The power of administrators in a voluntary administration to authorise and execute a Deed of Company Arrangement (DoCA) without the board’s consent has been recently affirmed by the High Court.
The decision provides welcome confirmation that a DoCA approved by creditors cannot be stymied either by unwilling directors, or by the absence of a functioning board.
The administrators had applied to the High Court1 for a direction permitting them to authorise, without a resolution from the board, the execution of a DoCA which was being put to creditors in respect of five companies in the CBL Group.
Once a DoCA has creditor approval, the Companies Act requires that it be executed by both the company and the deed administrators. But in this case, none of the companies had a functioning board capable of executing the DoCA.
Ambiguity in the Companies Act
In Australia it is well-established that an administrator may execute a DoCA on behalf of a company. The Australian legislation is clear. Under section 444B of Australia's Corporations Act 2001, the board “may" authorise a DoCA to be executed by or on behalf of the company, but that does not limit the administrator's functions and powers. Those powers include the ability to commit a company to a deed.
The position is not as clear in the Companies Act. In a departure from the Australian provisions, section 239ACO(3) says that the company “may not execute" the DoCA unless the board has authorised its execution. Section 239ACO(4) then follows by saying that section 239ACO(3) does not limit the administrator's functions and powers (including the ability to commit a company to a deed).
It is not clear from the Parliamentary materials why section 239ACO differed from the Australian provisions, particularly when Parliamentary materials state that New Zealand's Voluntary Administration (VA) scheme was “intended to reflect the Australian voluntary administration provisions".2
The Court observed that the Act could be interpreted as making board authorisation a prerequisite to the exercise of the administrators' powers to sign a DoCA.
But it did not adopt that interpretation, considering that the purposes of the VA regime would be undermined if a DoCA supported by creditors could be “scuttled" by the inability or refusal of the board to authorise that DoCA. Accordingly, the Court found that, where the directors have failed, or are unable to execute a DoCA, the administrators can step in and exercise that power.
While this particular application arose because none of the companies had a functioning board, the decision is not limited to those circumstances. The administrators' power to sign the DoCA also extends to situations where a board is in place and refuses to approve the DoCA.
Chapman Tripp comments
The Court’s decision is entirely consistent with the policy aims of the VA regime. VA is designed to be an alternative to liquidation in order to achieve a better outcome for creditors than an immediate liquidation. A central aspect of the regime is the transfer of control to a third party, whose role is similar in many respects to a liquidator (e.g. valuing claims for voting purposes, advising creditors on possible outcomes of a liquidation).
It is very clear that the administrators’ role is primarily to protect creditors’ interests. Those interests may be at odds with those of the directors and the shareholders.
If the creditors and the administrators consider that it is in the best interests of creditors to enter into a DoCA, it would potentially defeat or prejudice the purpose of the regime to allow directors a chance effectively to veto that DoCA. The decision provides welcome confirmation that directors do not have such power.
Thank you to Janko Marcetic for preparing this Brief Counsel. For more information please contact the authors listed.