Grant and Khov v Commissioner of Inland Revenue Coa

• Jurisdiction: New Zealand
• Judge: Stevens J
• Judgment Date: 15 August 2011
• Neutral Citation: [2011] NZCA 390
• Docket Number: CA357/2010
• Court: Court of Appeal
• Date: 15 August 2011

BETWEEN

Damien Grant and Steven Khov

Appellants

and

Commissioner of Inland Revenue

Respondent

[2011] NZCA 390

CA357/2010

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal against High Court declaration that a deed of company arrangement (DOCA) was void as it failed to meet requirements of s239AK Companies Act 1993 (“CA”) (conduct of creditors' meetings) and that the DOCA was oppressive and unfairly prejudicial to respondents — whether administrator, acting as chair, could exercise a casting vote when they lacked statutorily prescribed super-majority in value — whether DOCA was oppressive or unfairly prejudicial as it failed to take into account preferential position a creditor would have if liquidation occurred

• A The appeal is dismissed.

• B The appellants must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Stevens J)

Table of Contents

	Para No
Should a DOCA be declared void or terminated?	[1]
Factual background	[4]
Prior to 21 January 2009	[5]
The watershed meeting	[13]
23 January to 7 March 2009	[16]
Statutory scheme	[20]
High Court decision	[23]
Meaning of a “casting vote”	[26]
Appellants' submissions	[28]
Respondent's submissions	[36]
Discussion	[45]
Was the DOCA oppressive or unfairly prejudicial?	[55]
Appellants' submissions	[56]
Respondent's submissions	[60]
Our evaluation	[65]
Result	[69]

Should a DOCA be declared void or terminated?

1 The appellants, Messrs Grant and Khov, are the administrators of three companies including Jones Publishing Ltd (Jones). The respondent, the Commissioner of Inland Revenue (the Commissioner), is a creditor of each of the three companies. In February 2009 a deed of company arrangement (DOCA) under Part 15A of the Companies Act 1993 (the Act) was executed for all three companies. The Commissioner applied to the High Court to have the DOCA declared void, or terminated. Williams J granted a declaration that the DOCA was void on the basis that it was not entered into in accordance with the provisions of s 239AK of the Act. 1 Alternatively, an order would have been made terminating the DOCA on the basis that it was oppressive or unfairly prejudicial to the respondent. 2 The appellants appeal both of these findings.

2 There are two issues to be determined. The first concerns the meaning of the term “casting vote” in s 239AK(3) of the Act. In order for a resolution to be adopted at a creditors' meeting, there must be “a majority in number representing 75% in value of the creditors” who are voting. 3 The question is whether an administrator, acting as the chair of the meeting, is permitted to exercise a casting vote when the majority of a company's creditors vote in favour of the resolution but lack the statutorily prescribed super-majority in value. This is, essentially, a matter of statutory interpretation.

3 The second issue is whether a DOCA is oppressive or unfairly prejudicial under s 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. If the Court finds that the DOCA in the current case was oppressive on this basis, a subsidiary issue is whether the Court should in fact use its discretion to terminate the DOCA.

Factual background

4 There is no real dispute between the parties as to the relevant factual background. Mr Whale, counsel for the appellants, accepts that the facts are, for the most part, fairly summarised in the judgment of Hugh Williams J. 4 It is convenient to describe the background in three parts: prior to 21 January 2009; the meeting of creditors on 21 January 2009; and events between 23 January and 7 March 2009.

Prior to 21 January 2009

5 On 5 December 2008 the appellants were appointed the joint administrators of Jones, Dish Publishing (Dish) and Top Gear NZ Limited (Top Gear) (together the Jones Group) under Part 15A of the Act. 5 Top Gear and Dish were subsidiaries of Jones, incorporated to publish magazines of the same name, which Jones printed alongside other titles. Both magazines were making losses, although Dish was near break even. With one exception there was a common ownership and directorship of the companies. Two days prior to the appointment of the administrators, all three companies licensed the use of their intellectual property and sold their book debts and physical assets to Tangible Media Limited (TML) for $1.00. The licences gave TML the right to publish on payment of a fee. TML is owned by Image Centre Holdings Ltd, the holding company for the Image Centre Group. One of its subsidiaries, Image Centre Ltd, was a major creditor of the Jones Group.

6 The Commissioner was a creditor of Jones, Dish and Top Gear respectively. As at the date of the watershed meeting 6 on 21 January 2009, the companies owed the Commissioner the following sums:

• • Top Gear: $4,886.83, of which $3,980.27 was claimed to be preferential debt;

• • Dish: $7,941.77, of which $4,730.96 was claimed to be preferential debt;

• • Jones: $349,315.90, of which $290,249.18 was claimed to be preferential debt.

7 By the time of the watershed meeting, the amount owed to the creditors of the companies totalled $1,173,215.27 for Jones, $525,504.86 for Dish and $440,284.33 for Top Gear. The purpose of the watershed meeting was for the creditors of the Jones Group, then under administration, to decide the future of the companies and in particular whether to execute a DOCA, end the administration or appoint a liquidator. 7

8 The DOCA presented by the appellants to the creditors of Jones, Dish and Top Gear in anticipation of the watershed meeting provided for the acceptance of the sales of the businesses and for an initial distribution to creditors on a pro rata basis. A further distribution, consisting of 50 per cent of the funds due from TML under the licensing agreement, would also be paid pro rata under the DOCA. Image Centre Holdings Limited, TML's owner (and, after the Commissioner, the largest creditor of the companies), was to be excluded from the initial distribution, but would receive the remaining 50 per cent of the licence fees.

9 Clause 18 of the DOCA provided that it covered all three companies and was conditional on all three executing the DOCA. Clause 18.5 provided:

This Deed cannot come into operation for one company unless it comes into operation by all three companies. If the creditors or board of one company vote against this Deed then this Deed shall not come into force.

10 The administrators presented a written report with the DOCA. The report discussed voidable and other transactions and powers available to a liquidator, as well as the administrator's powers. It stated that the administrators had discovered some payments to creditors that the administrators considered to be voidable transactions, but even if recovery action was successful it would not provide a better outcome for creditors than the proposed DOCA. The administrators also reported that, in the months before the administration, the directors had waived the debt they owed to the Jones group and in return waived the debt owed by the companies to their family trusts. But, unwinding that transaction would simply substitute one debt for another, with the debts to the family trusts being secured by general security agreements. Liquidation of the Jones Group was discussed as an option, including possible recovery from the directors, as were the other alternatives open to the creditors.

11 Although the DOCA referred to a proposed “trading distribution” the opinion of the administrators was that “the magazines are worthless”. 8 In correspondence with the Commissioner prior to the watershed meeting, the administrators confirmed that “the business will not be trading” under the DOCA. The written report to creditors also confirmed that “[e]ach business was … unsustainable in its current state” and that the companies would “cease to actively trade” under the DOCA.

12 The administrators recommended that all creditors vote for the DOCA, with the exception of the Commissioner. In correspondence with the Commissioner on 19 January 2008, Mr Grant stated: “It is clear that the position of the IRD would be better under a liquidation than a DOCA. On this basis I expect the IRD will vote against the DOCA, as perhaps they should.”

The watershed meeting

13 The watershed meeting occurred on 21 January 2009. Mr Grant chaired the meeting, during which the proposed DOCA and the written report prepared by the administrators were presented and discussed. In evaluating liquidation as an alternative to executing the DOCA, the administrators agreed that under a liquidation the “net position is a substantial improvement to the recovery of the IRD, who would probably get paid in full, and a reduction in the position for unsecured creditors, who optimistically would get three and a half percent, and would more likely get nothing”. The administrators recommended that the unsecured creditors support the DOCA but, because the Commissioner's debt would probably be payable in full on liquidation, recommended that the IRD should vote for liquidation.

14 After the discussion there was a vote on whether to approve the DOCA. A separate vote was conducted for each of the three companies. The outcome of the voting was as follows:

• • Top Gear: the Commissioner voted against, five other creditors voted for the resolution;

• • Dish: the Commissioner voted against, seven other creditors voted for the resolution;

• • Jones: the Commissioner voted against, 10 other creditors voted for the resolution.

15 The aftermath of the voting is conveniently summarised in an affidavit filed on behalf of the Commissioner in...