

The Court of Appeal did, however, uphold two aspects of Hinton J's judgment.  The first was that there was no affirmative defence available to Mr Cooper under s 138 of the Companies Act.  The advice Mr Cooper received from DHL's accountant did not fall within the section.  The second was that the payments made to Mr Cooper by DHL totalling $34,129.54 were voidable transactions and therefore Mr Cooper was required to repay those to DHL.

The decision can be found here.

"Soft touch" provisional liquidation

In our December 2018 newsletter and in the February 2019 INSOL International newsletter we reported on a decision of the New Zealand High Court on the scope of the powers of interim liquidators in New Zealand.  In December 2018 the BVI High Court approved the appointment of ‘soft touch’ provisional liquidators to six BVI companies as a part of a larger group restructuring involving a Chapter 15 application in the USA and a Brazilian judicial reorganisation. 

The nature of the so called ‘soft touch’ appointment “is that the company remains under the day to day control of the directors, but is protected against the actions of individual creditors.  The purpose is to give the Group the opportunity to restructure its debts, or otherwise achieve a better outcome for creditors than would be achieved by liquidation.” 

The application was described as a protective measure to ward off predatory creditors who may wish to make satellite ex parte applications against the BVI companies in an attempt to steal a march on creditors generally. 

The grounds for appointment of provisional liquidators in the BVI are similar to those in New Zealand in that the Court needs to be satisfied that the appointment is necessary for the purpose of maintaining the value of assets owned or managed by the company.  The Court has the power to appoint the provisional liquidators on such terms as it sees fit and similarly to limit their powers. 

The BVI Court considered authorities from a number of different jurisdictions, including those considered by the NZ High Court in the CBL Insurance Ltd application.  It went on to conclude that the BVI Court had a very wide common law jurisdiction to appoint provisional liquidators and that that jurisdiction included to make such appointments to aid a company’s reorganisation including co-operating with cross-border reorganisational efforts aimed at achieving that overall objective.  English law governed debts cannot be compromised in foreign insolvency proceedings.

The Antony Gibbs rule is confirmed

The English judiciary has continued England along its path of isolation in cross-border insolvency issues with the Court of Appeal's recent decision in Re OJSC International Bank of Azerbaijan [2018] EWCA Civ 2082. 

Following financial difficulties, the OJSC International Bank of Azerbaijan (IBA) underwent a restructuring process pursuant to Azerbaijani law, and applied for a permanent stay to prevent English creditors from bringing claims outside of the restructuring agreement, which bound all creditors under Azerbaijani law.  At first instance, the application was denied, a decision that was affirmed by the Court.

IBA sought to rely upon the Regulations that incorporated UNCITRAL's Model Law on Cross-Border Insolvency into English law, and in particular, Article 21(1) of the Model Law.  Under Article 21(1), a further stay can be ordered beyond the automatic procedural stay that is issued following the formal recognition of a foreign insolvency proceeding.  Despite IBA's attempts to convince the Court of the importance of international cooperation in insolvency matters, the Court sided with the respondents in ruling that granting the stay would discharge the contractual rights of the English creditors, contrary to the common law.

In reaching this conclusion, the Court applied the controversial Antony Gibbs rule, which holds that a debt governed by English law cannot be discharged by a foreign insolvency proceeding.  IBA reasoned that the relief was merely a matter of procedure through the Model Law, and accordingly the rule was not engaged.  However, the Court considered that it had a substantive effect on the rights of the creditors that had been conferred under English law and therefore, the rule in Antony Gibbs applied. 

The Court drew on the Supreme Court's judgment in Rubin v Eurofinance SA [2013] 1 AC 236 to support its conclusions, indicating that the current English position is likely to continue until the Supreme Court diverges from it, or Parliament takes action.  UNCITRAL has recently released a new Model Law that seeks to tackle this issue, so the time seems ripe for a reconsideration – judicial or legislative – of England's position. 

While an application for leave to appeal to the Supreme Court is highly likely, the weight of case law makes obtaining leave a challenge.  In 2018, the basic premise of the Antony Gibbs rule was affirmed in two cases – Goldman Sachs International v Novo Banco SA [2018] UKSC 34; [2018] 4 All ER 1026, and Investec Trust (Guernsey) Ltd v Glenalla Properties [2018] UKPC 7; [2018] 4 All ER 738.  Moreover, in Investec, the Committee acknowledged Australian and New Zealand case law that also confirmed the Antony Gibbs rule.  In light of this, it is likely that the Supreme Court will be more content with leaving the issue to Parliament to decide, as opposed to reversing course.

The decision can be found here.

Court of Appeal takes plain interpretation of prohibition on assignment clause

The Court of Appeal in FTG Securities Ltd v Bank of New Zealand [2019] NZCA 16 has upheld the High Court's decision declining FTG standing to seek declarations in respect of a Priority Deed.

Tuam Ventures Limited (TVL) obtained loans with Canterbury Finance Limited (CFL) and BNZ.  Both creditors obtained general security agreements and registered mortgages over TVL's property.  CFL and BNZ entered into a Priority Deed, which gave BNZ's security priority.  The Priority Deed contained a prohibition on assignment clause:

"Neither Secured Party will transfer or assign any interest or right in or to that Secured Party's Securities to any person unless that person has entered into a deed or contract in a form approved by the other Secured Party…"

Through two purported assignments, FTG argued that it is now the present holder of CFL's securities and therefore is able to enforce the Priority Deed against BNZ.  BNZ had never been asked to consent to the purported assignments. 

The Court of Appeal confirmed that contractual parties are free to enter into a prohibition on assignment clause and there is no public policy reason to give such a clause a restrictive interpretation.  The Court refused to read down the prohibition on assignment clause, stating that BNZ would have wanted to be aware of the details of any assignment. 

FTG also argued that the assignment was valid against BNZ on the basis of indefeasibility – relying on a registered mortgage over TVL's property.  The Court was quick to dismiss this argument, stating that FTG may well have acquired proprietary rights, but it did not acquire any contractual rights against BNZ.

Kelly Paterson of Buddle Findlay Christchurch acted for BNZ in these proceedings.

Read the judgment here.

BTI 2014 LLC v Sequana [2019] EWCA Civ 112

The English Court of Appeal recently heard an appeal in relation to the ongoing dispute between BTI 2014 LLC (BTI) and Sequana S.A. (Sequana).

The appeal concerned one of two dividends paid to Sequana by its former subsidiary Windward Prospects Ltd.  While the dividend adhered to the requirements of Part 23 of the Companies Act 2006, BTI claimed that it was a transaction at an undervalue under section 423 of the Insolvency Act 1986.  This argument was accepted by the Court of Appeal, which made a number of important observations in doing so.

When considering the nature of dividends, the Court noted that a dividend (as a return on investment) is not a gift, and not necessarily unilateral.  Thus, it could be considered a transaction under section 423.  Further, the fact that the dividend is otherwise lawful under the Companies Act does not qualify the application of section 423 Insolvency Act, as the respective sections of each Act are "wholly unrelated".  Finally, there is no policy justification for treating dividends as beyond the scope of the section 423, given their possible use as a means of avoiding a company's liabilities.

BTI also claimed that the directors of WPL made the distribution in breach of their duty to consider creditors' interests.  BTI submitted that this duty is 'triggered' "where there is a real, as opposed to a remote, risk of insolvency".  The Court rejected this threshold as going beyond the current state of the law, holding the duty arose "when the company is likely to become insolvent".  However, the extent to which this duty prevailed over other considerations of the directors once engaged was expressly left open.

Read the full judgment here.

Liquidators not liable for debts of litigation funding

The High Court in New Zealand recently considered a funding agreement between Commercial Factors Ltd (CFL) and the liquidators of Blue Chip New Zealand Ltd (in liq) (Company) by which CFL agreed to lend $67,750 to allow the liquidators to obtain an opinion on the merits of claims against the Company's directors for reckless trading.

If proceedings were commenced, the Company was to pay 2.5% of any proceeds received to CFL.  If the Company did not commence proceedings but otherwise received funds from another party, the agreement stipulated CFL's right to repayment after any liquidator costs.  The liquidators commenced but then discontinued proceedings on their own funding.  Following liquidator realisations of $307,961.19, CFL sued the liquidators to recover CFL's funding and argued a breach of contract by the Company and breach of the liquidator's requirement to act in good faith.

Also at issue was the meaning of 'commence proceedings'.  With no prospect of any proceeds from a commenced and discontinued proceeding, the liquidators argued there was no obligation to repay CFL under the agreement.

The Court reinforced that liquidators ordinarily are not liable for the debts of a company in liquidation.

The Court interpreted 'commence proceedings' broadly to mean 'start and continue', not solely the initial filing of a statement of claim.  However, it determined that the funding of the initial proceeding was not from another party, because the liquidators were agents of the Company.

Accordingly, the Court dismissed CFL's appeal from the High Court.

CFL sought leave of the Supreme Court to appeal, which was dismissed.

A copy of the Court of Appeal decision can be found here.

The good faith defence to undervalue transactions

Apollo Bathroom and Kitchen Limited (in Liquidation) v Ling [2019] NZHC 237

In 2016, Ms Ling was adjudged to be liable to the IRD for $467,000 and bankruptcy was imminent.  Fortunately for Ms Ling, Apollo (of which Ms Ling's husband was a director and shareholder) paid $400,000 to the IRD in settlement of Ms Ling's debt.  Apollo received $0 in return and was placed into liquidation five months later. 

The liquidators of Apollo sought to recover the $400,000 on the basis that the transfer of the $400,000 was a transaction at undervalue for the purposes of s 297 of the Companies Act 1993.  The High Court found that the elements of s 297 were satisfied, noting that the provision did not require the party against whom recovery was sought to be a party to the transaction. 

Ms Ling resisted the liquidators' claim.  She sought to rely on the 'good faith' defence afforded by s 296.  Her resistance, however, was futile.  The Court held that the defence in s 296 only applied when a liquidator sought to recover property and because a claim under s 297 was for the recovery of value, it did not apply.  In any event Ms Ling could not prove the elements of the s 296 defence; the Court found her evidence to be "strikingly unsatisfactory". 

See Court decision here.

Administrators’ ability to execute DoCAs on behalf of companies without functioning boards

The administrators of certain CBL Insurance Group companies sought directions from the High Court on whether they have the power to execute deeds of company arrangements (DoCAs) on behalf of companies which do not have functioning boards under section 239ACO of the Companies Act (the Act).

When certain companies in the CBL Group entered into administration creditors were expected to approve a DoCA at the watershed meeting, following which each CBL Subsidiary would be required to execute the DoCA.  The challenge here was that none of the CBL subsidiaries had a functioning board.  The only director recorded in the Companies Office indicated that he had resigned and would not authorise or execute the DoCA.

The Court clarified that the administrators have the power to authorise that the DoCA be executed by or on behalf of the CBL subsidiaries, given that the creditors had resolved that the CBL subsidiaries execute the DoCA.  Furthermore, the Court clarified that administrators have the power to execute the DoCA without requiring any resolution of the CBL subsidiaries' board.

A copy of the decision can be found here.

‘Seriously misleading’ description of collateral on PPSR leads to loss of priority

The case involved two competing summary judgment applications.  Partners Finance and Lease Limited alleged that it had a perfected security interest registered against a bulldozer on the Personal Property Securities Register (PPSR).  Partners had funded Westland Hire Ltd in purchasing the bulldozer in 2015 and then registered a financing statement with the description 'Goods – Other' rather than 'Goods – Motor Vehicles'.  Partners sought a declaration that it was the lawful owner of the bulldozer and an order requiring ASB Bank Limited to remove and discharge its security interest in respect of the bulldozer, allowing Partners to sell it. 

ASB contended, among other reasons, that Partners' financing statement was seriously misleading and as per section 149 of the Personal Properties Securities Act 1999 it was invalid.  ASB had conducted searches on the Register for 'motor vehicles' and did not find any secured party registered against the bulldozer.  In reliance of such result, ASB funded Richmond Business Trust to purchase the bulldozer in 2017 and registered its financing statement on the Register in December 2017. 

The Court affirmed the test for 'seriously misleading' was an objective one.  In this case, had Partners' collateral description been 'Goods – Motor Vehicles' then ASB's search would have revealed the registration.  Partners’ summary judgment application was dismissed.  The financing statement was held to be seriously misleading in terms of s 150 of the Act, meaning its security interest was not perfected.  The security interest of ASB was perfected, meaning its interest takes priority pursuant to s 66(a) of the Act. 

The full decision can be found here.

Right of the purchaser by way of mortgagee sale to insurance proceeds

This case concerned the entitlement of 100 Investments to the payment of insurance proceeds from NZI, a division of IAG, for damage to a building in the Canterbury Earthquakes.

The owner of the building insured the building for material damage with NZI.  The building was badly damaged in the Canterbury earthquakes in 2010 and 2011 and was demolished in 2012.  Property Finance Securities Ltd became the first mortgagee.  There was a second mortgage over the property.  The mortgagee used the standard ADLS form which provided that the owner assigned to the mortgagee all of its right, title and interest in "land proceeds", which was defined to include the proceeds of any insurance.  PFSL sold the land by way of mortgagee sale to 1IL in 2015.  The agreement for sale and purchase included an assignment by PFSL of the benefit of any residual insurance claim to 1IL.  IAG and 1IL then reached a settlement with respect to the insurance claims.  1IL's right to the insurance proceeds was subject to challenge.

The Court held that:

  • The proceeds of a claim under the material damage policy were an accrued contractual right arising at the time of damage (ie in 2010 and 2011). That right was "land proceeds" under the mortgage and was validly assigned to 1IL in the ASP (at [30] and [39])
  • The effect of the sale was to discharge the first and all subsequent mortgages over the property (at [32]). 1IL took the benefit of the assigned right to the insurance proceeds free of the discharged mortgages (at [44])
  • 1IL had the right to any remaining insurance proceeds and the ability to settle any insurance claims with IAG (at [46]).

The decision can be read here.

Demanding less by demanding more – Court builds on principles relating to demands on guarantors

In Barclays Bank plc v Price [2018] EWHC 2719 (Comm), Mr Cohen contended that the demand he had been sent by Barclays in his capacity as guarantor was invalid because it sought payment of £55,500 against a maximum specified liability under the guarantee of £55,000. 

The Court disagreed with Mr Cohen and found that a "reasonable recipient could not have been left in any doubt at all" that the right reserved was being exercised, particularly because no specific form of demand was required under the terms of the guarantee. 

This case builds on the principle that making a demand under a guarantee for an amount that exceeds the express liability cap under that guarantee may still be effective as a demand for the lesser amount actually due.

See the Court's decision here.